NISM-Series-VIII: Equity

Derivatives
Comprehensive Study Guide & Strategy Manual

Created by Yuvraj Chugh

Finance Trainer, TNS India Foundation
March 17, 2026

Abstract
This is a complete, one-stop solution for the NISM-Series-VIII Certification Ex-
amination[cite: 17]. It contains detailed conceptual notes, mathematical formulas,
and automated payoff charts for all major trading strategies.

Contents
1 CHAPTER 1: Basics of Derivatives 3

2 CHAPTER 2: Understanding the Index 4

3 CHAPTER 3: Introduction to Futures & Arbitrage 5

3.1 Cash and Carry Arbitrage (Numerical) . . . . . . . . . . . . . . . . . . . 5

4 CHAPTER 4: Options Fundamentals 6

4.1 Naked Options Payoffs (The Building Blocks) . . . . . . . . . . . . . . . 6

5 CHAPTER 5: Advanced Options Strategies 7

5.1 Vertical Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.2 Volatility Strategies (Straddles & Strangles) . . . . . . . . . . . . . . . . 8
5.3 Hedging / Yield Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . 8

6 CHAPTER 6: Trading Mechanism & Algo Trading 10

7 CHAPTER 7: Clearing, Settlement & Risk (SPAN) 11

8 CHAPTER 8: Legal & Regulatory Environment 12

8.1 Securities Contracts (Regulation) Act, 1956 (SCRA) . . . . . . . . . . . 12
8.2 Securities and Exchange Board of India (SEBI) Act, 1992 . . . . . . . . . 12
8.3 L.C. Gupta Committee & Exchange Eligibility . . . . . . . . . . . . . . . 12
8.4 Clearing, Settlement, and Membership Eligibility . . . . . . . . . . . . . 12
8.5 Standard Operating Procedures (SOPs) for Crisis Management . . . . . . 13

1
9 CHAPTER 9: Accounting and Taxation 14

10 CHAPTER 10: Sales Practices & Investor Protection 15

2
1 CHAPTER 1: Basics of Derivatives
• Meaning: A derivative is a contract or product whose value is derived from the
value of some other asset known as the underlying[cite: 109].

• Forwards: A contractual agreement between two parties to buy/sell an under-

lying asset at a certain future date for a particular price[cite: 156]. These are
Over-the-Counter (OTC) contracts, meaning terms are customized and carry high
counterparty risk[cite: 158, 467].

• Futures: Standardized forward contracts traded on an organized and regulated

exchange[cite: 160].

• Options: A contract giving the right, but not the obligation, to buy or sell the
underlying on or before a stated date at a stated price[cite: 164].

• Market Participants:

– Hedgers: Face risk associated with the prices of underlying assets and use
derivatives to reduce their risk[cite: 175].
– Speculators/Traders: Try to predict future price movements and take positions
to profit, utilizing leverage[cite: 178].
– Arbitrageurs: Produce risk-free profit by exploiting a price difference in a
product in two different markets[cite: 181].

3
2 CHAPTER 2: Understanding the Index
• Index Construction Methods:

– Market Capitalization Weighted: Each stock is given a weight according to

its market capitalization (Shares Outstanding × Market Price)[cite: 260, 261,
263].
– Free-Float Market Capitalization: Uses only shares readily available for trad-
ing, excluding locked-in shares like promoter holdings[cite: 280, 281]. Indian
indices like Sensex and Nifty use this[cite: 283].
– Price-Weighted: Stock weight is proportional to its price (e.g., Dow Jones,
Nikkei 225)[cite: 285, 295].

• Impact Cost (Numerical Concept): The percentage degradation experienced

vis-à-vis the ideal price when large shares are bought or sold[cite: 342].
Best Buy+Best Sell
– Ideal Price = 2
[cite: 337].
– Example Calculation: If Best Buy = 9.80 and Best Sell = 9.90[cite: 344].
– Ideal Price = (9.80 + 9.90)/2 = Rs. 9.85[cite: 345].
– Actual buy price for 1500 shares (1000 at 9.90 and 500 at 10.00) = [(1000 ×
9.90) + (500 × 10.00)]/1500 = Rs. 9.9333[cite: 346].
– Impact Cost = [(9.9333 − 9.85)/9.85] × 100 = 0.84%[cite: 347].

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3 CHAPTER 3: Introduction to Futures &
Arbitrage
• Basis: The difference between the spot price and the futures price[cite: 579]. It
converges to zero at maturity[cite: 589].

• Cost of Carry: Interest paid to finance the asset less the dividend earned during
the holding period[cite: 593, 594].

• Marking to Market (MTM): Profits and losses in futures are settled on a day-
to-day basis[cite: 617].

• Hedging a Portfolio (Numerical):

Vp ×βp
– Formula: Number of contracts = Vi
[cite: 1016].
– Where Vp is Value of portfolio, βp is Beta, and Vi is Value of index futures
contract[cite: 1017, 1018, 1019].

