Application of Options
33 questions. Each answer is explained.
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More units in NISM Series VIII
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 25% · 0.25 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | 28 of 100 marks (28%) |
That figure belongs to one published unit covered under these headings — Application of Options and Introduction to Options — so the marks belong to the whole group. They are quoted together because no source divides them among its headings.
Source: Unit 4: Introduction to Options (25) + Unit 5: Option Trading Strategies (3). The bank's two options headings straddle both published units - payoffs and the greeks sit in Unit 4, spreads, straddles and covered calls in Unit 5 - so they share the pair's 28 marks rather than a split of either number that no source supports.
NISM Series VIII Equity Derivatives
Exam rules read on NISM's site on 3 October 2026. Test objectives in force from 1 May 2022. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 3 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 33 questions on Application of Options, with answers
Q1A trader buys one 23,000 call for a premium of 180 points. Assume a lot size of 65 units. At expiry the underlying settles at 23,320. Ignoring charges, what is the net profit?
Option A. ₹9,100 — Correct answer
Option B. ₹11,700
Why it is wrong: ₹11,700 equals the premium amount (180 × 65), not the net profit.
Option C. ₹20,800
Why it is wrong: This is the gross intrinsic payoff (320 × 65), before deducting premium.
Option D. ₹32,000
Why it is wrong: It does not correspond to either gross payoff or net payoff under the stated lot size.
Answer: A. At expiry, call intrinsic value = 23,320 − 23,000 = 320 points. Net profit per unit = 320 − 180 = 140 points. For 65 units, profit = 140 × 65 = ₹9,100. Remember: Long-call net P&L at expiry = max(S−K,0) − premium, multiplied by contract quantity.
Hint, shown before you answer in practice mode: Common mistake: Using gross intrinsic payoff without subtracting the premium paid.
VIII-037mediumnumerical
Q2A trader buys one 24,000 put for 150 points. Assume a lot size of 65. At expiry the underlying is 24,220. Ignoring charges, what is the result?
Option A. Profit of ₹9,750
Why it is wrong: The put does not generate an expiry payoff when spot is above strike.
Option B. Loss of ₹9,750 — Correct answer
Option C. Loss of ₹14,300
Why it is wrong: ₹14,300 does not match the stated premium and lot size.
Option D. No profit or loss
Why it is wrong: The premium paid is a real cost and is lost if the option expires worthless.
Answer: B. Because the expiry price is above the put strike, the put expires out of the money with zero intrinsic value. The buyer loses the premium paid: 150 × 65 = ₹9,750. Remember: An OTM long option at expiry loses the premium paid.
Hint, shown before you answer in practice mode: Common mistake: Ignoring the premium because the option is not exercised.
VIII-038mediumnumerical
Q3A trader buys a 24,100 call for a premium of 165 points and holds it to expiry. Ignoring charges, the break-even underlying level is:
Option A. 23,935
Why it is wrong: Subtracting premium from strike is the wrong direction for a long-call break-even.
Option B. 24,265 — Correct answer
Option C. 24,165
Why it is wrong: This adds only 65 points rather than the full 165-point premium.
Option D. 24,100
Why it is wrong: At the strike, the option has no intrinsic value and the entire premium is still a loss.
Answer: B. For a long call held to expiry, break-even = strike price + premium paid = 24,100 + 165 = 24,265. Remember: Long-call break-even at expiry = strike + premium.
Hint, shown before you answer in practice mode: Common mistake: Forgetting that the premium must also be recovered before the trade breaks even.
VIII-039mediumnumerical
Q4A trader sells one 24,500 call and receives 120 points. Assume a lot size of 65. At expiry the underlying is 24,740. Ignoring charges, what is the writer’s net result?
Option A. Profit of ₹7,800
Why it is wrong: The sign is wrong: intrinsic loss exceeds premium received.
Option B. Profit of ₹15,600
Why it is wrong: The call writer does not profit when intrinsic loss exceeds premium income.
Option C. Loss of ₹15,600
Why it is wrong: ₹15,600 is the gross intrinsic obligation (240 × 65), before crediting premium received.
