NCFM Options Trading Strategies cheat sheet

An option contract represents 100 shares of the underlying; the premium quoted is per share, so total cost = premium × 100.

Call buyer has the right to buy at the strike; put buyer has the right to sell at the strike; the writer (seller) has the obligation to perform if assigned.

American-style options can be exercised any trading day before expiration; European-style only at expiration. Index options (e.g., Nifty) are European and cash-settled.

Expiration: monthly contracts expire on the last Thursday of the expiry month; weekly contracts expire on the Thursday of the expiry week. If Thursday is a holiday, expiry moves to the previous trading day.

Strike intervals vary by underlying: Nifty strikes typically have 50-point intervals, Bank Nifty 100-point intervals, and stock options use a fixed interval (e.g., 2.5, 5, or 10) as specified by the exchange.

In-the-money (ITM): call strike < spot; put strike > spot. At-the-money (ATM): strike ≈ spot. Out-of-the-money (OTM): call strike > spot; put strike < spot.

Intrinsic value: call = max(0, spot − strike); put = max(0, strike − spot). Time value = premium − intrinsic value.

Settlement: stock options are physically settled (delivery of shares); index options are cash-settled. STT is higher on exercised options than on squared-off positions.

Black-Scholes-Merton (BSM) formula for a European call: C = S·e^(−qT)·N(d1) − K·e^(−rT)·N(d2), where d1 = [ln(S/K) + (r − q + σ²/2)T] / (σ√T) and d2 = d1 − σ√T.

Put-call parity for European options: C − P = S·e^(−qT) − K·e^(−rT). For non-dividend stocks (q=0): C − P = S − K·e^(−rT).

Intrinsic value bounds: call ≥ max(0, S − K·e^(−rT)); put ≥ max(0, K·e^(−rT) − S). Violations create arbitrage opportunities.

Time value is highest for ATM options and decreases as the option moves ITM or OTM. Time value erodes as expiration approaches (theta).

Volatility (σ) is the only unobservable input in BSM; implied volatility is the σ that equates model price to market price.

Dividends (q) reduce call value and increase put value because they lower the expected ex-dividend stock price.

Interest rates (r) increase call value and decrease put value due to the present value of the strike and the cost of carry.

Binomial/trinomial models handle American-style early exercise and discrete dividends; BSM does not.

Delta (Δ) = ∂V/∂S. Call delta ranges 0 to +1; put delta ranges −1 to 0. ATM delta ≈ ±0.5. Delta approximates the probability of finishing ITM (risk-neutral).

Gamma (Γ) = ∂Δ/∂S = ∂²V/∂S². Gamma is highest for ATM options near expiration; long options have positive gamma, short options negative gamma.

Theta (Θ) = ∂V/∂t (per day). Long options have negative theta (time decay hurts); short options have positive theta. Theta accelerates in the final 30 days.

Vega (ν) = ∂V/∂σ. Long options have positive vega; short options negative. Vega is highest for ATM options with long time to expiration.

Rho (ρ) = ∂V/∂r. Calls have positive rho; puts negative. Rho is small for short-dated options.

Portfolio greeks are additive: sum delta, gamma, vega, theta, and rho across positions (adjusting for contract multiplier and quantity).

Implied volatility (IV) is the market's forecast of future volatility. IV rises in uncertain markets (e.g., before elections, earnings) and falls in calm markets.

Volatility smile/skew: OTM puts often trade at higher IV than ATM calls (crashophobia), producing a skew. Straddles/strangles are sensitive to changes in IV.

Covered call: long stock + short call. Max profit = (strike − stock price) + premium; max loss = stock price − premium (if stock goes to zero). Breakeven = stock price − premium.

Protective put: long stock + long put. Max loss = (stock price − strike) + premium; max profit unlimited. Breakeven = stock price + premium. Acts like insurance.

Bull call spread: buy lower-strike call, sell higher-strike call. Max profit = (higher strike − lower strike) − net debit; max loss = net debit; breakeven = lower strike + net debit.

Bear put spread: buy higher-strike put, sell lower-strike put. Max profit = (higher strike − lower strike) − net debit; max loss = net debit; breakeven = higher strike − net debit.

Bull put spread (credit): sell higher-strike put, buy lower-strike put. Max profit = net credit; max loss = (higher strike − lower strike) − net credit; breakeven = higher strike − net credit.

Bear call spread (credit): sell lower-strike call, buy higher-strike call. Max profit = net credit; max loss = (higher strike − lower strike) − net credit; breakeven = lower strike + net credit.

Long call: max loss = premium; max profit unlimited; breakeven = strike + premium. Long put: max loss = premium; max profit = strike − premium; breakeven = strike − premium.

Short call (naked): max profit = premium; max loss unlimited; breakeven = strike + premium. Short put: max profit = premium; max loss = strike − premium; breakeven = strike − premium.

Long straddle: buy ATM call + ATM put (same strike, same expiry). Max loss = net debit; profit potential unlimited (call side) or large (put side). Breakevens = strike ± net debit. Profits from large move either direction; loses from time decay and falling IV.

Short straddle: sell ATM call + ATM put. Max profit = net credit; max loss unlimited. Profits from low volatility and time decay; loses from large moves and rising IV.

Long strangle: buy OTM call (higher strike) + OTM put (lower strike). Cheaper than straddle but needs larger move. Max loss = net debit; breakevens = call strike + debit and put strike − debit.

Short strangle: sell OTM call + OTM put. Max profit = net credit; max loss unlimited on call side, large on put side. Profits from range-bound market.

Long butterfly (call): buy 1 lower-strike call, sell 2 middle-strike calls, buy 1 higher-strike call (equidistant strikes). Max profit = (middle − lower) − net debit; max loss = net debit; breakeven = lower + debit and higher − debit.

Short butterfly: reverse of long butterfly; profits from large move away from middle strike; max loss limited to width minus credit.

Long condor: buy 1 lower-strike call, sell 1 lower-middle call, sell 1 upper-middle call, buy 1 higher-strike call (four strikes). Max profit = net credit (if credit) or width − debit; max loss = net debit. Profits from range-bound market.

Ratio spread (call): buy 1 lower-strike call, sell 2 higher-strike calls. Net debit or small credit. Max profit at higher strike; max loss unlimited above higher strike. Bearish/neutral strategy.

SPAN margin (SEBI/exchanges): initial margin = max(loss under price scan range, loss under volatility scan range) + short option minimum margin. Exposure margin is additional.

Margin benefit for hedged positions: spreads and covered calls receive lower margin because risk is capped. Naked short options require higher margin.

Position limits: SEBI prescribes client-level, trading-member-level, and market-wide limits on open interest for index and stock options to prevent concentration.

Settlement: Indian index options are cash-settled; stock options are physically settled. Expiry-day settlement price is the weighted average of the underlying in the last 30 minutes.

STT: on sale of options, 0.05% of premium; on exercise, 0.125% of intrinsic value (for options). Higher STT on exercise discourages exercising ITM options.

Regulatory: SEBI regulates exchanges (NSE, BSE) and clearing corporations. NCFM certification is offered by NSE Academy.

Risk disclosures: options involve leverage and can result in loss of entire premium; writers face unlimited risk. Client must sign risk disclosure document.

Assignment: option writers are assigned randomly by the clearing corporation when a buyer exercises. American-style options can be exercised anytime before expiry.