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What To Do If Sold Short Options Are Losing Money

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In this post you will learn that shorting naked (not-hedged) options will never bring profits and will always lead to losses.

I am getting to know from various sources that even traders who have done my course are shorting options naked, means selling without hedging.

When I wrote the email that VIX will start falling after the RBI results, some people thought that it is a great time to short options without hedge because in any case the VIX will fall and they can profit.

Well the whole essence of my course is that you learn how to hedge.

Whether you are a senior trader, experienced trader or new trader – naked selling of options is just not recommended.

If we can make money easily by shorting options, then why study in college and get a degree? Just ask your parents 2 lakh rupees and start selling options. Life is not that simple.

And imagine this – if we all start selling options and make money then who will ever buy options? Option trading itself will stop.

Please do not get me wrong, even in my course selling is required, but we hedge these options and hedge it pretty well. Buyers rarely make money, sellers do but sometimes the losses can be unlimited – to stop these unlimited losses hedging is required and in fact is a must.

Paid customers are now taking leverage of my newsletters where I tell them VIX will increase – they short sell options without hedge thinking when it drops they can benefit a lot.

Do not forget it is not just about the VIX – there are other factors that also determine the values of the options. Just because I say VIX will drop does not mean whatever options you sell will lose its premium, and you can make money, so the hedging is not required.

Other than Vega, options have delta, gamma, theta and prevailing interest rates that determines their premium. People keep forgetting that.

In fact a lot of retail option sellers in India never even cared about VIX, a lot of them do so now especially those who have done my course.

Nifty move of over 2-3% can damage a short option. And then traders call me asking for help. Well if you do not follow the rules in the course, how can I help?

Why Traders Short Option on High Vega?

When you short option on high Vega (VIX), you get a feeling that since you got a great premium nothing can go wrong. Well let me tell you that stock markets do not care. You have taken a risk and if the trade goes wrong, then remember that you are at unlimited risk. No matter what you do – some leave that trade till expiry on the hope that Nifty will reverse (worst case), some start selling puts against calls, or calls against puts, or some start buying Futures.

Well let me tell you whatever you do – when a short position without hedge has gone wrong, then it has gone wrong. No matter how hard you try, if luck does not favor, you have to take a loss. And while trading it is not a great idea to leave things to luck.

Trading short options is almost like trading in Futures, after a certain time – they start behaving like Futures. Delta becomes close to 1, and you start losing 1 point for every 1 point move of Nifty against the short option. Agreed losses can be less than a Future trade gone wrong – but remember that when Future traders are right they also get unlimited money. When you sell an option you only get a limited money.

Then there are some people who follow my newsletters like sheep. You have done the course and you must first follow the rules of the strategies.

If I send an email to close the position but if your stop loss is not hit or the profits have not been achieved then you should not close the position. If you follow anyone like a sheep when will you ever grow?

I send newsletters to my paid subscribers to make them a better trader – not to follow it blindly. Trades like Ravi make more because they also use their brains after doing my course.

If you do my course I will help you to become a better trader for 1 year – for as low as Rs.5000/-. Who will do this in the whole world? If you are willing to learn, I am wiling to help.

Here are a few things you can try if the short options have gone in the money – but keep in mind – why get into trouble when you can avoid this trouble? No one is forcing you to short options without hedge so please hedge and stop this way of making money trading.

What to do if short options have gone ITM (In the money)

In my experience Stop Loss is the best option. Exit as soon as the short option strike goes In The Money (ITM). So suppose you have sold 8000 strike CE. Just take a stop loss as soon as Nifty spot (not Futures) reaches 8000. No hope no calculations. You took a risk, it failed – now it’s time to stop the losses. Remember that Nifty may come down and the option you sold may expire worthless – but no one knows the future so it’s always better to stop the losses than taking a chance. Once you take the stop loss forget the trade – because back testing this is useless.

Some people love to back test my strategies. Now back test this:

Sell an option 200 or 300 or whatever points away from the first day of expiry and check from your Rs. 1 lakh or more back testing software what would have happened in the last one/two/twenty years had you:

a) Left it till expiry, or
b) Taken a stop loss once the stock hit the shorted option’s strike.

Now whatever the result – do you think Nifty will give the same result in the years to come? No way.

Now do you get why I do not believe in back testing?

A lot also depends on the back testing software. Not all back testing software is the same. Some people have back tested my strategies and found it to be great, some found it not so great. Why do the results differ? After all it was back testing the same strategies right? So the results should be same.

My point is forget both. You are in control when the trade is on, not that back testing software. What happened exactly one year back is not going to happen now. So when you do the course think about the future not what it could have done had you done the course a couple of years back or 100 years back. You cannot go back and change your life – so why bother?

In fact no one takes a stop loss, but they try the following strategies in vain to try to make money from a lost trade:

1. Rollover – Rollover is selling options of higher strike. This is the most popular choice among short option sellers. After a stop loss rolling over is not a bad idea but there must be a logic.

Most popular among trades is to sell 100 points out of money option once the short strike is hit. Nothing wrong with a rollover – but please remember that rollover is nothing but taking a loss in the current trade and opening another unlimited loss trade at a strike where you are not very comfortable. Forget the first trade, now ask yourself – if this is the trade you are comfortable trading? In 99% of the cases the answer is no. Rollover can be good option only if you took a limited loss and are willing to take a limited loss. It’s not good if you took a big loss and are again trying to take an unlimited loss.

With hedging since the loss is limited we can always stop our limited loss and again rollover with a limited loss trade. If there is no hedge and if both of the trades ends in losses – I can guarantee two losses can take away 6 months of profits or more. You will start again, thinking it won’t happen next time. More often than not, the next time it happens, you forget the previous losses and this time you end up giving more than your principal to the markets.

