Contract specifications of exchange-traded options

An exchange‑traded option is a derivative that gives the holder the right, but not the obligation, to buy (call) or sell (put) the underlying asset at a predetermined strike price before or on a specified expiry date. The contract specifications are set by the exchange (NSE/BSE) and approved by SEBI, ensuring uniformity across market participants.

Each specification – contract size, tick size, expiry cycle, strike price interval, exercise style, and settlement type – is fixed in advance. This prevents bargaining over terms and makes the option market liquid, because every contract of the same series is identical.

For the NISM exam, you will be asked to match a description (e.g., “the smallest price movement allowed”) with the correct term (tick size) or to compute outcomes using the given specifications. Memorising the standard values for popular indices like NIFTY and BANKNIFTY is a common shortcut.

The contract size defines how many units of the underlying asset one option contract represents. For equity options, the size is usually 75 shares per contract on NSE, while index options use a multiplier (e.g., NIFTY = 75 × index value). This multiplier is crucial for premium calculations because the total premium payable equals the per‑point premium multiplied by the contract size.

The tick size is the minimum price increment in which the option premium can move. For equity options, the tick is ₹0.05 per share; for index options, it is ₹0.05 × index multiplier (₹3.75 for NIFTY). Knowing the tick helps you answer questions on bid‑ask spreads and the smallest possible change in option value.

Exam tip: When a question provides the premium in rupees per contract, always convert it to per‑share (or per‑point) by dividing by the contract size before applying any formula.

Options on Indian exchanges follow a well‑defined expiry calendar. The most common cycle is the monthly expiry, which occurs on the last Thursday of every month (or the preceding Thursday if the last day is a holiday). In addition, the NSE introduced weekly expiries for index options, occurring every Thursday.

Quarterly expiries (the last Thursday of March, June, September, and December) are also available for certain index contracts and are used by institutional investors for longer‑term hedging. The expiry day is the final day on which the option can be exercised or traded.

For the exam, remember the hierarchy: Weekly < Monthly < Quarterly. Questions may ask you to identify the correct expiry for a given contract symbol (e.g., NIFTY21JUL). Recognising the month code in the symbol is a quick way to avoid mistakes.

The strike price is the price at which the holder may buy or sell the underlying asset. Exchanges set a range of permissible strikes around the underlying’s current market price. For equity options, strikes are offered at ₹50 intervals for stocks priced above ₹1,000 and at ₹25 intervals for lower‑priced stocks.

For index options, the interval is typically 50 points for NIFTY and 100 points for BANKNIFTY. The interval is chosen to balance granularity with liquidity – too many strikes would fragment the market, while too few would limit hedging precision.

Exam relevance: A common question presents a stock trading at ₹1,235 and asks which strike prices are available. Applying the ₹50 interval rule quickly eliminates impossible strikes and saves time.

Two exercise styles exist in India: American and European. American‑style options (most equity options) can be exercised any time up to and including the expiry date. European‑style options (most index options) can only be exercised on the expiry date itself.

Settlement can be physical or cash. Equity options settle physically – the buyer receives the underlying shares upon exercise. Index options settle in cash – the difference between the index’s closing value on expiry and the strike price is paid in rupees.

Understanding the distinction is vital for NISM questions that ask about the payoff profile on a given day before expiry. For American options, early exercise may be optimal when dividends are imminent; for European options, early exercise is never possible.