Option D. Loss of ₹7,800 — Correct answer
Answer: D. The call finishes 240 points in the money. The writer received 120 points but owes 240 points of intrinsic value, so net loss = 120 points per unit. Total loss = 120 × 65 = ₹7,800. Remember: Short-call net P&L at expiry = premium received − max(S−K,0).
Hint, shown before you answer in practice mode: Common mistake: Ignoring the premium credit or, conversely, treating the premium as profit regardless of expiry payoff.
VIII-040mediumnumerical
Q5A bull call spread is created by buying a 24,000 call for 170 points and selling a 24,300 call for 70 points, same expiry. Ignoring charges, its expiry break-even is:
Option A. 24,070
Why it is wrong: This adds only the short-call premium to the lower strike.
Option B. 24,100 — Correct answer
Option C. 24,170
Why it is wrong: This adds the full long-call premium without subtracting the premium received.
Option D. 24,300
Why it is wrong: The upper strike is the profit cap point, not the break-even.
Answer: B. The net debit is 170 − 70 = 100 points. A bull call spread breaks even at the lower strike plus the net debit: 24,000 + 100 = 24,100. Remember: Bull call spread break-even = lower strike + net debit.
Hint, shown before you answer in practice mode: Common mistake: Using the premium of only one leg instead of the net premium of the spread.
VIII-041hardnumerical
Q6Using the same bull call spread—long 24,000 call at 170, short 24,300 call at 70—and assuming a lot size of 65, what is the maximum profit?
Option A. ₹6,500
Why it is wrong: ₹6,500 is the maximum loss, equal to the 100-point debit × 65.
Option B. ₹9,750
Why it is wrong: This corresponds to 150 points per unit, not the correct 200.
Option C. ₹13,000 — Correct answer
Option D. ₹19,500
Why it is wrong: This is the full strike width × lot, before deducting the net debit.
Answer: C. The strike width is 300 points and the net debit is 100 points, so maximum profit is 300 − 100 = 200 points per unit. For 65 units, maximum profit = 200 × 65 = ₹13,000. Remember: Bull call spread max profit = strike width − net debit, times contract quantity.
Hint, shown before you answer in practice mode: Common mistake: Forgetting to deduct the spread’s initial net debit from the strike-width payoff.
VIII-042hardnumerical
Q7A trader constructs a defined-risk bullish call spread on a 65-unit contract. The lower-strike call costs 170 points and the higher-strike call brings in 70 points. Ignoring charges, what is the greatest rupee loss the position can suffer?
Option A. ₹6,500 — Correct answer
Option B. ₹4,550
Why it is wrong: ₹4,550 corresponds to 70 points × 65, the short-leg premium alone.
Option C. ₹13,000
Why it is wrong: ₹13,000 is the maximum profit from the companion calculation.
Option D. Unlimited
Why it is wrong: A bull call spread has bounded downside because both legs are calls with different strikes and the initial outlay is limited.
Answer: A. The strategy is entered for a net debit of 100 points. If both calls expire worthless, that debit is lost. Maximum loss = 100 × 65 = ₹6,500. Remember: Maximum loss on a debit bull call spread is the net debit paid.
Hint, shown before you answer in practice mode: Common mistake: Treating the long call’s premium alone as the loss instead of netting the short-call premium received.
VIII-043mediumnumerical
Q8A trader buys a 25,000 straddle by paying 210 points for the call and 190 points for the put. Ignoring charges, the two expiry break-even levels are:
Option A. 25,000 and 25,400
Why it is wrong: The strike itself is not a break-even because the full premium is lost there.
Option B. 24,790 and 25,190
Why it is wrong: This subtracts/ adds only one leg’s premium.
Option C. 24,810 and 25,210
Why it is wrong: These levels do not reflect the combined 400-point premium.
Option D. 24,600 and 25,400 — Correct answer
Answer: D. Total premium paid = 210 + 190 = 400 points. A long straddle breaks even at strike − total premium and strike + total premium: 25,000 − 400 = 24,600 and 25,000 + 400 = 25,400. Remember: Long straddle break-evens = common strike ± total premium paid.