Then you get your salary, bring more cash to your trading account and the viscous circle continues – for years. No doubt why I get calls by traders who lost 10 lakhs almost every day. You are doing nothing but giving a part of your salary to the markets.

2. Selling the other side option – This is again a limited profit as against unlimited loss risk. So basically traders sell puts when their calls get in the money, or sell calls if the puts they sold gets in the money.

Selling options is limited profit. So if you do, the max profit you get is the cash received from the option sold. If Nifty keep rising all you get is the cash received from the other option. But what if Nifty reverses. Now you have another problem in hands. How to manage the losses in the other option you sold? In fact when the trade ends you will see that you had a loss in the original trade and the adjusted trade. You won’t believe but Nifty will reverse almost exactly from the same place where you decided to sell the other side of the option. You will feel like the biggest fool on earth.

3. Some traders buy some in the money (ITM) options, some buy Futures to protect losses. Fact is whatever you do it’s really hard to make a profit out of sold options gone into losses.

Instead of trying to save a situation where you are losing money, it is always better let go of your ego and stop further losses in the trade. Then wait for the next opportunity to trade.

The reason I love hedge is I know I am at a limited loss and I can just exit the trade at a limited loss whenever I want to. I do not want to trade in panic and will never trade in panic.

What tricks you did when you sold an option and it went into the money? I would love to know, please me know in the comments section.

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Open ZERO Brokerage FREE Share Trading Account - Buy and Sell Stocks Without Brokerage - Set GTT (Good Till Triggered) Orders on System and Forget

Traditional brokers charge a lot for brokerage; however, this broker does not charge anything for stock buying and selling. Also, you can set GTT (Good Till Triggered) order after buying a stock, so that the system can sell the stock automatically at your target price even if you are not monitoring the market. Only 25k is blocked for option selling with hedge. Also, you get a lifetime free account in Sensibull (virtual trading app & strategy builder) which charges Rs.800/-+GST a month. It takes 5 minutes to open an account online. Click here and Open Free Account with Them Today >>

About the author: Dilip Shaw I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

{ 14 comments… add one }
  • anuradha April 20, 2016, 9:45 am

    Can you please post your views and share your expertise on covered call with futures and options instead of stocks and options. Will it be a good idea to long nifty futures and short a call 200 or 300 points away on a day when nifty fell consecutively for 4-5 days and preferably for the next month expiry.

    • Dilip Shaw April 20, 2016, 10:48 am

      Anuradha, covered calls are meant for stocks and options, not for futures and options. I think if you have done my course there is a very good trade on Futures combined with options. Why don’t you practice that?

  • marina s rao April 29, 2016, 2:01 am

    Dilip ji,


    Learning points from this post :

    To stop the unlimited losses hedging is required and in fact is a must.

    If you follow anyone like a sheep when will you ever grow?

    It’s always better to stop the losses than taking a chance.

    You are in control when the trade is on, not the back testing software.

    Plz correct the following line :

    In the line above sub-heading : ‘ Why Traders Short Option on High Vega? ‘

    And then trades call me asking for help.


    And then traders call me asking for help.

    Strategy 3 is missing under sub-heading :

    ‘ In fact no one takes a stop loss, but they try the following strategies in vain to try to make money from a lost trade: ‘

    1. Rollover

    2. Selling the other side option

    3. ???????????/??

    4. Some traders buy some in the money (ITM) options, some buy Futures to protect losses.


    M S Rao

    • Dilip Shaw May 24, 2016, 11:37 am

      At last today got time to do the changes. Thank You it is done now.

  • sanjay ghose May 11, 2016, 2:24 pm

    if your strategies are brilliant which can make 3-4% per month i.e.48% per year.thats huge
    you should sell your strategies to any hedge fund company,they are just making 10%.

    • Dilip Shaw May 11, 2016, 6:51 pm

      Sanjay, Hedge funds makes less I agree but why should I sell them for 5k?
      I want to help retail traders like you, not Hedge Fund managers. They are already crorepatis.

  • Kaisar Imam May 12, 2016, 11:00 pm

    Once i sold one option and that came in ITM. I sold option with very high price and was not expecting market will go there. anyhow market touched that point in 15 days. after crossing that point that stock came in bull zone. what i did covered my sold option at loss and made up my loss by selling put options at down level because i sold above resistance level and stock price crossed that level. i feel before shorting options select that stock which is in bull run for put selling and bear run for call selling. it is not easy for a stock to reverse trend. never short option on a stock which is in range. hope this is million dollar advice if implemented.

    • Dilip Shaw May 13, 2016, 6:33 pm

      Imamji what if you would have made money – then you would have said something else in fact exact opposite. That is the reason I teach people hedging through my site and course. Anything that makes money by fluke or looses money by fluke will teach you wrong things. Thanks for the comment though.

  • Dilip Shaw May 14, 2016, 12:58 pm

    Ok. So you are mostly right in the direction of Future.

    • anuradha May 15, 2016, 9:20 pm

      can you please tell me the full details of the trade particularly the x% and y% that you mentioned. I hope it was not intended to be a secret.

  • Meenakshi December 7, 2016, 10:30 pm

    Sir I did 8naked selling options without hedging in Banknifty.my practice was selling deep out of money options.I may get premium like 2000-3000.I book profits if price near 1000-1500 profits after deducting commissions. Even if market moves towards ITM direction still I square off with 50% loss.in any time I book 50% profit r 50% loss.50% of premium received.if we follow this rule still we have to hedge?

    • Dilip Shaw December 8, 2016, 1:53 pm

      Meenakshi, only problem of trading without hedging is that one bad sudden move may take out months or even years of profits so better trade with a hedge.

  • BHAVSAR January 19, 2017, 1:57 pm

    I am new to option trading.Pl.let me
    Know what to do if market go against

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