Unit ko samjho · NISM Series VIII

Introduction to Options

21 questions is unit mein

Sawaal aur jawaab English mein hain, kyunki NISM ka exam paper bhi English mein hota hai.

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A buyer of an equity call option obtains the:
Ignoring transaction costs, what is the maximum loss of a buyer who pays a premium for a plain-vanilla option and holds it to expiry?
How are NIFTY 50 index options on NSE characterised with respect to exercise style and settlement?
NIFTY is at 24,800. A NIFTY put option has a strike price of 25,000. The put is:
NIFTY is at 25,240. A 25,000 call trades at a premium of 310 points. What are the call’s intrinsic value and time value?
At a given instant before expiry, which statement is necessarily true of an out-of-the-money plain call or put option?
Which statement about an option writer (seller) is correct?
Which statement correctly compares an option buyer with a futures buyer?
A stock trades at ₹780. Which of the following puts is in-the-money?
A stock is at ₹24,600. A ₹24,500 call trades at a premium of ₹180. What are its intrinsic value and time value?
Holding spot, strike, interest rate, dividends and time to expiry constant, what is the usual effect of an increase in expected volatility on the value of both a plain call and a plain put?
All else equal, which statement best describes the effect of the passage of time on a long plain option as expiry approaches?
Holding other inputs constant, a larger expected cash dividend before option expiry will generally have which directional effect on European equity option values?
For European options on a non-dividend-paying stock, holding other inputs constant, an increase in the risk-free interest rate generally tends to:
Which model is classically associated with a closed-form valuation framework for European-style options under its standard assumptions?
What is a defining feature of a binomial option-pricing model?
Which sign is normally associated with the delta of a long put option?
A trader says, 'My option's delta will change quickly if the underlying moves.' Which Greek most directly measures that sensitivity of delta?
A long option has theta of approximately -₹4 per day, with all other pricing inputs assumed unchanged for this simplified illustration. What does that sign most directly indicate?
An option has vega of 12, using a convention in which vega is the premium change for a one-percentage-point change in implied volatility. If implied volatility rises from 20% to 21% and other inputs are unchanged, the option premium is approximately expected to:
Which Greek measures an option's sensitivity to a change in the risk-free interest rate, holding other inputs constant?

Zaroori ideas

Practice bank se · 1

A buyer of an equity call option obtains the:

A call option gives its buyer the right, but not the obligation, to buy the underlying at the according to the option contract. The option seller carries the corresponding obligation if the option is validly exercised/settled. Remember: Call buyer = right to buy. Put buyer = right to sell.

Hint Common mistake: Confusing the buyer’s right with the seller’s obligation.

VIII-031

Practice bank se · 2

Ignoring transaction costs, what is the maximum loss of a buyer who pays a premium for a plain-vanilla option and holds it to expiry?

An option buyer may choose not to exercise an option that is unfavorable. Therefore the buyer’s maximum contractual loss is the premium paid, assuming no additional transaction costs or other positions. Remember: Long-option risk is limited to premium paid. Reward characteristics depend on whether it is a call or put.

Hint Common mistake: Applying the uncovered option seller’s risk profile to the option buyer.

VIII-032

Practice bank se · 3

How are NIFTY 50 index options on NSE characterised with respect to exercise style and settlement?

NSE index options are European style, meaning exercise occurs at under the contract framework, and index derivatives are cash settled because an index itself cannot be physically delivered as a basket through option exercise. Remember: Index options on NSE are European-style, cash-settled contracts.

Hint Common mistake: Confusing the physical settlement of individual-stock derivatives with index-option settlement.

VIII-033

Practice bank se · 4

NIFTY is at 24,800. A NIFTY put option has a strike price of 25,000. The put is:

A put has when strike price exceeds spot. Here, intrinsic value = 25,000 − 24,800 = 200 points, so the put is by 200 points. Remember: Put ITM when strike > spot. Call ITM when spot > strike.

Hint Common mistake: Applying call-option moneyness rules to puts.

VIII-034

Practice bank se · 5

NIFTY is at 25,240. A 25,000 call trades at a premium of 310 points. What are the call’s intrinsic value and time value?

Call intrinsic value = max(spot − strike, 0) = 25,240 − 25,000 = 240 points. = premium − intrinsic value = 310 − 240 = 70 points. Remember: = intrinsic value + time value.

