When to short sell Nifty options, how much margin required for Option Selling

Nifty option is the most liquid option contract traded on NSE. Having a daily average turnover of about whooping $106 billion (Rs.7,80,000 crore). Nifty option selling is done when a trader believes that the option is going to expire worthlessly.

When the options are really expensive then it is a good time to write nifty options rather than buying options.

When the Implied volatility IV is high, options will be expensive.

Traders short sell nifty options when they see nifty future to be trading in a range. Also expecting that this range will continue to stay for some time.

In a ranging market, the nifty option trader can short sell:

1. Out of money nifty call option
2. Little far out of money nifty put option.

Keeping these strike prices at least 1 standard deviation away. So the probability of being profitable is at least 68%.

Now let us find out how much margin is required for writing a nifty option. In other words, for selling nifty options.

Margin for Selling Nifty Options:

Short selling nifty options require margin equivalent to nifty future. So if we want to short sell nifty option we need ~Rs.1,40,000 per 1 lot. Yes! you read it right that’s ~Rs.1.4 lakh for 75 quantity.

This is because naked option writing has unlimited risk. Profit is limited to the premium received at the time of selling the nifty option. But if you hedge this position by buying a far out of money option, then the margin requirement will be much lower.

In case of spread strategy, this margin requirement can go down by ~85%.

The margin for naked option selling:

The margin for selling nifty option with hedging:

The positional margin for selling options is decided by the stock exchanges. So all brokers will offer the same margin for positional trade. Whereas intraday margin depends on the broker you are trading with.

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