Equity Derivatives

Overview

Series VIII is the equity derivatives certification — required for traders, dealers, and analysts working on equity F&O segments at NSE and BSE. It covers cash-settled and physical-settled derivatives, option pricing, Greeks, hedging strategies, and the SEBI/exchange regulatory framework.

At a glance: 100 questions · 2 hours · 60% pass mark · 0.25 negative marking · ₹1,500 + GST.

Who should take VIII

• Authorized persons / dealers at brokers in F&O segment
• Risk and compliance staff at brokers running F&O desks
• Traders looking to formalise their derivatives knowledge
• Anyone progressing into equity research with options coverage

Key Knowledge Areas

Futures pricing

The cost-of-carry model for equity futures:

F = S × e^(r−q)T

where S is spot, r is risk-free rate, q is dividend yield, and T is time to expiry. For non-dividend stocks q = 0 and the formula reduces to F = S × e^(rT).

In practice the Indian market uses lot sizes set by NSE/BSE that make notional values ~₹5–10 lakh per contract.

Option pricing — Black-Scholes

For European options on a non-dividend stock:

C = S·N(d₁) − K·e^(−rT)·N(d₂) P = K·e^(−rT)·N(−d₂) − S·N(−d₁)

where:

• d₁ = [ln(S/K) + (r + σ²/2)T] / (σ√T)
• d₂ = d₁ − σ√T

Greeks

Greek	Measures	Sign convention
Delta (Δ)	dP/dS	Long call: 0 to +1; long put: −1 to 0
Gamma (Γ)	d²P/dS²	Always positive for long options
Theta (Θ)	dP/dt	Negative for long options (time decay)
Vega (V)	dP/dσ	Positive for long options
Rho (ρ)	dP/dr	Positive for calls, negative for puts

Key Fact: Gamma is highest for at-the-money options near expiry. Theta accelerates as expiry approaches — the “weekend effect” is real.

Option strategies

Common strategies tested in NISM VIII:

1. Bull Call Spread — buy low strike call, sell high strike call. Limited risk, limited reward.
2. Bear Put Spread — buy high strike put, sell low strike put. Mirror of bull call spread.
3. Straddle — buy ATM call + ATM put. Profit on big moves either direction.
4. Strangle — buy OTM call + OTM put. Cheaper than straddle but needs bigger move.
5. Iron Condor — sell OTM strangle, buy further-OTM strangle for protection.
6. Covered Call — long stock + short call. Income generation strategy.
7. Protective Put — long stock + long put. Downside hedging.
8. Collar — long stock + long put + short call. Cheaper hedging using call sale to fund put.

Margin & exposure

Equity F&O uses SPAN + Exposure margin:

• SPAN — risk-based scenario margin (covers 99% of expected losses)
• Exposure margin — additional buffer for systemic risk
• Initial margin = SPAN + Exposure (reported to client)

For options writers, additional assignment margin kicks in on the day of expiry.

Regulatory framework

• SEBI is the primary regulator
• Exchanges (NSE / BSE) enforce member rules and product specifications
• Clearing corporations (NSE Clearing, ICCL) novate trades and manage default risk
• Code of conduct for members covers fair dealing, KYC, position limits, market abuse

Practical exam topics

Position limits

Limit type	Stock derivatives	Index derivatives
Client-level	5% of total OI or ₹1,000 cr (whichever lower)	₹500 cr or 15% of total OI
Member proprietary	₹100 cr or 15% of total OI	Higher of the two

Settlement

• Stock futures — physical settlement (delivery)
• Stock options ITM at expiry — physical settlement
• Index futures & options — cash-settled

Exam tip: Physical settlement of stock derivatives can trigger margin shocks the day before expiry. NSE has a “do-not-exercise” facility for traders who don’t want to take delivery.

Exam Tips

Tip 1: Greeks are the most-tested chapter. Know how each Greek behaves with respect to spot, time, and volatility — and which is highest for ATM options.

Tip 2: Strategy questions often ask “max profit / max loss / breakeven” — practise these calculations until they’re automatic.

Tip 3: SPAN margin and exposure margin specifics are exam-favourites. Don’t get tripped up on the difference — SPAN = scenario-based, exposure = additional buffer.

Tip 4: Cash-vs-physical settlement rules changed in 2019. All stock derivatives are now physical-settled. Index derivatives remain cash-settled.

Try the Free Quiz

Test your knowledge with our free Series VIII practice quiz — or get the full bank of 555+ VIII questions plus mock tests in the NISM Exam Prep app. The app’s Option Greeks and Option Payoff calculators are essential for this exam.