📈 NISM Series VIII: Equity Derivatives

Master equity derivatives trading with comprehensive coverage of futures, options, strategies, and risk management. Become a certified equity derivatives professional.

100 Questions

2 Hours

60% Passing Score

25% Negative Marking

📋 Quick Overview

Eligibility

Age: 18+ years
Education: No specific requirements
Experience: No prior experience required

Target Audience

• Derivatives Traders
• Risk Managers
• Broking Firm Employees
• Portfolio Managers

Career Benefits

• Derivatives Trading Authorization
• Enhanced Market Knowledge
• Risk Management Skills
• Regulatory Compliance

Exam Format

• Computer-based
• Multiple choice
• 1 mark per question
• 25% negative marking
• 60% to pass

📊 Study Progress Tracker

Unit 1: Derivatives Market (15%)

Unit 2: Forward & Futures (20%)

Unit 3: Options Basics (20%)

Unit 4: Options Strategies (15%)

Unit 5: Options Pricing (10%)

Unit 6: Risk Management (10%)

Unit 7: Regulatory Framework (10%)

📚 Complete Syllabus Breakdown

Detailed coverage of all units with weightages and key topics

Unit 1: Derivatives Market

15%

Introduction to Derivatives
Types of Derivatives
Functions and Benefits
Market Participants
Derivatives Markets in India
Global Derivatives Markets

Unit 2: Forward & Futures

20%

Forward Contracts
Futures Contracts
Pricing and Valuation
Index Futures
Stock Futures
Trading Mechanisms
Margins and Settlement

Unit 3: Options Basics

20%

Call and Put Options
Option Payoffs
Intrinsic and Time Value
American vs European Options
Index and Stock Options
Exercise and Assignment

Unit 4: Options Strategies

15%

Basic Strategies
Spreads (Bull, Bear, Butterfly)
Straddles and Strangles
Covered Calls
Protective Puts
Synthetic Strategies

Unit 5: Options Pricing

10%

Factors Affecting Option Prices
Black-Scholes Model
Greeks (Delta, Gamma, Theta, Vega)
Implied Volatility
Put-Call Parity

Unit 6: Risk Management

10%

Types of Risks
Risk Measurement
Margin Requirements
Position Limits
Risk Control Measures

Unit 7: Regulatory Framework

10%

SEBI Regulations
Exchange Rules
Clearing and Settlement
Surveillance and Compliance
Investor Protection

📈 Unit 1: Derivatives Market (15%)

What are Derivatives?

Derivatives are financial instruments whose value is derived from an underlying asset. The underlying asset can be stocks, bonds, commodities, currencies, interest rates, or market indices.

💡 Key Definition

A derivative is a contract between two or more parties whose value is dependent upon or derived from one or more underlying assets.

Types of Derivatives

1. Based on Trading:

Exchange-Traded Derivatives: Standardized contracts traded on exchanges
Over-the-Counter (OTC) Derivatives: Customized contracts between parties

2. Based on Product:

Forwards: Obligation to buy/sell at future date
Futures: Standardized forward contracts
Options: Right but not obligation to buy/sell
Swaps: Exchange of cash flows

📝 Example

Stock Future: A contract to buy/sell 1000 shares of Reliance at ₹2500 per share on December 30, 2024. Current price ₹2450. If price rises to ₹2600, buyer gains ₹1,00,000.

Functions and Benefits

Risk Management (Hedging): Protect against adverse price movements
Price Discovery: Determine fair value of underlying assets
Speculation: Profit from price movements
Arbitrage: Exploit price differences
Leverage: Control large positions with small capital
Liquidity: Enhance market liquidity

⚠️ Important

While derivatives provide leverage and risk management benefits, they also amplify losses and require sophisticated risk management.

Market Participants

Participant	Objective	Characteristics
Hedgers	Risk Management	Have exposure to underlying, seek protection
Speculators	Profit from price movements	Take on risk for potential returns
Arbitrageurs	Risk-free profits	Exploit price discrepancies
Market Makers	Provide liquidity	Quote buy and sell prices

🔮 Unit 2: Forward & Futures (20%)

Forward Contracts

A forward contract is a customized agreement between two parties to buy or sell an asset at a specified price on a future date.

Characteristics:

Customized contract terms
No initial margin required
High counterparty risk
Not tradeable
Settled at maturity

Forward Price Formula

F = S × e^(r-d)T

Where:

F = Forward Price, S = Spot Price, r = Risk-free rate

d = Dividend yield, T = Time to maturity

Futures Contracts

Futures are standardized forward contracts traded on exchanges with daily settlement.