3.1 Cash and Carry Arbitrage (Numerical)

When the futures price is higher than the fair theoretical price[cite: 831, 1100].

• Fair Price Formula: F = S(1 + r)T or F = SerT [cite: 1096, 1099].

• Example: Spot = Rs. 1500; 3-month Future = Rs. 1550; Cost of carry = 9% p.a.
(0.75% per month) [cite: 2127].

• Fair Price: 1500 × e0.09×3/12 = Rs. 1534.13[cite: 2128].

• Action: Buy shares in cash market at 1500, Sell Futures at 1550[cite: 2130].

• Arbitrage Profit: (1550 − 1534.13) × 100 (Lot Size) = Rs. 1587[cite: 2131].

5
4 CHAPTER 4: Options Fundamentals
The option premium consists of Intrinsic Value + Time Value[cite: 1335].

• Call Intrinsic Value: M ax(0, S − X)[cite: 1339, 1340].

• Put Intrinsic Value: M ax(0, X − S)[cite: 1341, 1342].

• Moneyness:

– In-the-Money (ITM): Has Intrinsic Value. (Call: Spot ¿ Strike, Put: Spot ¡
Strike) [cite: 1319, 1320, 1321].
– Out-of-the-Money (OTM): Only Time Value. (Call: Spot ¡ Strike, Put: Spot
¿ Strike) [cite: 1329, 1331, 1332].

• Option Greeks:

– Delta (∆): Sensitivity to underlying asset price change[cite: 1646].

– Gamma (γ): Rate of change of Delta (Acceleration)[cite: 1665].
– Theta (θ): Sensitivity to time decay. Negative for option buyers[cite: 1669,
1671].
– Vega (ν): Sensitivity to volatility changes[cite: 1677].
– Rho (ρ): Sensitivity to interest rate changes[cite: 1684].

4.1 Naked Options Payoffs (The Building Blocks)

Long Call (Strike=17500, Prem=95) Short Call (Strike=17500, Prem=95)

400
0
Profit/Loss

Profit/Loss

200
−200
0
−400
1.72 1.74 1.76 1.78 1.8 1.72 1.74 1.76 1.78 1.8
Index at Expiry ·104 Index at Expiry ·104

Max Loss = Rs. 95[cite: 1426]. BEP = Max Profit = Rs. 95[cite: 1463]. Risk =
17595[cite: 1389]. Unlimited[cite: 1465].

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 Long Put (Strike=17500, Prem=150) Short Put (Strike=17500, Prem=150)
400 200
Profit/Loss

Profit/Loss
200 0

0 −200

−200 −400
1.7 1.72 1.74 1.76 1.78 1.8 1.7 1.72 1.74 1.76 1.78 1.8
Index at Expiry ·104 Index at Expiry ·104

Max Loss = Rs. 150. BEP = 17350[cite: Max Profit = Rs. 150. Risk = Unlim-
1480, 1544]. ited[cite: 1566, 1568].

5 CHAPTER 5: Advanced Options Strate-

gies
5.1 Vertical Spreads
Bull Call Spread: Bullish view, but limits cost and caps profit. Long 17500 Call @
185, Short 17800 Call @ 61. Net Premium Paid = 124. Max Profit = 176, Max Loss =
124[cite: 2239, 2246, 2269, 2270].

Bull Call Spread

400 Long 17500 Call

Profit/Loss (Rs.)

Short 17800 Call

200 Net Payoff

−200

1.7 1.71 1.72 1.73 1.74 1.75 1.76 1.77 1.78 1.79 1.8 1.81 1.82
Index Value at Expiry ·104

Bear Put Spread: Bearish view. Long 17500 Put @ 125, Short 17000 Put @ 34.
Max Profit = 409, Max Loss = 91[cite: 2290, 2291, 2292, 2293].

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 Bear Put Spread
600 Long 17500 Put
Profit/Loss (Rs.)
Short 17000 Put
400 Net Payoff
200

−200
1.67 1.68 1.69 1.7 1.71 1.72 1.73 1.74 1.75 1.76 1.77 1.78 1.79
Index Value at Expiry ·104

5.2 Volatility Strategies (Straddles & Strangles)

Long Straddle: Expecting massive movement in any direction[cite: 2307]. Long 6000
Call @ 257, Long 6000 Put @ 136. Max Loss = Rs. 393 at strike[cite: 2304, 2305].

Long Strangle
Long Straddle

200
200
Profit/Loss
Profit/Loss

0
0
−200
−200
−400
5,500 6,000 6,500
5,500 6,000 6,500
Index
Index
Long Strangle: Buy OTM Call (6200@145)
Unlimited Profit, Max Loss = 393[cite:
+ Buy OTM Put (6000@140)[cite: 2334].
2313, 2318].
Max Loss = 285[cite: 2346].

