NISM Series VIII: Equity Derivatives | Chapter 4 MCQs | 40 Solved Questions

Chapter 4: Introduction to Options - 35 Solved MCQs

💡 MASTERING OPTIONS:

This chapter is the heart of NISM 8. Focus on Moneyness (ITM/ATM/OTM), Intrinsic vs. Time Value, and Option Greeks. Click the questions below to reveal the answers!

1. What is the primary advantage of options over forward contracts?

A) Options require no upfront payment
B) Options provide the right but not the obligation to buy or sell
C) Options are traded in over the counter market
D) Options do not involve any risk

View Answer & Logic

Answer: B) Options provide the right but not the obligation to buy or sell

Explanation: In a forward, both parties are obligated. In an option, only the seller is obligated if the buyer chooses to exercise their right.

2. ________ allows the holder to exercise the option at any time before expiry.

A) European option
B) American option

View Answer & Logic

Answer: B) American option

Explanation: American options offer flexibility to exercise anytime before expiry, whereas European options can only be exercised on the expiry date.

3. What is the strike price of an option?

A) The price paid for the option contract
B) The price at which the underlying asset can be bought or sold if exercised
C) The price at which the option was initially issued
D) The current market price of the underlying asset

View Answer & Logic

Answer: B) The price at which the underlying asset can be bought or sold if exercised

4. Which term describes a transaction that eliminates an existing options position?

A) Opening a position
B) Closing a position
C) Exercising a position
D) Rolling a position

View Answer & Logic

Answer: B) Closing a position

5. What is the 'contract trading cycle' for stock option contracts on the NSE?

A) Weekly
B) Monthly
C) Three-month trading cycle
D) Quarterly

View Answer & Logic

Answer: C) Three-month trading cycle

Explanation: NSE follows a Near, Next, and Far month cycle for stock options.

6. The intrinsic value of an option can be negative. True or False?

View Answer & Logic

Answer: False

Explanation: Intrinsic value is at minimum zero. If an option is OTM, it has no intrinsic value, but it is never negative.

7. Nifty Put (Strike 18400), Spot Price 18500. Intrinsic Value?

A) 0
B) 100
C) -100
D) 18400

View Answer & Logic

Answer: A) 0

Math: Put IV = Strike - Spot. Since 18400 - 18500 is negative, the value is zero (OTM).

8. Premium is 162.80, Intrinsic Value is 82.30. Time Value?

A) Rs. 80.50
B) Rs. 84.90
C) Rs. 124.50
D) Rs. 177.60

View Answer & Logic

Answer: A) Rs. 80.50

Math: 162.80 (Premium) - 82.30 (Intrinsic) = 80.50.

9. Which is a characteristic of European options?

A) They can only be exercised on the expiration date
B) They are not traded on exchanges
C) They are settled daily
D) They can be exercised at any time

View Answer & Logic

Answer: A) They can only be exercised on the expiration date

10. Strike is 18400, Spot is 18315.10. Put Intrinsic Value?

A) 0
B) 177.60
C) 124.50
D) 84.90

View Answer & Logic

Answer: D) 84.90

Math: 18400 (X) - 18315.10 (S) = 84.90.

11. What is the maximum loss for a long call option position?

A) The premium paid
B) The strike price
C) Unlimited
D) Difference between Spot and Strike

View Answer & Logic

Answer: A) The premium paid

12. Buy Call (Strike 17500, Premium 95). Index at expiry is 18200. Net Profit?

A) Rs. 595
B) Rs. 405
C) Rs. 605
D) Rs. 600

View Answer & Logic

Answer: C) Rs. 605

Math: (18200 - 17500) - 95 = 700 - 95 = 605.

13. Which is true about the payoff of a short call?

A) Max profit is limited to premium received
B) Max loss is limited to premium received
C) Max loss is zero
D) Max profit is unlimited

View Answer & Logic

Answer: A) Max profit is limited to premium received

14. Delta for a put option buyer is positive. True or False?

View Answer & Logic

Answer: False

Explanation: Puts have negative Delta because their value increases when the market falls.