Hint, shown before you answer in practice mode: Common mistake: Using only the call or only the put premium to calculate break-even.
VIII-044hardnumerical
Q9A trader expects the underlying to make a very large move before expiry but has no reliable view on whether the move will be up or down. Which strategy most directly expresses that view?
Option A. Short straddle
Why it is wrong: A short straddle benefits from limited movement and is harmed by large moves.
Option B. Covered call
Why it is wrong: A covered call is generally used to earn premium while accepting capped upside on an owned asset.
Option C. Long straddle — Correct answer
Option D. Cash-and-carry arbitrage
Why it is wrong: Cash-and-carry arbitrage targets futures mispricing rather than an uncertain directional volatility view.
Answer: C. A long straddle buys a call and a put with the same strike and expiry. It benefits from a sufficiently large move in either direction, while its maximum loss is the combined premium paid if the underlying remains near the strike. Remember: Large move expected, direction uncertain → long-volatility structures such as a long straddle.
Hint, shown before you answer in practice mode: Common mistake: Selecting a short straddle because it also contains both a call and put, while ignoring the direction of its volatility exposure.
VIII-045mediumapplication
Q10A standard short iron condor is established for a net credit. If all four legs have the same expiry, what is its maximum profit?
Option A. The lower short strike minus the upper short strike
Why it is wrong: The strike difference alone is not the profit measure.
Option B. The width of either spread plus the net premium received
Why it is wrong: Spread width is relevant to maximum loss, not added to maximum profit.
Option C. Unlimited
Why it is wrong: Both sides are hedged by long wings, so profit is capped.
Option D. The net premium received — Correct answer
Answer: D. A short iron condor combines an out-of-the-money short put spread and short call spread for an initial net credit. Its maximum profit is the net credit received, achieved when the underlying expires between the two short strikes so that all options expire without intrinsic loss. Remember: A credit iron condor has limited profit equal to net credit and limited loss determined by spread width minus that credit.
Hint, shown before you answer in practice mode: Common mistake: Confusing the iron condor’s maximum loss formula with its maximum profit.
VIII-046mediumconceptual
Q11Which position is a covered call on a stock?
Option A. Short the stock and long a call
Why it is wrong: This is not a covered call and has a different directional profile.
Option B. Long the stock and short a call on the same stock — Correct answer
Option C. Long the stock and long a put
Why it is wrong: Long stock plus long put is a protective put.
Option D. Short a call with no position in the stock
Why it is wrong: A short call without underlying ownership is an uncovered or naked call.
Answer: B. A covered call consists of owning the underlying shares and writing a call against them. The stock holding “covers” the delivery/economic exposure created by the short call if the call finishes in the money. Remember: Covered call = long underlying + short call.
Hint, shown before you answer in practice mode: Common mistake: Confusing a protective put with a covered call because both begin with a long stock position.
VIII-047mediumapplication
Q12For European options on a non-dividend-paying stock with the same strike and expiry, the stock is ₹1,000, the present value of the strike is ₹980 and the put premium is ₹40. What call premium does put-call parity imply?
Option A. ₹20
Why it is wrong: ₹20 is the difference between spot and PV(K) but omits the put premium.
Option B. ₹40
Why it is wrong: This simply copies the put premium without applying parity.
Option C. ₹60 — Correct answer
Option D. ₹80
Why it is wrong: It overstates the parity-implied call by ₹20.
Answer: C. Rearrange parity: C = P + S − PV(K) = 40 + 1,000 − 980 = ₹60. A materially different observed call price, after allowing for costs and assumptions, would indicate a relative pricing inconsistency among the parity legs. Remember: Put-call parity links call, put, spot and the present value of the strike for matched European options.
Hint, shown before you answer in practice mode: Common mistake: Memorising the equation but moving PV(K) to the wrong side when solving for the call.
VIII-048hardnumerical
Q13An option’s delta is primarily used to estimate the change in the option premium for a small change in:
Option A. The price of the underlying — Correct answer
Option B. The time remaining to expiry only
Why it is wrong: Time sensitivity is measured primarily by theta.