5.3 Hedging / Yield Strategies

Covered Call: Long Stock @ 1590, Short 1600 Call @ 10. Restricts upside to generate
income[cite: 2355, 2360, 2366].

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 Covered Call (Synthetic Short Put)

100 Long Stock

Profit/Loss (Rs.) Short 1600 Call
Net Payoff
0

−100
1,4801,5001,5201,5401,5601,5801,6001,6201,6401,6601,6801,700
Stock Price at Expiry

Protective Put: Long Stock @ 1600, Long 1600 Put @ 20. Insurance against
crash[cite: 2428, 2429, 2430].

Protective Put (Synthetic Long Call)

100 Long Stock

Profit/Loss (Rs.)

Long 1600 Put

Net Payoff
0

−100
1,4801,5001,5201,5401,5601,5801,6001,6201,6401,6601,6801,7001,720
Stock Price at Expiry

Butterfly Spread (Using Calls): Extension of short straddle to cap unlimited

downside risk[cite: 2389, 2390]. Net Premium Paid = 230 − 150 − 150 + 100 = 30. Max
Loss = Rs. 30. Max Profit = Rs. 70 at 6100[cite: 2394, 2395, 2396, 2397, 2401].

Call Butterfly Spread

Profit/Loss (Rs.)

50

Net Payoff
5,900 5,950 6,000 6,050 6,100 6,150 6,200 6,250 6,300
Index Value at Expiry

9
6 CHAPTER 6: Trading Mechanism & Algo
Trading
• Order Matching Rules: Order driven market matching automatically on a price-
time priority basis[cite: 2591, 2594].

• Dynamic Price Bands (SEBI May 2024): Price bands flex simultaneously
across cash and futures. Slide adjustments prevent extreme one-sided movements.
Requires 50 trades, 10 unique traders, and 3 brokerages to flex[cite: 2602, 2603,
2604, 2605, 2609].

• Corporate Action Adjustments: Strike price is adjusted for dividends only if

the dividend is extraordinary (at or above 2% of the market value)[cite: 2672].

• Algorithmic Trading: Executing orders utilizing automated and pre-programmed

instructions[cite: 2719]. Highly regulated, requiring Open Authentication (OAuth),
Static IP, 2FA, and an emergency “Kill Switch” to halt trading automatically[cite:
2735, 2736, 2739].

• IRRA Platform (Investor Risk Reduction Access): Helps investors square

off/close open positions if their broker’s sites face technical outages[cite: 2779, 2780].

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7 CHAPTER 7: Clearing, Settlement & Risk
(SPAN)
• Interoperability: Trades done on any exchange can be cleared and settled by the
clearing corporation of any other exchange, bringing netting efficiencies[cite: 2852,
2853].

• Settlement Mechanism:

– MTM Settlement: Cash-settled daily on T+1 basis based on Daily Settlement

Price (last 30 mins VWAP)[cite: 2873, 2875].
– Final Settlement: Index derivatives are cash-settled[cite: 2881]. Stock futures
and options are settled by physical delivery[cite: 2861, 2889].

• Margining (SPAN): Computes Initial margin based on 99% value at risk over a
one-day horizon[cite: 2978, 2982, 2990].

• Peak Margin Obligation: Clearing corporations take a minimum of 4 snapshots

of client margins daily. EOD margin collection is verified based on fixed Beginning
of Day (BOD) margin parameters[cite: 3041, 3045, 3047].

• Pledge/Repledge Mechanism: Clients provide collateral via a ”margin pledge”

rather than transferring title, preventing brokers from misappropriating assets[cite:
3073, 3074, 3082].

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8 CHAPTER 8: Legal & Regulatory Envi-
ronment
8.1 Securities Contracts (Regulation) Act, 1956 (SCRA)
The SCRA aims to prevent undesirable transactions in securities[cite: 3179].
• Definition of Securities: Includes shares, scrips, bonds, debentures, government
securities, and derivatives[cite: 3180, 3181, 3182].
• Definition of Derivatives: Defined as a security derived from a debt instru-
ment, share, loan, risk instrument, or a contract deriving its value from underlying
prices/indices[cite: 3184, 3185].
• Legality: Section 18A states that derivative contracts are legal and valid only if
they are traded on a recognized stock exchange and settled on the clearing house
of the exchange[cite: 3187, 3188].

8.2 Securities and Exchange Board of India (SEBI) Act, 1992

SEBI was established to protect investor interests, promote the development of the secu-
rities market, and regulate the market[cite: 3188].
• Powers: SEBI has statutory powers to regulate business in stock exchanges, reg-
ister brokers, prohibit fraudulent/unfair trade practices, and conduct inspections
and inquiries[cite: 3191, 3192, 3193, 3194].

