Options is the largest chapter in the NISM Series VIII syllabus — in our question bank it accounts for 149 of 600 questions, roughly one in four. If you are short of time, this is the chapter to get right.
Here is the material the exam actually tests, in the order it makes sense to learn it.
Calls and puts: the four positions
There are only four things you can do with an option, and every exam question is one of them:
| Position | You have the right / obligation to | Max gain | Max loss |
|---|---|---|---|
| Buy a call | Right to buy at strike | Unlimited | Premium paid |
| Sell (write) a call | Obligation to sell at strike | Premium received | Unlimited |
| Buy a put | Right to sell at strike | Strike − premium | Premium paid |
| Sell (write) a put | Obligation to buy at strike | Premium received | Strike − premium |
The asymmetry is the whole point: the buyer's loss is capped at the premium; the writer's is not. A very large number of exam questions are simply testing whether you know which side of that asymmetry you are on.
Moneyness
Moneyness describes where the strike sits relative to the spot price.
| Call | Put | |
|---|---|---|
| In the money (ITM) | Spot > Strike | Spot < Strike |
| At the money (ATM) | Spot = Strike | Spot = Strike |
| Out of the money (OTM) | Spot < Strike | Spot > Strike |
The mnemonic that survives exam pressure: a call wants the price up, a put wants it down. Everything else follows.
Intrinsic value and time value
Every option premium splits into exactly two parts:
Premium = Intrinsic value + Time value
- Intrinsic value is what you would get by exercising right now. For a call it is (Spot − Strike), for a put it is (Strike − Spot) — and it is never negative. An out-of-the-money option has zero intrinsic value, not a negative one.
- Time value is everything else in the premium: the market's price for the chance that the option moves further into the money before expiry.
Two consequences the exam loves:
- An OTM option's premium is entirely time value.
- At expiry, time value is zero. The option is worth exactly its intrinsic value.
The Greeks
The exam tests the Greeks conceptually far more often than numerically. Know the direction of each relationship.
Delta — how much the option price moves for a 1-unit move in the underlying.
- Deep ITM call → delta approaches 1
- ATM option → delta around 0.5
- Far OTM option → delta approaches 0
- Put deltas are negative, from 0 to −1.
Gamma — the rate of change of delta. Highest for at-the-money options near expiry; low for deep ITM and far OTM. Gamma is what makes an ATM option's delta swing about violently as expiry approaches.
Theta — time decay. Almost always works against the buyer and for the writer, and it accelerates as expiry nears. This is why writers like short-dated options.
Vega — sensitivity to volatility. Higher volatility means a higher premium for both calls and puts, because either has more chance of finishing deep in the money. Vega is highest for ATM options with time left.
Payoff arithmetic — the marks most often thrown away
This is where careless candidates lose the exam. The questions look like this:
Ms Mishra sold a put option of strike ₹500 on PQR stock for a premium of ₹50. The lot size is 1,000. On expiry the stock closed at ₹440. What is her profit or loss?
Work it in three steps, every time:
- Is it exercised? The put is ITM because spot (440) is below strike (500). The buyer exercises.
- Intrinsic value per share: 500 − 440 = ₹60. The writer pays this out.
- Net: premium received (50) − paid out (60) = −₹10 per share × 1,000 = −₹10,000.
The trap is stopping at step 2 and answering −₹60,000, or getting the sign backwards because you forgot she was the writer.
Build the habit: identify the position, compute intrinsic value, then add or subtract the premium. Never skip step 1.
What to memorise before exam day
- The four positions and their maximum gain and loss.
- Moneyness conditions for calls and puts.
- Premium = intrinsic + time value; intrinsic is never negative.
- Delta approaches 1 (deep ITM) and 0 (far OTM); gamma peaks ATM.
- Theta hurts the buyer; vega rises with volatility for calls and puts alike.
- The three-step payoff method.
Remember that Series VIII carries 25% negative marking, so on an options question you cannot crack, eliminate what you can and only then commit.
Practise all 149 options questions free on ScoreSetu, each with a worked explanation, then test yourself under the clock with a full-length mock.