Option C. Implied volatility only
Why it is wrong: Volatility sensitivity is vega.
Option D. The risk-free interest rate only
Why it is wrong: Interest-rate sensitivity is rho.
Answer: A. Delta measures the sensitivity of an option’s price to a change in the price of the underlying, holding other factors approximately constant. It is also central to delta-hedging calculations. Remember: Delta connects option-price changes to small underlying-price changes and is used in directional-risk hedging.
Hint, shown before you answer in practice mode: Common mistake: Mixing up delta with theta, vega or rho.
VIII-049mediumconceptual
Q14Under the usual textbook approximation for a near-term at-the-money call on a non-dividend-paying underlying, its delta is closest to:
Option A. −1.0
Why it is wrong: A long call delta is normally non-negative and bounded around 0 to +1 in standard models.
Option B. −0.5
Why it is wrong: A negative delta is characteristic of a long put, not a long call.
Option C. +0.5 — Correct answer
Option D. +1.5
Why it is wrong: Standard long-call delta does not exceed +1.
Answer: C. An at-the-money call commonly has a delta near +0.5 under standard textbook assumptions. The exact value depends on time, volatility, interest rates, dividends and model conventions, so +0.5 should be read as an approximation rather than an invariant constant. Remember: ATM call delta is often approximated as +0.5, but exact delta is model- and input-dependent.
Hint, shown before you answer in practice mode: Common mistake: Treating +0.5 as an exact universal value for every at-the-money call.
VIII-050mediumconceptual
Q15All else equal in the usual option-pricing setting, what does negative theta for a long option indicate?
Option A. The option gains one rupee whenever the underlying falls one rupee
Why it is wrong: Directional sensitivity to the underlying is delta, not theta.
Option B. The option tends to lose value as time passes — Correct answer
Option C. The option becomes less sensitive to volatility by definition
Why it is wrong: Volatility sensitivity is vega and does not follow directly from the sign of theta.
Option D. The strike price automatically declines each day
Why it is wrong: The contract strike does not decay with time.
Answer: B. Theta measures sensitivity of option value to the passage of time. Long options commonly have negative theta: with other inputs unchanged, the option’s time value tends to decay as expiry approaches. Remember: Theta is time-decay sensitivity. Long options usually pay for time and therefore generally have negative theta.
Hint, shown before you answer in practice mode: Common mistake: Confusing theta with delta or assuming the strike changes with time.
VIII-051mediumconceptual
Q16Other things being broadly comparable, gamma tends to be largest for options that are:
Option A. Very deep in the money with many years to expiry
Why it is wrong: Deep ITM options tend to have delta already near its boundary, reducing gamma.
Option B. Near the money and relatively close to expiry — Correct answer
Option C. Very deep out of the money with many years to expiry
Why it is wrong: Deep OTM options also tend to have relatively small delta changes for small spot moves.
Option D. Already expired
Why it is wrong: An expired option no longer has live time-sensitive option Greeks in the trading sense.
Answer: B. Gamma measures how rapidly delta changes when the underlying moves. Gamma is typically concentrated around at-the-money strikes and becomes especially pronounced as expiry approaches, because delta can shift quickly when the option moves between in-the-money and out-of-the-money states. Remember: Gamma measures change in delta. It is generally most intense near the strike, especially close to expiry.
Hint, shown before you answer in practice mode: Common mistake: Assuming the option with the highest premium necessarily has the highest gamma.
VIII-052mediumconceptual
Q17Vega measures the sensitivity of an option’s price primarily to a change in:
Option A. The number of contracts held
Why it is wrong: Position quantity scales total exposure but is not the market variable vega measures.
Option B. The strike price written in the contract
Why it is wrong: Strike is a fixed contract term, not the variable measured by vega.
Option C. The underlying asset’s volatility — Correct answer
Option D. The exchange trading hours
Why it is wrong: Trading hours are not an option-pricing Greek input measured by vega.
