Investing F&O risk leverage options writing margin call physical settlement SEBI

Risks of F&O trading on Zerodha

From WebNotes, a public knowledge base. Last updated 21 June 2026. Reading time ~14 min.

Key facts

Retail traders who lose money	About 91 per cent of individual F&O traders made net losses (SEBI study, FY22 to FY24)
Aggregate retail loss	Rs 1.81 lakh crore over three years (SEBI, September 2024)
Worst-case loss on a long option	Limited to the premium paid
Worst-case loss on a short (written) option	Theoretically unlimited on a call, capped only at strike for a put
Stock F&O at expiry	Physically settled; in-the-money positions deliver or take actual shares
Margin shortfall penalty	0.5 to 5 per cent of the shortfall per day, levied by the exchange

Futures and options trading carries risks that differ in kind, not just degree, from buying shares. A delivery investor in Zerodha can lose at most the money put in. An F&O trader using leverage can lose a multiple of the margin posted, can be forced out of a position at the worst possible moment by a margin call, and, in the case of a written call option, faces a loss with no fixed ceiling. The Securities and Exchange Board of India (SEBI) studied the segment and found that most individual traders lose money: about 91 per cent posted net losses over three financial years, with the aggregate loss running to Rs 1.81 lakh crore.

This article sets out the specific risks of the F&O segment on Zerodha : the leverage that magnifies both directions, the unlimited-loss profile of short options, gap risk that defeats stop-losses, margin calls and the penalties behind them, and the physical-settlement obligation that turns a forgotten stock option into a delivery demand. It draws on SEBI’s own published evidence rather than general warnings, and links to the operational guides and margin articles where each mechanism is documented in detail.

The SEBI evidence on retail F&O losses

The starting point for any honest account of F&O risk is the regulator’s own data. SEBI published a study on 23 September 2024 covering individual traders in the equity derivatives segment across FY22, FY23 and FY24. The headline finding: about 91 per cent of individual traders made net losses after accounting for transaction costs, and the aggregate net loss came to Rs 1.81 lakh crore over the three years. Only around 7.2 per cent of traders booked a net profit.

The losses were not evenly spread. SEBI found that the top 3.5 per cent of profit-making traders, fewer than four lakh individuals, accounted for a large share of the total profits, while the loss-makers paid out across the base. Transaction costs alone, brokerage, securities transaction tax (STT) , exchange charges, stamp duty and GST, consumed a meaningful fraction of trading capital; the median loss-making trader paid more in costs than many earned in gross trading gains. The full picture appears in the dedicated article on the SEBI study showing 90 per cent of retail F&O traders lose money .

This evidence drove the SEBI index-derivatives framework of October 2024 and the F&O entry-barrier rules , which raised contract sizes, cut the number of weekly expiries and added margin on expiry day. The regulator did not ban the segment; it raised the cost and capital threshold to trade it.

Leverage: the core mechanism

Leverage is the feature that distinguishes F&O from cash-market investing, and the source of most of its risk. A futures contract or a short option lets a trader control a position worth several times the margin posted.

A single Nifty 50 futures lot of 65 units (the lot size from the January 2026 cycle) against an index near 25,000 carries a notional value of about Rs 16.25 lakh. The SPAN margin on Zerodha plus the exposure margin for that lot runs to roughly Rs 1.8 lakh to Rs 2.2 lakh, depending on volatility. A trader posts around Rs 2 lakh to control Rs 16 lakh of index exposure, leverage of roughly eight times.

That ratio cuts both ways. A 2 per cent move in the index, ordinary for a single session, shifts the contract value by about Rs 32,500, or roughly 16 per cent of the margin posted. A 6 per cent gap, which has happened on election-result days and global-shock days, wipes out the entire margin and demands more. Leverage does not change the odds of being right; it changes how much a given move is worth, in both directions, against a smaller stake.

Unlimited loss on short options

The sharpest risk in the segment sits with option writers. The loss profiles of the four basic positions are not symmetric.

Position	Maximum loss	Maximum gain
Long call (buy)	Premium paid	Theoretically unlimited
Long put (buy)	Premium paid	Strike minus premium (large but capped)
Short call (sell)	Theoretically unlimited	Premium received
Short put (sell)	Strike minus premium (large but capped)	Premium received

Buying an option caps the loss at the premium. An option buyer cannot lose more than the amount spent, which is why long options require only the premium as margin and carry no SPAN obligation.

