Option Writing

Option writing, also called option selling, placed the trader on the opposite side of the options buyer. While the buyer paid a premium to acquire a right, the writer received that premium in exchange for assuming an obligation. If the option expired worthless — which occurred when the underlying stayed out-of-the-money — the writer retained the full premium as profit. If the option moved in-the-money and the buyer chose to exercise, the writer was obligated to fulfil the contract terms, potentially at a significant loss.

The appeal of option writing to experienced traders lay in the asymmetry of probability versus outcome. Statistical evidence from Indian markets showed that the majority of individual stock and index options expired worthless, tilting the frequency of winning trades toward the writer. However, the magnitude of occasional losses on written options could far exceed the premium collected, creating a profitability profile described as "picking up pennies in front of a steamroller." Risk discipline — through defined stop-losses, position sizing, and spread hedges — was the critical differentiator between sustainable and ultimately ruinous option writing strategies.

In the NSE F&O segment, option writing required the highest margin among derivative strategies. SEBI's margin regulations, updated through a series of circulars between 2019 and 2021, mandated collection of SPAN margin plus an exposure margin of 2 percent of the notional value (or a higher percentage for volatile stocks). The introduction of the peak margin framework in August 2021 required brokers to collect margin based on the highest intraday obligation, effectively ending the practice of writing large option positions intraday without adequate capital.

The tax treatment of option writing in India added complexity. Under the Income Tax Act, profits from F&O trading — including premium income from option writing — were classified as non-speculative business income, making them subject to taxation at the applicable slab rate while also requiring maintenance of books of accounts and, in many cases, a tax audit if turnover exceeded specified thresholds. SEBI's STT (Securities Transaction Tax) on option writing was levied on the premium amount, adding a transaction cost that writers factored into their expected returns.

Option writing strategies ranged from conservative — such as covered calls on existing stock holdings — to aggressive naked writing of multiple lots on index options. The institutionalisation of option writing as an income strategy among retail participants was reflected in NSE data showing that retail investors accounted for a significant portion of option seller open interest in benchmark index contracts, a trend that SEBI monitored closely given the potential for large-scale losses during market dislocations.