Answer: C. Vega estimates how much an option’s value changes when the volatility input changes, with other inputs held approximately constant. Long options generally have positive vega in standard models. Remember: Vega = option-price sensitivity to volatility.
Hint, shown before you answer in practice mode: Common mistake: Confusing volatility sensitivity with directional sensitivity, which is delta.
VIII-053mediumconceptual
Q18Which description best captures implied volatility?
Option A. The realised volatility that must occur in the underlying over the rest of the option's life
Why it is wrong: Future realised volatility can differ materially from implied volatility.
Option B. The volatility input that makes an option-pricing model match the option's market price — Correct answer
Option C. The historical standard deviation that every exchange mandates for pricing options
Why it is wrong: Historical volatility is an observed past-data measure, not the definition of implied volatility.
Option D. The guaranteed percentage move of the underlying price before the option expires
Why it is wrong: Implied volatility is not a guaranteed future price move.
Answer: B. Implied volatility is backed out from the observed option price: it is the volatility input which, when used with the other model inputs, reproduces the market premium. It is not a guarantee of future realised volatility. Remember: Implied volatility is inferred from option prices. Realised/historical volatility is measured from price data.
Hint, shown before you answer in practice mode: Common mistake: Treating implied volatility as a forecast that must come true.
VIII-054hardconceptual
Q19An investor owns shares and buys a put on the same underlying to limit downside while retaining upside participation. This combination is called a:
Option A. Calendar spread
Why it is wrong: A calendar spread uses different expiries.
Option B. Covered call
Why it is wrong: A covered call is long stock plus short call and caps upside beyond the call strike.
Option C. Short straddle
Why it is wrong: A short straddle sells both call and put and does not require owning the underlying.
Option D. Protective put — Correct answer
Answer: D. A protective put combines a long underlying position with a long put. The put establishes a floor on the economic value of the combined position below the strike, subject to the premium paid, while the shares still participate in upside. Remember: Protective put = insurance-like downside protection for a long underlying position.
Hint, shown before you answer in practice mode: Common mistake: Confusing downside protection from a put with premium income from a covered call.
VIII-055mediumapplication
Q20A trader buys a 25,200 call for 70 points and a 24,800 put for 60 points, same expiry. Ignoring charges, the expiry break-even levels of this long strangle are:
Option A. 24,800 and 25,200
Why it is wrong: The strikes themselves do not recover the premiums paid.
Option B. 24,730 and 25,270
Why it is wrong: These levels use only the call premium on one side and put premium on the other.
Option C. 24,670 and 25,330 — Correct answer
Option D. 24,540 and 25,460
Why it is wrong: This doubles the total premium adjustment.
Answer: C. Total premium paid = 70 + 60 = 130 points. Lower break-even = put strike − total premium = 24,800 − 130 = 24,670. Upper break-even = call strike + total premium = 25,200 + 130 = 25,330. Remember: Long strangle break-evens use the total premium across both legs, not each leg’s premium separately.
Hint, shown before you answer in practice mode: Common mistake: Subtracting only put premium from the put strike and adding only call premium to the call strike.
VIII-056hardnumerical
Q21A long call butterfly uses strikes 24,000/24,200/24,400: buy one 24,000 call, sell two 24,200 calls, and buy one 24,400 call. The net debit is 45 points. Assume a lot size of 65. What is the maximum profit?
Option A. ₹2,925
Why it is wrong: ₹2,925 is the maximum loss, equal to the 45-point debit × 65.
Option B. ₹26,000
Why it is wrong: This double-counts the spread width.
Option C. ₹13,000
Why it is wrong: This is the full 200-point width × 65 before deducting the debit.
Option D. ₹10,075 — Correct answer
Answer: D. The equal strike width is 200 points. A long butterfly’s maximum profit per unit is spread width − net debit = 200 − 45 = 155 points, achieved at the middle strike at expiry. Total maximum profit = 155 × 65 = ₹10,075. Remember: Long butterfly max profit = wing width − net debit. Max loss = net debit.
Hint, shown before you answer in practice mode: Common mistake: Using the full strike width as profit without subtracting the initial debit.
