Unit study guide · NISM Series XIII
Introduction to Options – Options on Equities and Currencies
22 questions in this unit
What this unit covers
- What right does the buyer of a call option obtain?
- What right does the buyer of a put option obtain?
- What does an option premium represent to the person who buys the contract?
- How does an American-style option differ from a European-style option?
- What does an option writer take on when selling an uncovered option?
- When is a call option at the money?
- In options pricing, what market sensitivity does the Greek called delta primarily estimate?
- A call has strike ₹100 and its underlying trades at ₹113. What is the call's intrinsic value per unit?
- A put has strike ₹120 and its underlying trades at ₹105. What is the put's intrinsic value per unit?
- A call premium is ₹19 and intrinsic value is ₹12. What is its time value?
- What is the maximum expiry loss per unit for a fully paid long call purchased at ₹9?
- A call is bought for ₹8 with strike ₹100. What expiry underlying price gives zero profit before costs?
- A put is bought for ₹7 with strike ₹120. What expiry underlying price gives zero profit before costs?
- Which Greek estimates an option's value loss from time passing, with other inputs held constant?
- A call has delta 0.60. If its underlying rises ₹2, what is its approximate first-order premium change?
- With other inputs fixed, what usually happens to a standard option's value when implied volatility increases?
- Which Greek describes how an option's delta changes for a small move in the underlying?
- An underlying trades at ₹105. A call has strike ₹110 and positive premium. Which moneyness category applies?
- A call with strike ₹110 is purchased for ₹8. At expiry the underlying is ₹130. What is profit per unit?
- A trader writes a put with strike ₹95 for ₹6 premium. At expiry the underlying is ₹85. What is profit per unit?
- A put with strike ₹120 costs ₹9. At expiry its underlying is ₹90. What is the buyer's net profit per unit?
- In a one-period model, a ₹100 share becomes ₹120 or ₹90. Interest is zero and a ₹100-strike call expires then. What is the no-arbitrage call value?
Key ideas
From the practice bank · 1
What right does the buyer of a call option obtain?
A call option gives its buyer the right to buy the specified underlying exposure at the agreed subject to contract settlement terms. Remember: A call grants a buying right to its holder.
Hint Common mistake: Do not confuse a call buyer with a call writer. Distinguish buying rights from selling rights.
XIII-075From the practice bank · 2
What right does the buyer of a put option obtain?
A put gives the holder a right to sell the specified underlying exposure under the contract's settlement terms. Remember: Puts provide a selling right.
Hint Common mistake: Do not swap call and put exercise rights. Recall the direction of a put option.
XIII-076From the practice bank · 3
What does an option premium represent to the person who buys the contract?
The is the price paid by the option buyer and received by the writer, before costs. Remember: Premium is the contract's purchase price.
Hint Common mistake: A high premium does not guarantee future profit. Think about the cost of acquiring the option right.
XIII-077From the practice bank · 4
How does an American-style option differ from a European-style option?
An American-style option allows exercise before or at under its contract terms. Remember: Exercise style is about permitted timing.
Hint Common mistake: American style is not about the currency of denomination. Focus on when exercise is permitted.
XIII-078From the practice bank · 5
What does an option writer take on when selling an uncovered option?
An option writer receives premium but accepts the contractual settlement obligation if required. Remember: Option writers receive premium in exchange for obligation.
Hint Common mistake: Selling options is not riskless income. Compare a holder's right with a writer's duty.
XIII-079From the practice bank · 6
When is a call option at the money?
An at-the-money call has an underlying price at or near its strike price. Remember: compares underlying price with strike.
Hint Common mistake: An option can be at the money even with a premium. Compare spot price with the strike.
XIII-080From the practice bank · 7
In options pricing, what market sensitivity does the Greek called delta primarily estimate?
measures the first-order sensitivity of option value to the underlying price. Remember: Delta links option price to underlying price.
Hint Common mistake: Do not use delta as a time-decay measure. Think about which input is moved.
XIII-081From the practice bank · 8
A call has strike ₹100 and its underlying trades at ₹113. What is the call's intrinsic value per unit?
Call = max(113 − 100, 0) = ₹13. Remember: Call intrinsic value cannot be negative.
Hint Common mistake: Do not confuse spot price with option value. Compare underlying price and call strike.
XIII-082From the practice bank · 9
A put has strike ₹120 and its underlying trades at ₹105. What is the put's intrinsic value per unit?
Put intrinsic value = max(120 − 105, 0) = ₹15. Remember: Put intrinsic value rises as the underlying falls below strike.
Hint Common mistake: Do not subtract strike from spot for put intrinsic value. A put benefits from a strike above the current underlying price.
XIII-083From the practice bank · 10
A call premium is ₹19 and intrinsic value is ₹12. What is its time value?
= premium − intrinsic value = ₹19 − ₹12 = ₹7. Remember: Option premium includes intrinsic and time value.
Hint Common mistake: Do not treat the total premium as time value. Separate intrinsic value from the remaining option premium.
XIII-084From the practice bank · 11
What is the maximum expiry loss per unit for a fully paid long call purchased at ₹9?