Hint Common mistake: Treating the full premium of an ITM option as intrinsic value.

VIII-035

Practice bank se · 6

At a given instant before expiry, which statement is necessarily true of an out-of-the-money plain call or put option?

An out-of-the-money option has no intrinsic value. Before expiry it can still have a positive market premium because time remains for the option to become valuable, so its premium may consist entirely of time value. Remember: OTM does not mean worthless before expiry. It means zero intrinsic value at that moment.

Hint Common mistake: Assuming zero intrinsic value means zero option premium.

VIII-036

Practice bank se · 7

Which statement about an option writer (seller) is correct?

The option buyer pays the premium for a right. The option writer receives the premium in exchange for taking the corresponding obligation. Depending on the option and position, a writer's potential loss can greatly exceed the premium received, and short-option positions are subject to requirements. Remember: Option buyer = right for a premium. Option writer = premium received plus obligation.

Hint Common mistake: Assuming the premium received is also the writer's maximum possible loss.

VIII-100

Practice bank se · 8

Which statement correctly compares an option buyer with a futures buyer?

An option buyer pays premium to obtain a right. A futures position, by contrast, creates a contractual exposure that is settled according to futures rules. It is not merely an optional right that can be abandoned without consequence. Remember: Options create asymmetric rights for the buyer. Futures create symmetric contractual obligations for long and short.

Hint Common mistake: Assuming 'buyer' always means maximum loss is only an upfront premium.

VIII-110

Practice bank se · 9

A stock trades at ₹780. Which of the following puts is in-the-money?

A put has intrinsic value when its strike price is above the current underlying price. With spot at ₹780, the ₹820 put has ₹40 of intrinsic value. The ₹780 put is at-the-money. The lower-strike puts are out-of-the-money. Remember: For puts, higher strike relative to spot means more intrinsic value. For calls the direction is reversed.

Hint Common mistake: Using the call-option moneyness rule for puts.

VIII-111

Practice bank se · 10

A stock is at ₹24,600. A ₹24,500 call trades at a premium of ₹180. What are its intrinsic value and time value?

For a call, intrinsic value = max(spot − strike, 0) = ₹100. Time value = option premium − intrinsic value = ₹180 − ₹100 = ₹80. Remember: Option premium = intrinsic value + time value.

Hint Common mistake: Calling the entire premium intrinsic value whenever an option is ITM.

VIII-112

Practice bank se · 11

Holding spot, strike, interest rate, dividends and time to expiry constant, what is the usual effect of an increase in expected volatility on the value of both a plain call and a plain put?

Greater volatility increases the range of possible future underlying prices. Because an option buyer has asymmetric payoff—downside is limited to premium while favourable moves can increase payoff—higher expected volatility generally raises the value of both calls and puts, other factors held constant. Remember: is typically positive for long vanilla calls and puts: more expected volatility generally means more option value.

Hint Common mistake: Thinking higher volatility benefits calls but hurts puts because their directional payoffs differ.

VIII-113

Practice bank se · 12

All else equal, which statement best describes the effect of the passage of time on a long plain option as expiry approaches?

As time passes with other factors unchanged, an option has less remaining opportunity for a favourable move, so its time value generally decays. Theta measures the sensitivity of option value to the passage of time. Remember: Time decay affects time value, not the contractual strike.

Hint Common mistake: Assuming theta means the option's intrinsic value falls each day.

VIII-114

Practice bank se · 13

Holding other inputs constant, a larger expected cash dividend before option expiry will generally have which directional effect on European equity option values?

An expected dividend tends to reduce the ex-dividend stock price relative to a no-dividend case. Holding other inputs constant, that generally reduces call value and increases put value. Option holders do not directly receive the cash dividend, but expected dividends affect the underlying-price path used in valuation. Remember: Expected dividends enter option valuation through their effect on the underlying's expected ex-dividend price.

Hint Common mistake: Assuming dividends cannot affect options because option holders are not shareholders.

VIII-115

Practice bank se · 14

For European options on a non-dividend-paying stock, holding other inputs constant, an increase in the risk-free interest rate generally tends to:

In the standard European option-pricing relationship for a non-dividend-paying stock, a higher risk-free rate reduces the present value of the strike payment. Other things equal, this tends to increase call value and decrease put value. Remember: Know the directional effects of each pricing determinant rather than memorising only volatility.