Key Features:

Standardization: Fixed contract size, expiry dates
Margin System: Initial and maintenance margins
Daily Settlement: Mark-to-market daily
Clearinghouse: Eliminates counterparty risk
Liquidity: Can be traded anytime

📝 Futures Example

Nifty Future Contract:

• Lot Size: 50 units

• Current Nifty: 18,000

• Future Price: 18,100

• Contract Value: 18,100 × 50 = ₹9,05,000

• Margin Required: ~10-15% = ₹1,00,000 approx

Types of Futures in India

1. Index Futures:

Nifty 50: Lot size 50, tick size 0.05
Bank Nifty: Lot size 25, tick size 0.05
Nifty IT: Lot size 50, tick size 0.05
Sensex: Lot size 10, tick size 0.05

2. Stock Futures:

Available on eligible stocks
Minimum lot size varies by stock
Monthly expiry cycles
Maximum 3 month contracts

💡 Contract Specifications

All equity derivatives in India expire on the last Thursday of every month. If Thursday is a holiday, expiry is on the previous trading day.

Margin System

Types of Margins:

Initial Margin: Required to open position (SPAN + Exposure)
Maintenance Margin: Minimum balance to maintain
Mark-to-Market Margin: Daily settlement of P&L
Delivery Margin: Additional margin for physical delivery

⚠️ Margin Call

If account balance falls below maintenance margin, broker issues margin call. If not met, positions may be squared off.

🎯 Unit 3: Options Basics (20%)

What are Options?

An option is a contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time period.

Types of Options:

Call Option: Right to BUY the underlying asset
Put Option: Right to SELL the underlying asset

💡 Key Terminology

Strike Price: Price at which option can be exercised
Premium: Price paid to buy the option
Expiry: Date when option expires
Exercise: Using the right given by option

Call Option Payoffs

For Call Buyer (Long Call):

Breakeven: Strike Price + Premium Paid
Maximum Loss: Premium Paid
Maximum Profit: Unlimited

For Call Seller (Short Call):

Breakeven: Strike Price + Premium Received
Maximum Profit: Premium Received
Maximum Loss: Unlimited

📝 Call Option Example

Reliance Call Option:

• Current Price: ₹2500

• Strike Price: ₹2550

• Premium: ₹30

• If Reliance closes at ₹2650 on expiry:

• Buyer Profit: (2650 - 2550 - 30) = ₹70 per share

• Seller Loss: ₹70 per share

Put Option Payoffs

For Put Buyer (Long Put):

Breakeven: Strike Price - Premium Paid
Maximum Loss: Premium Paid
Maximum Profit: Strike Price - Premium (if stock goes to zero)

For Put Seller (Short Put):

Breakeven: Strike Price - Premium Received
Maximum Profit: Premium Received
Maximum Loss: Strike Price - Premium

Options Payoff Matrix

Position	Market View	Max Profit	Max Loss	Breakeven
Long Call	Bullish	Unlimited	Premium Paid	Strike + Premium
Short Call	Bearish/Neutral	Premium Received	Unlimited	Strike + Premium
Long Put	Bearish	Strike - Premium	Premium Paid	Strike - Premium
Short Put	Bullish/Neutral	Premium Received	Strike - Premium	Strike - Premium

Intrinsic Value and Time Value

Intrinsic Value:

Call Option: Max(Spot Price - Strike Price, 0)
Put Option: Max(Strike Price - Spot Price, 0)

Time Value:

Time Value = Option Premium - Intrinsic Value

💡 Time Decay

Time value decreases as expiry approaches, accelerating in the final weeks. This is called "time decay" or "theta decay".

Option Moneyness:

In-the-Money (ITM): Option has intrinsic value
At-the-Money (ATM): Strike price equals spot price
Out-of-the-Money (OTM): Option has no intrinsic value

🧩 Unit 4: Options Strategies (15%)

Basic Strategies

1. Covered Call:

Hold stock + Sell call option

Purpose: Generate income from stock holdings
Max Profit: Strike Price - Stock Price + Premium
Max Loss: Stock Price - Premium
When to Use: Neutral to slightly bullish view

2. Protective Put:

Hold stock + Buy put option

Purpose: Insurance against stock price fall
Max Profit: Unlimited
Max Loss: Stock Price - Strike Price + Premium
When to Use: Bullish but want downside protection