Selling a call inverts the picture. The writer collects a small premium and accepts the obligation to deliver at the strike however high the underlying goes. There is no upper bound on the price, so there is no upper bound on the loss. A short call on a stock that gaps up on a takeover bid can lose many times the premium collected. This is the central reason the margin on naked option selling at Zerodha is large and rises with volatility: the exchange is collateralising a loss that has no fixed ceiling. Writing a put caps the loss at the strike (a stock cannot fall below zero), but that cap can still be a large rupee figure relative to the premium received.

Gap risk and the limits of a stop-loss

Many traders rely on a stop-loss order to bound their risk. A stop-loss works only while the market trades continuously. It cannot protect against a gap.

A gap is a jump between one session’s close and the next session’s open, with no trades in between. When a stock closes at Rs 1,000 and opens at Rs 850 after bad results overnight, a stop-loss set at Rs 980 does not trigger at Rs 980; it triggers at the first available price, around Rs 850. The 2 per cent of protection the trader thought was in place becomes a 15 per cent loss the moment the market reopens. For a leveraged futures or short-option position, that gap is measured against margin, not notional, so it can exceed the capital posted before a single order can be placed.

Index futures and options carry the same exposure across event windows: budget days, monetary-policy decisions, election results and global risk events all produce gaps. A short straddle held over such an event can lose more than the combined premium even if the trader was right about direction, because the move was larger than the position could absorb.

Margin calls and shortfall penalties

Holding a futures or short-option position requires margin to be maintained for the life of the position, not just at entry. NSE recalculates SPAN margin at least four times a day and can revise it intraday during volatility. When margin requirements rise or the account balance falls, a shortfall appears.

SEBI’s peak-margin framework, effective from September 2021, requires that the margin used during the day be backed by collateral available at the start of the day plus any intraday additions. A shortfall attracts a daily penalty levied by the exchange:

Shortfall below 10 per cent: 0.5 per cent of the shortfall per day.
Shortfall between 10 and 50 per cent: 1 per cent per day.
Shortfall above 50 per cent: 5 per cent per day.

Zerodha’s risk management system monitors margins in real time and can square off positions to bring the account within limits, exactly when the market is moving against the trader and liquidity is thin. A forced square-off locks in the loss at a price the trader did not choose. Understanding the margin-call timeline at Zerodha matters, because the broker’s intervention point, not the trader’s intention, often decides the exit. Hedged positions attract lower margin and lower shortfall risk; the article on peak margin on hedged positions sets out how an offsetting leg reduces the requirement.

Physical settlement of stock F&O

All single-stock futures and stock options on NSE are physically settled at expiry, under SEBI circular SEBI/HO/MRD/DP/CIR/P/2018/167. Index F&O remains cash-settled; the delivery risk is specific to single-stock contracts.

A trader who holds an in-the-money stock option or a stock futures position into the expiry settlement is obliged to deliver or take delivery of the full lot of shares. The rupee value of that delivery is the full contract value, which dwarfs the margin posted to hold the derivative. A stock option bought for a Rs 3,000 premium can, if left to expire in the money, create a delivery obligation worth several lakh rupees, with the associated margin ramp during expiry week and the STT trap on the exercised value.

Zerodha squares off physical-settlement stock F&O positions in the last two to three trading days before expiry to protect clients who have not arranged delivery. A trader who wants to take or give delivery must inform the risk desk; a trader who forgets a small open position can still be caught by the obligation. The mechanics appear in physical settlement of stock F&O , and the avoidance route in how to avoid physical settlement of options .

The STT trap on exercised options

Closely linked to physical settlement is a tax mechanism that surprises traders at expiry. STT on the sale of an option is charged at 0.15 per cent of the premium on the sell side (raised from 0.1 per cent by the Finance Act 2026, effective 1 April 2026; the 0.1 per cent rate had applied from 1 October 2024). STT on an exercised in-the-money option is charged at 0.15 per cent of the intrinsic value, the strike-to-spot difference, not the premium.

Because the intrinsic value at expiry can be many times the premium, letting an in-the-money option run to exercise can cost far more in STT than selling it before the close. This is why traders are routinely advised to square off in-the-money options before expiry rather than allow auto-exercise. The detail sits in the article on STT on exercised options and the broader STT hike of October 2024 .

