Naked option selling margin on Zerodha
A naked (unhedged) short option position on Zerodha requires the full SPAN + Exposure margin, with no hedge benefit. This makes naked option selling capital-intensive but is the standard structure for many premium-collection strategies.
What “naked” means
A short option position with no offsetting hedge:
- Short call with no long call hedge.
- Short put with no long put hedge.
- Selling either side of a strangle without protective wings.
The seller’s loss is theoretically unlimited (for short calls) or substantial (for short puts).
Margin required
For a single naked short index option on Nifty:
- SPAN: ~Rs 1.3-1.5 lakh per lot (Nifty 22000 strike).
- Exposure: ~Rs 50-70K.
- Total: ~Rs 1.8-2.2 lakh per lot.
For a Rs 16.5 lakh notional contract, that’s roughly 11-13% margin requirement, giving ~7-9x leverage.
For stock options (single naked short):
- SPAN + Exposure: ~12-20% of notional.
Why no hedge benefit
The SPAN engine looks at the portfolio:
- Naked short option: large losses in adverse scenarios.
- No offsetting position.
- Worst-case loss = unhedged tail.
- Full SPAN required to cover.
Risk profile
| Risk | Detail |
|---|---|
| Maximum loss | Unlimited (short call); substantial (short put) |
| Maximum gain | Premium received |
| Time decay | In your favour (theta-positive) |
| Implied volatility | Against you on IV spike |
Many retail option sellers focus only on time decay and ignore the tail-risk.
When to use naked
Naked option selling appropriate when:
- High confidence in the directional view (or non-direction).
- Substantial capital available.
- Risk management discipline (stop-losses, position sizing).
- Volatility regime allows for profitable premium collection.
Not appropriate for:
- Small accounts (capital-inefficient).
- Inexperienced traders.
- High-stress market periods.
Capital cost vs hedge
For Rs 5 lakh capital:
- Naked short Nifty option: 2-3 lots possible.
- Bull call spread: 15-20 lots possible.
The capital efficiency of hedged strategies is the main reason most retail traders use spreads.
Tax treatment
Short option P&L is taxed as business income (F&O). For complex tax situations involving substantial short-option positions, consult a Chartered Accountant before filing.
SEBI’s stance
SEBI has tightened F&O participation rules (Entry barrier rules ) partly because of naked option selling risks. The 90% retail loss study found that naked option selling contributed disproportionately to retail losses.
See also
- Hedged positions margin benefit on Zerodha
- SPAN margin on Zerodha
- Exposure margin on Zerodha
- ELM (Extreme Loss Margin) on Zerodha
- Zerodha margin calculator
- Margin required on order window
- Margin available / used / cash on Kite funds
- Margins and leverage at Zerodha
- Margin call timeline at Zerodha
- Margin shortfall and auto-square-off
- Margin on exit calculation
- Cash component vs collateral component
- 50:50 cash collateral rule explained
- Higher margin near expiry
- Long-dated contracts margin requirements
- Additional margin for selling index options
- Intraday margin increases on volatile days
- Option premium credit on Kite funds
- Use option premium received as margin
- Covered call margin benefit
- How to add F&O contracts to the marketwatch
- How to add Nifty / BankNifty options to the marketwatch
- SEBI 90% retail F&O traders lose money study
- SEBI F&O entry barrier rules 2024
- SEBI broker risk disclosure norms
- SEBI peak margin rules explained
- Sold stocks shown as negative positions
- Kite Positions tab explained
- Futures and options
- Zerodha
- Kite (Zerodha)
External references
References
- NSE Clearing, SPAN margin for short options, nseclearing.com.
- SEBI, F&O margin framework, sebi.gov.in.
- Zerodha, Margin policies for option sellers, zerodha.com.