VIII-057hardnumerical
Q22Ignoring margining and assuming the underlying price has no upper bound, the potential loss on a naked short call is:
Option A. Limited to the premium received
Why it is wrong: Premium received is the maximum profit, not the maximum loss.
Option B. Theoretically unlimited — Correct answer
Option C. Limited to the strike price
Why it is wrong: Loss can exceed the strike amount as the underlying continues rising.
Option D. Always zero if the option began out of the money
Why it is wrong: An initially OTM call can become deeply ITM before expiry.
Answer: B. A naked call writer receives a fixed premium but is exposed to increasing losses as the underlying rises above the strike. Because there is no theoretical upper limit to the underlying price, the short call’s potential loss is theoretically unlimited. Remember: Naked short call: limited profit, theoretically unlimited loss.
Hint, shown before you answer in practice mode: Common mistake: Equating the initial OTM status with permanently limited risk.
VIII-058mediumconceptual
Q23A trader sells a 25,000 call for 210 points and a 25,000 put for 170 points, creating a short straddle. Assume a lot size of 65. At expiry the index is 25,220. Ignoring charges, what is the net result?
Option A. ₹10,400 loss
Why it is wrong: The 160 points are positive, not negative.
Option B. ₹10,400 profit — Correct answer
Option C. ₹14,300 profit
Why it is wrong: ₹14,300 is the call's intrinsic payout (220 × 65), not the net straddle result.
Option D. ₹24,700 profit
Why it is wrong: ₹24,700 is total premium received (380 × 65) before paying the call's intrinsic settlement.
Answer: B. Total premium received = 210 + 170 = 380 points. At 25,220, the call finishes 220 points in the money and the put expires worthless. Net profit = 380 − 220 = 160 points. For 65 units, profit = 160 × 65 = ₹10,400. Remember: For a short straddle, start with total premium received and subtract the intrinsic payout of the in-the-money leg at expiry.
Hint, shown before you answer in practice mode: Common mistake: Calculating only the losing option leg and forgetting the premiums collected on both legs.
VIII-099hardnumerical
Q24A trader is long 10 call-option contracts. Each contract represents 50 shares and each call currently has delta +0.60. Ignoring gamma and other changes, approximately how many shares should the trader sell short to create an initial delta-neutral hedge?
Option A. 60 shares
Why it is wrong: 60 ignores the number of contracts and contract size.
Option B. 200 shares
Why it is wrong: 200 does not match the computed +300 delta exposure.
Option C. 500 shares
Why it is wrong: 500 would hedge the full notional shares as if delta were +1.
Option D. 300 shares — Correct answer
Answer: D. Total option delta exposure = 10 contracts × 50 shares × 0.60 = +300 share-equivalents. To offset this first-order exposure, the trader sells approximately 300 shares, producing -300 share delta. Remember: Delta hedge quantity = option delta × contract multiplier × number of contracts, with the opposite sign.
Hint, shown before you answer in practice mode: Common mistake: Hedging the full notional share count instead of the delta-adjusted exposure.
VIII-124hardnumerical
Q25For European call and put options with the same strike and expiry, what expiry payoff is created by a long call plus a short put?
Option A. The payoff of a long forward with delivery price equal to the strike — Correct answer
Option B. The payoff of a long straddle with both options at the same strike
Why it is wrong: A long straddle is long call plus long put, not short put.
Option C. A guaranteed zero payoff whatever the underlying price is at expiry
Why it is wrong: The payoff changes with the terminal underlying price.
Option D. The payoff of a short position in the stock with no financing component
Why it is wrong: A short stock payoff moves in the opposite direction.
Answer: A. At expiry, long call minus long put (that is, long call + short put) produces max(ST−K,0) − max(K−ST,0) = ST−K. That is the payoff of a long forward struck at K. Remember: Long call + short put at the same strike/expiry creates synthetic long-forward exposure.
Hint, shown before you answer in practice mode: Common mistake: Calling the combination a long stock without accounting for the financing/strike leg implied by put-call parity.