8.3 L.C. Gupta Committee & Exchange Eligibility

Derivatives trading in India was introduced following the framework developed by the
Dr. L. C. Gupta Committee[cite: 3196, 3197].
• Exchange Requirements: The derivative segment must have a separate gov-
erning council where representation of trading/clearing members is limited to a
maximum of 40%[cite: 3202]. The exchange needs a minimum of 50 members[cite:
3204].
• Contract Value: Effective November 2024, the minimum contract value for deriva-
tives cannot be less than Rs. 15 to 20 lakhs[cite: 3214, 3215].

8.4 Clearing, Settlement, and Membership Eligibility

• Clearing Member (CM) Net Worth: SEBI prescribes a minimum net worth of
Rs. 3 Crores for clearing members[cite: 3263, 3264], and Rs. 1 Crore for self-clearing
members[cite: 3265].
• Liquid Net Worth: Every clearing member must maintain at least Rs. 50 Lakhs
as Liquid Net Worth with the exchange/clearing corporation[cite: 3267, 3268].
• Asset Composition: Liquid assets must comprise at least 50% cash component
(cash, bank guarantees, fixed deposits, T-bills)[cite: 3221, 3222, 3256].

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8.5 Standard Operating Procedures (SOPs) for Crisis Manage-
ment
• SOP for Default: Upon receiving warning signals of a possible Trading Member
(TM) default, exchanges must first settle the credit balances of small investors
(under Rs. 25 lakh) using unencumbered deposits[cite: 3272, 3273, 3275]. Larger
investors are paid on a pro-rata basis[cite: 3276].

• SOP for Exchange Outage:

– The affected exchange must inform SEBI immediately and notify market par-
ticipants within 15 minutes of the outage[cite: 3279, 3280].
– If trading does not resume to normalcy within 1 hour before the scheduled
market closure, all stock exchanges must extend their trading hours by one
and a half hours[cite: 3287].

13
9 CHAPTER 9: Accounting and Taxation
• Accounting Treatment:

– Initial margin paid is debited to ”Initial Margin - Equity Index/Equity stock

Futures Account” and shown under ”Current Assets”[cite: 3305, 3306].
– MTM payments/receipts are tracked in a ”Mark-to-Market Margin Account”[cite:
3317, 3318].
– Under the principle of ”prudence”, provisions are created for anticipated losses
by debiting the P&L account; anticipated profits are ignored[cite: 3323, 3324,
3356].

• Taxation:

– Derivatives executed on recognized exchanges are excluded from being ”spec-

ulative transactions”. They are taxed as ”Profits and Gains from Business
or Profession” (Non-speculative) and can be set off against any non-salary
income[cite: 3399, 3400, 3401].
– Unabsorbed losses can be carried forward for 8 assessment years[cite: 3403].
– Tax Audit is mandatory if turnover exceeds Rs. 10 Crores, or if turnover is
between Rs. 2-10 Crores without opting for presumptive taxation and profits
are less than 6%[cite: 3409, 3410].
– FPIs’ F&O gains are taxed as ”Capital Gains”[cite: 3405].

• Securities Transaction Tax (STT): 0.02% on the sale of futures (paid by

Seller)[cite: 3415]. 0.10% on the sale of an option (paid by Seller on premium)[cite:
3415]. 0.125% on settlement price of an exercised option (paid by Purchaser)[cite:
3415].

14
10 CHAPTER 10: Sales Practices & In-
vestor Protection
• Risk Disclosure Document (RDD): Given to clients at registration, it highlights
risks of leverage, market volatility, and liquidity[cite: 3490, 3491, 3500, 3501]. SEBI
mandates displaying key facts: 9 out of 10 individual traders in equity F&O incurred
net losses, averaging Rs. 50,000[cite: 3536, 3541, 3542].

• Anti-Money Laundering (PMLA): Brokers must implement Customer Due

Diligence (CDD), verify beneficial ownership, categorize risk (e.g., Clients of Special
Categories like PEPs, NGOs, NRIs), and submit Suspicious Transaction Reports
(STR) to FIU-IND[cite: 3540, 3550, 3553, 3574, 3577, 3617, 3618].

• Client Onboarding (KYC): Requires PAN (mandatory), address proof, In-

Person Verification (IPV), and assigning a Unique Client Code (UCC) mapped
to the demat account to prevent broker misappropriation[cite: 3592, 3597, 3604,
3609].

• Investor Grievance Mechanisms:

– SCORES: SEBI Complaints Redressal System. Web-based centralized system.

Entities must resolve complaints within 21 days of intimation[cite: 3635, 3638].
– SMART ODR Portal: Online Dispute Resolution portal for conciliation and
arbitration of disputes regarding service issues, trade discrepancies, fee dis-
putes, etc. Conciliation must conclude within 21 calendar days[cite: 3642,
3645, 3679].

15