European option
An option that can be exercised only on its expiry date. Indian equity options are European — coded CE for calls and PE for puts — unlike American options, exercisable any time up to expiry.
In plain language
An option gives its buyer a right. The style of the option decides when that right can be used.
A European option can be exercised only on the expiry date. An American option can be exercised any time before or on the expiry date. The workbook is explicit that in the Indian markets only European options are traded at this time — which is why every equity option symbol ends in CE (Call European) or PE (Put European).
How it works
The specification (section 6.5.4):
| Feature | Indian equity options |
|---|---|
| Style | European only; CE and PE |
| Underlying | The same indices and stocks on which futures are available |
| Price step | Re 0.05 |
| Trading lot | Value at base price on introduction not below Rs 5 lakh |
| Daily settlement | Premium, on a T+1 basis |
| Expiry settlement | Exercised options settled at the in-the-money strike price at close of trading on expiry; long positions assigned to short positions |
| Settlement type | Index options in cash; stock options by physical delivery (SEBI mandate since October 2019) |
What European style means in practice. The holder cannot exercise before expiry. To realise value earlier, the holder sells the option in the market for its premium. The writer's obligation, correspondingly, can be called on only at expiry.
Margins follow the same system as futures, with differences: initial margin on the premium; exposure margin only on short option positions; plus premium margin and assignment margin.
A worked example
Illustrative premiums, using the workbook's illustrative lot of 50. On the 1st of the month Kiran buys a Nifty 24,000 PE (Put European) at a premium of Rs 150.
Cost = 50 × Rs 150 = Rs 7,500
Ten days before expiry the Nifty falls to 23,500. The put is deep in the money — but being European, Kiran cannot exercise it now. He can sell it: the premium has risen to Rs 560.
Sell now: 50 × (Rs 560 − Rs 150) = Rs 20,500 profit
If he holds to expiry and the Nifty recovers to 23,900:
Value at expiry = 50 × (24,000 − 23,900) = Rs 5,000 (cash-settled)
Net result = Rs 5,000 − Rs 7,500 = − Rs 2,500
The right to exercise existed only on expiry day. The profit available ten days earlier could be captured only by selling the option, not by exercising it.
Why NISM asks about it
Chapter 6 (Derivatives Markets), section 6.5.4, defines option style and states that only European options trade in India; the chapter's sample question asks what an option exercisable any time before expiry is called (American). Expect CE/PE coding, the settlement rules and the premium-margin details alongside it.
Common exam traps
- European = exercise only on expiry. American = any time up to and including expiry. The chapter's sample question tests exactly this.
- Only European options trade in India, per the workbook. The workbook's glossary entry on American options — "most listed stock options, including those on European exchanges are US style" — describes markets abroad, not India.
- The workbook gives two expiry days — know both. Section 6.5.1, citing SEBI's circular of 26 May 2025, says monthly equity derivative contracts expire on the last Tuesday or last Thursday of the month depending on the exchange, with all of an exchange's equity derivative expiries on the same weekday. Section 6.5.4 still says option expiry is "the last Thursday of the month". The May 2025 rule is the current one.
- Before expiry, a European option holder exits by selling, not by exercising.
- Exposure margin is levied only on short (written) option positions.
Where this is taught
- Series IV · Chapter 4: Exchange Traded Interest Rate Optionsintroduced here
- Series XVI · Chapter 4: Commodity Optionsintroduced here
- Series V-D · Chapter 21: Exchange Traded Interest Rate Optionsintroduced here
- Series VIII · Chapter 4: Introduction to Optionsintroduced here
- Series XII · Chapter 6: Derivative Marketsintroduced here
Related terms
- American optionAn option whose holder may exercise it at any time on or before expiry. All exchange-traded index and stock options in India are European style instead — exercisable only on expiry.
- Call optionA contract giving its buyer the right, but never the obligation, to buy the underlying at a fixed strike price — so the loss is capped at the premium and the gain is not.
- Futures contractA standardised forward traded on an exchange, where the exchange fixes every term except the price and the clearing corporation guarantees settlement, so neither side carries the other's default risk.
- Strike priceThe price fixed in an option contract at which the buyer may buy (call) or sell (put) the underlying if he chooses to exercise — fixed for the life of the contract, unlike the premium.
- Option premiumThe price an option buyer pays the seller for the right the contract carries — non-refundable, and made up of intrinsic value plus time value.
- Put optionA contract giving its buyer the right, but never the obligation, to sell the underlying at a fixed strike price — insurance against a fall, bought for a premium.
- SwaptionAn option on a swap — the right, not the obligation, to enter an interest rate swap at a predetermined strike rate on a future date, bought for a premium.
- Bermudan optionAn option that can be exercised only on specific dates named in the contract, usually near expiry — more flexible than a European option, less flexible than an American one.
- ExercisePutting an option's right into effect: a call holder buys the underlying at the strike, a put holder sells at the strike. In cash settled IRD options the holder simply receives the difference.
- Premium style optionThe style in which Exchange Traded Interest Rate Options are structured: the buyer pays the full option premium upfront, in cash, to the seller, at the time of the trade.
- Binomial pricing modelAn option pricing model that maps the underlying's possible prices as a tree of up and down moves at equally spaced time steps — accurate and flexible because it is iterative, but slow to compute.
- Put-call parityThe arbitrage-free relationship binding a European call and put of the same strike and expiry to the spot and the discounted strike: c + X·e^(−rt) = p + S. Deviations create risk-free profit.
- AssignmentThe allocation of exercised options to one or more option sellers — the moment the writer's obligation becomes a real cash outflow, decided by the exchange and not by the writer.
- Currency optionAn option giving the buyer the right, but not the obligation, to buy or sell an agreed amount of one currency against another at a specified exchange rate, on or before a specified future date.