How-to options hedging Kite

How to hedge a naked options position in Zerodha

From WebNotes, a public knowledge base. Last updated 19 May 2026. Reading time ~8 min.

Key facts

Time required	Under 5 minutes
Cost	Additional brokerage + STT for the hedge leg + cost of the long-OTM premium
Effect on margin	Substantial reduction (from full SPAN+exposure to defined-loss margin)
Effect on profit	Capped by hedge cost; reduces but caps risk

Hedging a naked options position in Zerodha is a fundamental risk-management technique. A naked sold call or put has theoretically unlimited downside (call) or substantial downside (put), requiring high margin. Buying a further-OTM option in the same expiry caps the downside risk and dramatically reduces margin requirements.

This guide covers the procedure, the SEBI margin framework, and the strategic implications.

Conflict-of-interest disclosure. This guide is published by WebNotes Editorial Team for informational purposes. WebNotes has no commercial relationship with Zerodha or any options-strategy platform. No affiliate commission is earned from option trading.

Step-by-step procedure

See the procedure infobox above for the canonical step sequence. Expanded notes follow.

1. Identify your naked position

In Kite Positions, naked options are sold positions (Quantity column shows negative) with no offsetting long.

2. Choose the hedge type

Naked position	Hedge	Result
Sold call (e.g., NIFTY 24000 CE sold)	Buy higher-strike call	Bear call spread (defined loss)
Sold put (e.g., NIFTY 23800 PE sold)	Buy lower-strike put	Bull put spread (defined loss)
Sold straddle (call + put same strike)	Buy iron condor wings	Iron condor (defined loss both sides)
Sold strangle (call + put different strikes)	Buy further-OTM call + put	Iron condor variant

3. Identify the hedge strike

The hedge strike determines:

Maximum loss of the spread = strike difference - net premium received.
Margin requirement scales with strike difference (smaller difference = lower margin).
Premium cost of the hedge = price of the long option.

Wider spreads (further-OTM hedge) preserve more premium but increase max-loss exposure. Tighter spreads (closer-OTM hedge) reduce max-loss but consume more premium.

4. Open Kite options chain

The options chain in Kite shows all available strikes for the selected expiry with bid-ask, OI, and Greeks.

5. Place the hedge order

Buy the hedge option. Quantity must equal the sold-leg quantity (e.g., if sold 1 lot 24000 CE, buy 1 lot 24200 CE).

Order types:

Market: Immediate execution; risk of slippage in less-liquid strikes.
Limit: Price control; risk of non-execution if market moves.

For most retail option traders on liquid Nifty / Bank Nifty strikes, limit orders close to mid-price work well.

6. Verify margin reduction

The SEBI margin framework recognises defined-loss spreads:

Naked sold call: SPAN + Exposure margin (~Rs 1 to 1.5 lakh for 1 lot NIFTY 24000 CE).
Hedged bear call spread (1 lot, 200-point wide): ~Rs 20-30k margin.

This is a 5-10x margin reduction, freeing capital for additional trades.

7. Confirm spread structure

Both legs should show in Kite Positions. The combined position is the spread.

8. Monitor and exit together

Always close spreads as a unit. Leaving one leg open (after closing the other) re-exposes you to the naked-position risk.

Why hedge

Margin efficiency

The most common reason: margin reduction frees capital for additional trades or other capital uses.

Defined-loss risk

A naked sold call has theoretically unlimited loss if the underlying rallies sharply. A hedged spread caps the loss at the strike difference minus net premium.

Regulatory compliance

SEBI’s risk-management framework heavily favours defined-loss positions. Naked option selling is increasingly restricted, particularly for retail accounts.

Hedge selection considerations

Liquidity

Choose hedge strikes with reasonable open interest and tight bid-ask spreads. NIFTY and BankNIFTY weekly expiries are most liquid; monthly expiries less so; stock options least so.

Theta decay

If the hedge is further OTM, it loses theta value faster than the sold-leg gains theta. Optimal hedge strikes balance theta with downside protection.

Greeks

The combined spread has:

Reduced gamma: Less risk from sharp price moves.
Reduced vega: Less sensitive to IV changes.
Smaller net theta: Less profit from time decay than naked.

Common spread strategies

Bear call spread

Sold lower-strike call + bought higher-strike call.
Bullish-neutral view (expect underlying to stay below sold strike).
Defined max loss.

Bull put spread

Sold higher-strike put + bought lower-strike put.
Bullish view (expect underlying to stay above sold strike).
Defined max loss.

Iron condor

Bear call spread + bull put spread, same expiry.
Neutral view (expect underlying to stay between strikes).
Defined max loss both sides.

External references

References

SEBI F&O margin framework circular (Risk Management for Derivatives).
NSE Clearing Corporation SPAN methodology documentation.
Zerodha SPAN + Exposure margin documentation.
Zerodha Varsity Options module.

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: 19 May 2026
Conflicts of interest: WebNotes is independent. No relationship with any broker, registrar or bank named in this article.