Spread Strategies

1. Bull Call Spread:

Buy lower strike call + Sell higher strike call

Market View: Moderately bullish
Max Profit: Higher Strike - Lower Strike - Net Premium
Max Loss: Net Premium Paid

2. Bear Put Spread:

Buy higher strike put + Sell lower strike put

Market View: Moderately bearish
Max Profit: Higher Strike - Lower Strike - Net Premium
Max Loss: Net Premium Paid

📝 Bull Call Spread Example

Nifty Bull Call Spread:

• Buy 18000 Call at ₹150

• Sell 18200 Call at ₹75

• Net Premium: ₹75

• Max Profit: 200 - 75 = ₹125

• Max Loss: ₹75

• Breakeven: 18000 + 75 = 18075

Volatility Strategies

1. Long Straddle:

Buy ATM call + Buy ATM put (same strike, same expiry)

Market View: Expect high volatility, direction uncertain
Max Profit: Unlimited
Max Loss: Total premium paid
Breakeven: Strike ± Total Premium

2. Long Strangle:

Buy OTM call + Buy OTM put (different strikes)

Market View: Expect high volatility, cheaper than straddle
Max Profit: Unlimited
Max Loss: Total premium paid
Breakeven: Lower Strike - Premium, Higher Strike + Premium

3. Butterfly Spread:

Buy 1 ITM call + Sell 2 ATM calls + Buy 1 OTM call

Market View: Low volatility, price stays near ATM strike
Max Profit: Middle Strike - Lower Strike - Net Premium
Max Loss: Net Premium Paid

Strategy Selection Guide

Market Outlook	Volatility View	Recommended Strategy	Risk Profile
Strongly Bullish	Any	Long Call / Bull Call Spread	Limited Loss, High Profit
Strongly Bearish	Any	Long Put / Bear Put Spread	Limited Loss, High Profit
Neutral	Low	Short Straddle / Butterfly	Limited Profit, High Risk
Neutral	High	Long Straddle / Strangle	Limited Loss, High Profit

🔢 Unit 5: Options Pricing (10%)

Factors Affecting Option Prices

Primary Factors:

Underlying Price (S): Direct impact on calls, inverse on puts
Strike Price (K): Lower strikes cost more for calls
Time to Expiry (T): More time = higher premium
Volatility (σ): Higher volatility = higher premium
Risk-free Rate (r): Higher rates favor calls
Dividends (D): Reduce call premiums, increase put premiums

💡 Volatility Impact

Volatility is the most important factor after underlying price. Historical volatility measures past price movements, while implied volatility reflects market expectations.

The Greeks

1. Delta (Δ):

Measures price sensitivity to underlying price change
Call Delta: 0 to +1, Put Delta: -1 to 0
ATM options have delta around ±0.5
Used for hedge ratio calculation

2. Gamma (Γ):

Rate of change of delta
Highest for ATM options
Decreases as option moves ITM or OTM
Important for dynamic hedging

3. Theta (Θ):

Time decay - premium lost per day
Always negative for long options
Accelerates as expiry approaches
Highest for ATM options

4. Vega (ν):

Sensitivity to volatility changes
Positive for long options (calls and puts)
Higher for ATM options and longer-dated options
Important for volatility trading

Greeks Summary

Delta: ∂P/∂S (Price sensitivity)

Gamma: ∂²P/∂S² (Delta sensitivity)

Theta: ∂P/∂T (Time decay)

Vega: ∂P/∂σ (Volatility sensitivity)

Rho: ∂P/∂r (Interest rate sensitivity)

Black-Scholes Model

The Black-Scholes model is the fundamental framework for options pricing, providing theoretical estimates of options prices.

Model Assumptions:

Constant volatility and risk-free rate
No dividends during option life
European exercise (only at expiry)
No transaction costs
Log-normal distribution of stock prices

Black-Scholes Formula (Simplified)

Call Option: C = S₀N(d₁) - Ke^(-rT)N(d₂)

Put Option: P = Ke^(-rT)N(-d₂) - S₀N(-d₁)

Where N(x) is cumulative standard normal distribution

⚠️ Model Limitations

Real markets violate many B-S assumptions. The model serves as a baseline, but traders adjust for volatility smiles, early exercise features, and dividends.

Put-Call Parity

Put-Call Parity establishes the relationship between call and put option prices for the same underlying, strike, and expiry.