A long call's maximum expiry loss is its ₹9 premium per unit, excluding other costs. Remember: Purchased options have a premium-limited loss.
Hint Common mistake: Do not apply the naked call writer's loss profile to a buyer. Think about the initial cost of a purchased option.
XIII-085From the practice bank · 12
A call is bought for ₹8 with strike ₹100. What expiry underlying price gives zero profit before costs?
Long call = ₹100 + ₹8 = ₹108. Remember: Long call break-even is above strike by premium.
Hint Common mistake: At-the-money expiry does not repay a call premium. Account for strike and paid premium.
XIII-086From the practice bank · 13
A put is bought for ₹7 with strike ₹120. What expiry underlying price gives zero profit before costs?
Long put break-even = ₹120 − ₹7 = ₹113. Remember: Long put break-even lies below strike by the premium.
Hint Common mistake: Do not use the long call break-even rule for a put. A long put must earn back the premium through an intrinsic payoff.
XIII-087From the practice bank · 14
Which Greek estimates an option's value loss from time passing, with other inputs held constant?
Theta represents option-price sensitivity to the passage of time. Remember: Theta tracks time sensitivity.
Hint Common mistake: Time decay is not the same as a change in implied volatility. Which factor changes as expiry gets closer?
XIII-088From the practice bank · 15
A call has delta 0.60. If its underlying rises ₹2, what is its approximate first-order premium change?
Approximate change = delta × underlying move = 0.60 × ₹2 = ₹1.20 upward. Remember: Delta gives a local approximation, not an exact forecast.
Hint Common mistake: Remember gamma can alter delta during a larger move. Use delta as a small-move estimate.
XIII-089From the practice bank · 16
With other inputs fixed, what usually happens to a standard option's value when implied volatility increases?
Higher implied volatility generally increases the values of standard calls and puts, other inputs equal. Remember: Standard options generally have positive vega.
Hint Common mistake: A high-volatility option is not automatically profitable to buy. Consider uncertainty and possible option payoff.
XIII-090From the practice bank · 17
Which Greek describes how an option's delta changes for a small move in the underlying?
Gamma measures the rate of change of delta as the underlying price moves. Remember: Gamma shows how quickly delta changes.
Hint Common mistake: Do not confuse delta with gamma. Think of the sensitivity of a sensitivity.
XIII-091From the practice bank · 18
An underlying trades at ₹105. A call has strike ₹110 and positive premium. Which moneyness category applies?
The call is out of the money because buying at ₹110 is worse than the ₹105 underlying price. Remember: Out-of-the-money calls can still have time value.
Hint Common mistake: Positive premium does not imply positive intrinsic value. Compare the exercise price with the market price.
XIII-092From the practice bank · 19
A call with strike ₹110 is purchased for ₹8. At expiry the underlying is ₹130. What is profit per unit?
Call intrinsic payoff = max(130 − 110, 0) = ₹20. Net profit = ₹20 − ₹8 = ₹12. Remember: Option payoff and net profit are different.
Hint Common mistake: Always include premium when calculating option profit. Subtract the paid premium from the expiry exercise benefit.
XIII-093From the practice bank · 20
A trader writes a put with strike ₹95 for ₹6 premium. At expiry the underlying is ₹85. What is profit per unit?
Short put profit = premium − max(strike − spot, 0) = 6 − (95 − 85) = −₹4. Remember: Option writers must account for exercise loss net of premium.
Hint Common mistake: Premium received does not ensure a profitable short put. Combine premium received with the writer's intrinsic obligation.
XIII-094From the practice bank · 21
A put with strike ₹120 costs ₹9. At expiry its underlying is ₹90. What is the buyer's net profit per unit?
Put intrinsic payoff = 120 − 90 = ₹30. Net profit = 30 − 9 = ₹21. Remember: Long put profit is intrinsic payoff less premium.
Hint Common mistake: A large decline still requires deducting option cost. Calculate put exercise value and deduct cost.
XIII-095From the practice bank · 22
In a one-period model, a ₹100 share becomes ₹120 or ₹90. Interest is zero and a ₹100-strike call expires then. What is the no-arbitrage call value?
Risk-neutral up probability = (100 − 90) ÷ (120 − 90) = 1/3. Call payoffs are ₹20 and ₹0. Value = 20 × 1/3 = approximately ₹6.67. Remember: A binomial price weights contingent payoffs using risk-neutral probabilities.
Hint Common mistake: Do not use an unprovided subjective probability. Use risk-neutral probabilities rather than assuming equal chances.
XIII-096The strike price is the level at which an option can be exercised.
Read moreExpiry day is the last day on which a derivative contract can be traded.
Read moreMoneyness describes where an option's strike sits relative to the current level of the underlying.
Read moreDelta is the rate at which an option's premium changes for a one-unit change in the underlying.
Read moreIntrinsic value is the part of an option's premium that would survive if the contract expired at this instant.
Read moreTime value is the part of an option's premium that is left after intrinsic value is taken out.
Read moreBreakeven is the point at which a defined result is exactly zero.
Read more