Concentration, addiction and behavioural risk

The SEBI study identified a behavioural pattern alongside the financial one. A large share of loss-making traders were under 30, traded frequently, and increased position size after losses rather than reducing it. Frequent intraday options trading, where time decay works against the buyer every day, produced the heaviest losses relative to capital.

The segment’s design rewards this pattern in the short run: a leveraged win feels disproportionate to the stake, which encourages larger and more frequent bets. The data shows the long-run result. A trader who treats F&O as a path to quick income is, on the published evidence, far more likely to join the 91 per cent than the 7 per cent. Zerodha offers a kill switch for the F&O segment and nudges precisely because the regulator and the broker recognise the behavioural element of the risk.

Risk controls that actually help

The risks above can be bounded, though not removed, by specific choices:

Buy options instead of selling them naked. A long option caps the loss at the premium. This is the single largest reduction in tail risk available in the segment.
Hedge a short option with a long option at a further strike, turning a naked position into a spread with a defined maximum loss. This also cuts the margin; see how to hedge naked options on Zerodha .
Size positions against a full adverse gap, not against a stop-loss. Assume the stop will not fill at the intended price.
Close single-stock F&O before expiry week unless you intend to give or take delivery, to avoid physical settlement and the STT trap.
Keep margin buffer above the requirement, so an intraday SPAN revision does not trigger a forced square-off.
Use the kill switch to enforce a daily limit when discipline fails.

None of these change the underlying truth in the SEBI data. They reduce the size and the surprise of losses; they do not turn a losing edge into a winning one.

External references

References

SEBI, Analysis of profit and loss of individual traders dealing in equity F&O segment, 23 September 2024.
SEBI Circular SEBI/HO/MRD/DP/CIR/P/2018/167, physical settlement of stock derivatives.
SEBI peak-margin framework, phased from December 2020, full peak margin effective September 2021.
SEBI measures to strengthen the index derivatives framework, circular dated 1 October 2024.
Finance (No. 2) Act 2024, revised STT rates on futures and options, effective 1 October 2024.

Frequently asked questions

How many retail F&O traders actually lose money?

SEBI’s September 2024 study found about 91 per cent of individual futures and options traders made net losses over FY22 to FY24, with aggregate losses of Rs 1.81 lakh crore. Only around 7.2 per cent of traders booked a net profit after costs.

Can I lose more than I invest in F&O on Zerodha?

Yes. Selling a naked call option carries theoretically unlimited loss, and a futures position can lose far more than the margin posted. Buying an option caps the loss at the premium paid, so option buyers cannot lose more than they spend.

What is a margin call on Zerodha F&O?

A margin call arises when your account balance falls below the SPAN plus exposure margin required to hold open F&O positions. Zerodha’s risk team can square off positions to bring margins within limits, and the exchange levies a shortfall penalty of 0.5 to 5 per cent per day.

What is gap risk in F&O?

Gap risk is the loss from a price jump between one session’s close and the next session’s open, when no trading is possible. A stop-loss cannot execute inside a gap, so a futures or short-option position can open far beyond the intended exit level.

Why is physical settlement a risk for stock F&O?

All single-stock futures and options on NSE are physically settled at expiry. An in-the-money position you forget to close obliges you to deliver or take delivery of the full lot of shares, which can demand many times the margin you posted as the futures or option position.

Does Zerodha protect me from these risks?

Zerodha enforces SEBI margin rules, squares off physical-settlement stock F&O before expiry, and offers a kill switch. None of these remove market risk. The trader bears the full loss on an adverse move; the broker only manages settlement and margin compliance.

Reviewed and published by

WebNotes Editorial Team

The WebNotes Editorial Team covers Indian capital markets, payments infrastructure and retail investor procedures. Every article is fact-checked against primary sources, principally SEBI circulars and master directions, NPCI specifications and the official support documentation published by the intermediary in question. Drafts go through a second-pair-of-eyes review and a separate compliance read before publication, and revisions are tracked against the SEBI and NPCI rule changes referenced in the methodology section.

Last reviewed: 21 June 2026
Conflicts of interest: WebNotes is independent. No relationship with any broker, registrar or bank named in this article.