15. How is the intrinsic value of a call option calculated?

A) X - S
B) S - X
C) S / X
D) X + S

View Answer & Logic

Answer: B) S - X

16. A put option is ITM when Spot Price is ______ Strike Price.

A) Lower than
B) Higher than
C) Equal to
D) Unrelated to

View Answer & Logic

Answer: A) Lower than

17. If the last Thursday is a holiday, when does the option expire?

A) Next Friday
B) Previous trading day
C) Holiday has no effect
D) Carried forward to next month

View Answer & Logic

Answer: B) Previous trading day

18. What is the risk-return profile of a short-put position?

A) Limited risk and limited return
B) Unlimited risk and unlimited return
C) Unlimited risk and limited return
D) Limited risk and unlimited return

View Answer & Logic

Answer: C) Unlimited risk and limited return

19. How are margin payments managed in futures compared to options?

A) Only buyers pay in futures
B) Only sellers pay in options
C) No margins in futures
D) Both buyer and seller pay in options

View Answer & Logic

Answer: B) Only sellers pay margins in options

20. What is the main characteristic of options risk exposure?

A) Symmetric
B) Constant
C) None
D) Asymmetric

View Answer & Logic

Answer: D) Asymmetric

Explanation: Potential gains and losses are not equal for buyers vs sellers.

21. How does higher interest rate impact call option value?

A) Decreases value
B) No impact
C) Increases value
D) Causes expiry

View Answer & Logic

Answer: C) Increases value

22. If volatility decreases, premiums of both call and put options:

A) Both increase
B) Both decrease
C) Call increases, Put decreases
D) Call decreases, Put increases

View Answer & Logic

Answer: B) Both decrease

23. Which Greek measures sensitivity to underlying price changes?

A) Vega
B) Delta
C) Gamma
D) Theta

View Answer & Logic

Answer: B) Delta

24. Sensitivity of an option's price to changes in market volatility:

A) Delta
B) Gamma
C) Theta
D) Vega

View Answer & Logic

Answer: D) Vega

25. Delta is 0.50, Gamma is 0.08. New Delta if price increases by Rs. 2?

A) 0.50
B) 0.66
C) 0.58
D) 0.74

View Answer & Logic

Answer: B) 0.66

Math: 0.08 (Gamma) * 2 (Change) = 0.16. New Delta = 0.50 + 0.16 = 0.66.

26. Which Greek is often referred to as the hedge ratio?

A) Gamma
B) Theta
C) Delta
D) Vega

View Answer & Logic

Answer: C) Delta

27. How do traders calculate implied volatility (IV)?

A) Monte Carlo
B) Run Black-Scholes in reverse
C) Historical data
D) Binomial model

View Answer & Logic

Answer: B) By running the Black-Scholes model in reverse

28. Which pricing model is known for its iterative nature?

A) Black & Scholes
B) Binomial Pricing Model
C) Monte Carlo
D) Trinomial Model

View Answer & Logic

Answer: B) Binomial Pricing Model

29. If Index is at 17562, which Call strike has the highest time value?

A) 17500
B) 17400
C) 17300
D) 17600

View Answer & Logic

Answer: D) 17600

Explanation: 17600 is OTM. Since it has zero Intrinsic value, its entire premium is Time Value.

30. BEP for Call (Strike 17500, Premium 185)?

A) 17500
B) 17300
C) 17800
D) 17685

View Answer & Logic

Answer: D) 17685

Math: Strike (17500) + Premium (185) = 17685.

31. Which option has the highest uncertainty regarding its moneyness?

A) ITM
B) ATM
C) OTM
D) DITM

View Answer & Logic

Answer: B) ATM (At-the-money)

32. Call seller's max gain occurs when index closes at or below:

A) Premium
B) Strike price
C) BEP
D) Intrinsic value

View Answer & Logic

Answer: B) Strike price

33. Index at 17562, Buy Put (Strike 17500). Intrinsic Value is:

A) 62
B) 121
C) 38
D) 0

View Answer & Logic

Answer: D) 0

Explanation: 17500 Put is OTM because Spot (17562) is higher than Strike.

34. Short Put (Strike 300, Premium 35). Max possible loss?

A) 0
B) 300
C) 265
D) 35

View Answer & Logic

Answer: C) 265

Math: Max loss occurs if stock hits zero. Loss = Strike (300) - Premium (35) = 265.

35. What represents 'Time Value' of an option?

A) Intrinsic Value - Premium
B) Premium - Intrinsic Value
C) Strike - Spot
D) Spot - Strike

View Answer & Logic

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Dhaval Visariya

AMFI Registered Distributor (ARN-327925) | Software Developer & Finance Enthusiast

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