Hint Common mistake: Assuming rates affect futures but not options.

VIII-116

Practice bank se · 15

Which model is classically associated with a closed-form valuation framework for European-style options under its standard assumptions?

The Black-Scholes framework is a classic option-pricing model and provides closed-form formulas for European-style calls and puts under its assumptions. SPAN is a margin methodology, while free-float weighting and VWAP serve different purposes. Remember: Do not confuse option valuation models with margin models or execution benchmarks.

Hint Common mistake: Calling SPAN an option-pricing model because it also uses risk scenarios.

VIII-117

Practice bank se · 16

What is a defining feature of a binomial option-pricing model?

A binomial model represents possible underlying-price evolution through discrete up/down branches over successive time steps. Option values are then obtained by working backward through the tree using the model's valuation logic. Remember: Black-Scholes and binomial are valuation approaches. The binomial method is built around a discrete price tree.

Hint Common mistake: Thinking 'binomial' merely means an option has two payoff states at expiry.

VIII-118

Practice bank se · 17

Which sign is normally associated with the delta of a long put option?

A long put generally gains value when the underlying falls, so its delta is negative. For a standard European put, delta typically lies between -1 and 0, subject to the model and inputs. Remember: Call deltas are generally positive. Put deltas are generally negative.

Hint Common mistake: Assuming all long positions have positive delta.

VIII-119

Practice bank se · 18

A trader says, 'My option's delta will change quickly if the underlying moves.' Which Greek most directly measures that sensitivity of delta?

Gamma measures the rate of change of delta with respect to changes in the underlying price. High gamma means delta itself can change rapidly as the underlying moves. Remember: Delta measures first-order price sensitivity. Gamma measures how delta changes.

Hint Common mistake: Confusing gamma with vega because both can be large near certain option states.

VIII-120

Practice bank se · 19

A long option has theta of approximately -₹4 per day, with all other pricing inputs assumed unchanged for this simplified illustration. What does that sign most directly indicate?

Negative theta for a long option indicates time decay: in a local approximation, passage of one day reduces option value by the theta amount if other inputs are unchanged. Theta is an estimate/sensitivity, not a guarantee that market premium will actually change by exactly that amount. Remember: Greeks are local sensitivities, not guaranteed realised P&L.

Hint Common mistake: Treating theta as a deterministic daily loss regardless of changes in spot or volatility.

VIII-121

Practice bank se · 20

An option has vega of 12, using a convention in which vega is the premium change for a one-percentage-point change in implied volatility. If implied volatility rises from 20% to 21% and other inputs are unchanged, the option premium is approximately expected to:

With positive vega of 12 under the stated convention, a one-percentage-point increase in implied volatility produces an approximate 12-unit increase in option premium, holding other inputs constant. Remember: Always read the vega convention stated in the question before doing the arithmetic.

Hint Common mistake: Mixing a one-percentage-point IV change with a 1% multiplicative change in the premium.

VIII-122

Practice bank se · 21

Which Greek measures an option's sensitivity to a change in the risk-free interest rate, holding other inputs constant?

Rho measures sensitivity of option value to the risk-free interest-rate input. Delta, gamma and theta measure different dimensions of option sensitivity. Remember: Map each Greek to one risk factor: delta—spot, gamma—delta curvature, theta—time, vega—volatility, rho—rates.

Hint Common mistake: Ignoring rho because it is often less prominent for short-dated equity options.

VIII-123

Is topic ka lesson padho

Strike Price

The strike price is the level at which an option can be exercised.

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Expiry Day

Expiry day is the last day on which a derivative contract can be traded.

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Intrinsic Value

Intrinsic value is the part of an option's premium that would survive if the contract expired at this instant.

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Moneyness (ITM, ATM, OTM)

Moneyness describes where an option's strike sits relative to the current level of the underlying.

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Time Value

Time value is the part of an option's premium that is left after intrinsic value is taken out.

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Option Premium

An option's price is its premium.

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Margin

Margin is the money a participant must keep in place to carry a leveraged position.

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Vega

Vega measures how much an option's theoretical price changes when implied volatility changes.

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