NISM Series VIII, Chapter 4. Updated Jun 2026, 12-minute read.

Options Contracts — Calls, Puts, Payoffs and Pricing

Options are the most versatile — and most frequently tested — instruments in NISM Series VIII. Chapter 4 covers the mechanics of calls and puts, how they're priced, and the critical concept of put-call parity.

Key takeaways

Call option: right to BUY at strike price. Profitable when spot > strike + premium
Put option: right to SELL at strike price. Profitable when spot < strike − premium
Option buyer pays premium; option writer/seller receives premium and takes on obligation
Moneyness: ITM (profitable if exercised now), ATM (spot ≈ strike), OTM (not profitable if exercised now)
Option value = Intrinsic Value + Time Value; time value decays to zero at expiry (Theta decay)
Put-Call Parity: C − P = S − PV(K) — fundamental no-arbitrage relationship
Maximum loss for option buyer = premium paid; maximum profit = unlimited (calls) or strike − premium (puts)

Call Options

A call option gives the buyer the right (but not the obligation) to purchase the underlying asset at the strike price (K) on or before the expiry date.

Call Option Payoff at Expiry:

Buyer's payoff = max(S_T − K, 0) − Premium
Seller's payoff = Premium − max(S_T − K, 0)

The call buyer profits when the spot price (S_T) exceeds the break-even point (K + Premium). The call writer profits if S_T ≤ K (option expires worthless).

Put Options

A put option gives the buyer the right to sell the underlying at the strike price.

Put Option Payoff at Expiry:

Buyer's payoff = max(K − S_T, 0) − Premium
Seller's payoff = Premium − max(K − S_T, 0)

Break-even for put buyer = K − Premium. The put is useful for downside protection (portfolio insurance).

Moneyness

Moneyness	Call	Put	Intrinsic Value
In-the-Money (ITM)	S > K	S < K	Positive
At-the-Money (ATM)	S ≈ K	S ≈ K	Zero
Out-of-the-Money (OTM)	S < K	S > K	Zero

Option Premium Components

Option Premium = Intrinsic Value + Time Value

Intrinsic Value: Amount by which the option is ITM. Always ≥ 0.
Time Value: Premium attributable to the remaining time until expiry. Decreases as expiry approaches (Theta decay). Highest for ATM options.

Put-Call Parity

For European options on non-dividend-paying assets:

C − P = S − PV(K)
or equivalently: C + PV(K) = P + S

Where PV(K) = K × e^−rT = present value of strike price.

This is a fundamental no-arbitrage relationship. If violated, riskless arbitrage profit is possible.

European vs American Options

European: Can only be exercised at expiry. All index options (Nifty, Bank Nifty) in India are European.
American: Can be exercised any time before expiry. All single-stock options in India are American-style.

Frequently asked questions

What is the maximum profit and loss for an option seller?

For an option seller (writer): Maximum profit = premium received (if option expires worthless). Maximum loss = unlimited for call writers (if spot rises sharply), or strike price minus premium for put writers (if spot falls to zero).

Why would someone buy an OTM option?

OTM options are cheaper (lower premium) and offer higher leverage. Traders buy OTM options when they expect a large price move. However, OTM options have a lower probability of expiring profitably and will expire worthless if the expected move doesn't happen.

What is implied volatility?

Implied volatility (IV) is the market's expectation of future price volatility, derived by reversing the Black-Scholes formula from the market price of an option. High IV means options are expensive. IV rises during market uncertainty (e.g., budget, RBI policy) and falls after the event.

Written by Arpan Das.

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