Put-Call Parity Formula

C + PV(K) = P + S

Or: C - P = S - PV(K)

Where PV(K) = Present Value of Strike Price

📝 Put-Call Parity Example

Given: Stock Price = ₹100, Strike = ₹100, Risk-free rate = 8%, Time = 3 months

PV(K) = 100/e^(0.08×0.25) = ₹98.02

If Call Price = ₹5, then Put Price should be:

P = C + PV(K) - S = 5 + 98.02 - 100 = ₹3.02

⚠️ Unit 6: Risk Management (10%)

Types of Risks in Derivatives

1. Market Risk:

Price Risk: Adverse movement in underlying price
Volatility Risk: Changes in implied volatility
Interest Rate Risk: Changes in risk-free rates
Dividend Risk: Unexpected dividend announcements

2. Operational Risk:

Execution Risk: Errors in trade execution
Model Risk: Incorrect pricing models
Technology Risk: System failures
Human Error: Trading mistakes

3. Liquidity Risk:

Market Liquidity: Unable to exit positions
Funding Liquidity: Unable to meet margin calls

4. Credit Risk:

Counterparty Risk: Default by other party
Settlement Risk: Failure to deliver/pay

Risk Measurement Techniques

1. Value at Risk (VaR):

Maximum loss over specific time period at given confidence level
Example: 1-day VaR of ₹10 lakhs at 95% confidence
Methods: Historical, Parametric, Monte Carlo

2. Scenario Analysis:

Stress testing under extreme market conditions
What-if analysis for various market scenarios
Helps identify tail risks

3. Greek-based Risk:

Delta Risk: Exposure to underlying price moves
Gamma Risk: Risk of delta changing
Vega Risk: Exposure to volatility changes
Theta Risk: Time decay exposure

💡 Portfolio Greeks

For a portfolio, total Greeks = Sum of individual position Greeks. This helps in portfolio-level risk management and hedging decisions.

Margin System

SPAN Margin System:

Standard Portfolio Analysis of Risk
Calculates worst-case loss over 1-day holding period
Considers 16 scenarios of price and volatility changes
Dynamic margin calculation based on portfolio risk

Exposure Margin:

Additional margin to cover risks not captured by SPAN
Typically 3-5% of contract value
Covers extreme price movements beyond SPAN scenarios

📝 Margin Calculation Example

Long Nifty Future at 18,000:

• Contract Value: 18,000 × 50 = ₹9,00,000

• SPAN Margin: ₹85,000 (varies with volatility)

• Exposure Margin: ₹27,000 (3% of contract value)

• Total Margin Required: ₹1,12,000

Position Limits and Risk Controls

Position Limits:

Market-wide Position Limit (MWPL): 20% of free float
Client Level: 1% of free float or ₹500 crores, whichever is higher
FII/FPI Limits: Aggregate FII limit in F&O

Risk Control Measures:

Circuit Breakers: Trading halts on excessive price movements
Price Bands: Daily price movement limits
Velocity Checks: Sudden large order alerts
Exposure Limits: Maximum exposure per client/dealer

⚠️ Risk Management Best Practices

Never risk more than you can afford to lose
Diversify across strategies and underlyings
Use stop-losses and position sizing
Monitor Greeks and portfolio risk continuously
Have contingency plans for extreme scenarios

📋 Unit 7: Regulatory Framework (10%)

SEBI Regulations for Derivatives

Key Regulations:

SEBI (Stock Exchanges and Clearing Corporations) Regulations, 2012
SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003
SEBI (Intermediaries) Regulations, 2008
SEBI Circular on Risk Management

Regulatory Objectives:

Investor protection
Market integrity and transparency
Systemic risk management
Fair and efficient price discovery

Exchange Rules and Procedures

Contract Specifications:

Standardization: Fixed lot sizes, expiry dates, tick sizes
Underlying Selection: Criteria for derivative eligibility
Expiry Schedule: Monthly expiry cycles
Exercise and Assignment: Automatic exercise for ITM options

Trading Rules:

Trading Hours: 9:15 AM to 3:30 PM
Order Types: Market, limit, stop-loss orders
Price Bands: Daily price movement limits
Settlement: Cash settlement for index derivatives

💡 Contract Eligibility Criteria

For stock derivatives: Market cap > ₹500 crores, average daily turnover > ₹10 crores, and other liquidity parameters must be met.