VIII-125hardconceptual
Q26For European options on a non-dividend-paying stock, spot is ₹1,000, the call is ₹70 and the present value of the ₹1,000 strike is ₹975. What put value does put-call parity give?
Option A. ₹25
Why it is wrong: ₹25 is the difference between spot and PV strike, but it omits the call value.
Option B. ₹45 — Correct answer
Option C. ₹70
Why it is wrong: This simply copies the call premium.
Option D. ₹95
Why it is wrong: This adds rather than properly nets the parity components.
Answer: B. Rearrange parity: P = C + PV(K) − S = 70 + 975 − 1,000 = ₹45. Remember: Use the parity equation algebraically. Do not infer the put price from moneyness alone.
Hint, shown before you answer in practice mode: Common mistake: Forgetting that the strike is discounted to present value in the stated European no-dividend setup.
VIII-126hardnumerical
Q27An option series has put open interest of 12 lakh contracts and call open interest of 8 lakh contracts. What is the put-call ratio on open interest?
Option A. 0.67
Why it is wrong: 0.67 is the inverse ratio, call OI ÷ put OI.
Option B. 1.0
Why it is wrong: PCR would be 1 only if put and call OI were equal.
Option C. 1.5 — Correct answer
Option D. 2.0
Why it is wrong: The numbers do not produce 2.0.
Answer: C. PCR = put open interest ÷ call open interest = 12 ÷ 8 = 1.5. PCR is an observed positioning ratio. By itself it is not a guaranteed direction forecast. Remember: State the PCR convention and then calculate it. Interpretation should be combined with other information.
Hint, shown before you answer in practice mode: Common mistake: Automatically treating PCR above 1 as a certain bullish or bearish signal without context.
VIII-127mediumnumerical
Q28A trader creates a bull put spread by selling a 24,000 put for 150 points and buying a 23,800 put for 70 points. Ignoring charges, what is the maximum loss per index unit?
Option A. 120 points — Correct answer
Option B. 80 points
Why it is wrong: 80 points is the maximum profit/net credit.
Option C. 150 points
Why it is wrong: This is the premium on the short put, not the spread maximum loss.
Option D. 200 points
Why it is wrong: This is the strike width before deducting the credit received.
Answer: A. The spread width is 200 points. Net credit received is 150 − 70 = 80 points. Maximum loss = spread width − net credit = 200 − 80 = 120 points. Remember: For a defined-risk credit spread, max loss = strike width − net credit.
Hint, shown before you answer in practice mode: Common mistake: Calling the net credit the maximum loss.
VIII-129hardnumerical
Q29A trader sells a 24,500 call for 120 points and buys a 24,700 call for 50 points, forming a bear call spread. Ignoring charges, what is the maximum loss per index unit?
Option A. 70 points
Why it is wrong: 70 points is the maximum profit.
Option B. 130 points — Correct answer
Option C. 120 points
Why it is wrong: 120 is only the premium received on the short call.
Option D. 200 points
Why it is wrong: The credit reduces the 200-point worst-case intrinsic spread.
Answer: B. The strike width is 200 points. Net credit is 120 − 50 = 70. Maximum loss = 200 − 70 = 130 points. Remember: Credit-spread risk is capped by the strike width minus the initial credit.
Hint, shown before you answer in practice mode: Common mistake: Ignoring the long protective call when evaluating the short call's risk.
VIII-130hardnumerical
Q30An investor owns shares, buys a protective put below the current price and finances part of that protection by selling a call above the current price. What strategy is this?
Option A. Naked call
Why it is wrong: The call is covered by the owned shares rather than being naked in the stated structure.
Option B. Long straddle
Why it is wrong: A straddle uses a call and put at the same strike and does not require the stock position.
Option C. Collar — Correct answer
Option D. Long butterfly
Why it is wrong: A butterfly uses multiple options at three strikes.
Answer: C. A collar combines a long underlying position with a long put for downside protection and a short call that limits upside in exchange for premium income. It creates a defined protective range around the stock position. Remember: A collar trades some upside participation for cheaper downside protection.