Clearing and Settlement

Role of Clearing Corporation:

Central Counterparty: Becomes buyer to every seller and seller to every buyer
Risk Management: Margin collection and mark-to-market
Settlement: Cash settlement on expiry
Default Management: Handles member defaults

Settlement Process:

Mark-to-Market: Daily settlement of profits/losses
Expiry Settlement: Final settlement on last trading day
Physical Delivery: For eligible stock futures/options
Cash Settlement: For index derivatives

📝 Settlement Example

Nifty Options Expiry:

• Settlement Price: Average of Nifty spot prices in last 30 minutes

• ITM options automatically exercised

• Cash settlement based on intrinsic value

• Settlement on T+1 day

Surveillance and Compliance

Market Surveillance:

Real-time Monitoring: Unusual price/volume movements
Automated Alerts: System-generated surveillance alerts
Investigation: Follow-up on suspicious activities
Action: Warning, penalty, or trading ban

Prohibited Practices:

Market Manipulation: Artificial price movements
Insider Trading: Trading on material non-public information
Front Running: Trading ahead of client orders
Circular Trading: Creating artificial volumes

Compliance Requirements:

Client Due Diligence: KYC and risk profiling
Audit Trail: Complete transaction records
Reporting: Regulatory reporting requirements
Risk Management: Adequate risk controls

Investor Protection Measures

Suitability and Appropriateness:

Risk Profiling: Assess client's risk appetite and knowledge
Product Suitability: Match products to client profile
Disclosure: Risk disclosure documents
Cooling Period: Time to reconsider high-risk products

Grievance Redressal:

Exchange Level: Investor grievance cells
SEBI SCORES: Online complaint platform
Arbitration: Alternative dispute resolution
Ombudsman: For unresolved complaints

⚠️ Risk Disclosure

All derivatives clients must sign Risk Disclosure Documents highlighting the risks involved in derivatives trading, including total loss of capital.

🎯 Exam Preparation Strategy

📊

Focus on High Weightage Units

Prioritize Units 2 (20%), 3 (20%), and 1 (15%) as they carry maximum marks and form the foundation.

🧮

Master Payoff Calculations

Practice option payoffs, breakeven calculations, and strategy P&L scenarios extensively.

📋

Understand Greeks Conceptually

Focus on understanding what each Greek measures and their practical applications in trading.

📝

Practice Strategy Questions

Work through various market scenarios and identify appropriate strategies for each situation.

📚

Know Regulatory Framework

Memorize key position limits, margin requirements, and surveillance measures.

⏰

Time Management

Allocate 1.2 minutes per question. Solve calculation-based questions first.

🧮 Important Formulas & Numbers to Remember

Key Formulas

Essential Calculations

Forward Price: F = S × e^(r-d)T

Call Payoff: Max(S - K, 0) - Premium

Put Payoff: Max(K - S, 0) - Premium

Put-Call Parity: C - P = S - PV(K)

Intrinsic Value (Call): Max(S - K, 0)

Intrinsic Value (Put): Max(K - S, 0)

Time Value: Option Premium - Intrinsic Value

Key Numbers & Specifications

Nifty Lot Size: 50 units
Bank Nifty Lot Size: 25 units
Sensex Lot Size: 10 units
Tick Size: 0.05 for index derivatives
Trading Hours: 9:15 AM to 3:30 PM
Expiry: Last Thursday of every month
Position Limit (Client): 1% of free float or ₹500 crores
MWPL: 20% of free float market-wide
Exposure Margin: Typically 3-5% of contract value
Maximum Contracts: 3 monthly series at any time

Strategy Quick Reference

Strategy	Construction	Market View	Max Risk	Max Reward
Long Call	Buy Call	Bullish	Premium Paid	Unlimited
Bull Call Spread	Buy Low Strike Call + Sell High Strike Call	Moderately Bullish	Net Premium	Strike Diff - Net Premium
Long Straddle	Buy ATM Call + Buy ATM Put	High Volatility	Total Premium	Unlimited
Covered Call	Own Stock + Sell Call	Neutral to Slightly Bullish	Stock Price - Premium	Premium + (Strike - Stock Price)

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Master equity derivatives with comprehensive practice tests covering all units and question types!

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⚠️ Exam Day Tips

IMPORTANT: 25% negative marking - avoid random guessing
Focus on payoff diagrams and strategy identification questions
Greeks and risk management concepts are frequently tested
Know regulatory limits and position requirements
Practice time management - calculation questions take longer
60% passing score requires getting 60 out of 100 questions correct
Only attempt questions you're reasonably confident about