Hint, shown before you answer in practice mode: Common mistake: Confusing a collar with a protective put because both contain a long put.
VIII-131mediumapplication
Q31Which construction represents a standard bear put spread with the same expiry?
Option A. Buy two calls and no puts
Why it is wrong: Two calls alone do not create the described bear put spread.
Option B. Sell a higher-strike put and buy a lower-strike put
Why it is wrong: This is the opposite put-spread orientation and is generally bullish.
Option C. Buy a call and a put at the same strike
Why it is wrong: This is a long straddle.
Option D. Buy a higher-strike put and sell a lower-strike put — Correct answer
Answer: D. A bear put spread is typically created by buying a higher-strike put and selling a lower-strike put of the same expiry. The long higher-strike put provides bearish exposure while the short lower-strike put reduces cost but caps the maximum profit. Remember: Vertical put spreads use two strikes: bear put = long higher strike, short lower strike.
Hint, shown before you answer in practice mode: Common mistake: Remembering only 'two puts' but reversing which strike is bought and sold.
VIII-132mediumapplication
Q32An investor buys a share at ₹1,000 and simultaneously buys a ₹950 put for ₹20. Ignoring charges and dividends, what is the maximum loss per share at option expiry?
Option A. ₹70 — Correct answer
Option B. ₹50
Why it is wrong: ₹50 is the stock decline to the put strike but omits premium.
Option C. ₹20
Why it is wrong: ₹20 is only the insurance premium.
Option D. Unlimited
Why it is wrong: The long put caps downside below the strike, subject to the assumptions.
Answer: A. The put establishes a minimum sale value of ₹950 at expiry. Starting from ₹1,000, the protected stock downside is ₹50, and the investor also paid ₹20 premium. Maximum loss = ₹50 + ₹20 = ₹70 per share. Remember: A protective put floor must include the cost of the put when measuring maximum loss.
Hint, shown before you answer in practice mode: Common mistake: Ignoring the option premium when calculating the protected position's worst result.
VIII-133hardnumerical
Q33Which position is a basic long call calendar spread?
Option A. Buy and sell calls with the same expiry but different strikes only
Why it is wrong: Same expiry with different strikes is a vertical spread.
Option B. Sell a near-expiry call and buy a later-expiry call with the same strike — Correct answer
Option C. Buy a near-expiry put and sell the underlying stock
Why it is wrong: That combination is not the stated calendar spread.
Option D. Buy two identical calls with the same expiry
Why it is wrong: Two identical long calls create greater directional exposure, not an expiry spread.
Answer: B. A calendar spread primarily differs by expiry. A common long call calendar sells the shorter-dated call and buys the longer-dated call at the same strike, creating exposure to the differing time-decay and volatility characteristics of the two maturities. Remember: Calendar spreads separate option maturities. Vertical spreads separate strikes.
Hint, shown before you answer in practice mode: Common mistake: Calling any two-option spread a calendar spread.
VIII-134mediumapplication
Application of Options: common questions
How many practice questions are there on Application of Options?
33 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 11 practice topics for NISM Series VIII, which has 150 questions in total.
Are these real NISM Series VIII questions on Application of Options?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
How much of the NISM Series VIII exam is Application of Options?
NISM's published syllabus outline gives it 28 of the paper's 100 marks, or 28% of the exam. That figure covers one published unit taught here under more than one heading (Application of Options and Introduction to Options). So it is the marks for the group, not for this page alone. No source splits it, so it is not split here. The published unit it comes from: Unit 4: Introduction to Options (25) + Unit 5: Option Trading Strategies (3). The bank's two options headings straddle both published units - payoffs and the greeks sit in Unit 4, spreads, straddles and covered calls in Unit 5 - so they share the pair's 28 marks rather than a split of either number that no source supports.
Does negative marking apply to NISM Series VIII?
Yes. NISM takes off 25% of a question's marks for a wrong answer. On a 1-mark question that is 0.25 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Trading Mechanism
11 questions on Trading Mechanism. Its quiz opens on that unit.
Open Trading Mechanism