I considered the chuck key holster/interlock a while ago and never did it on mine.
Some thoughts on it, though:
A small switch may not be able to carry the current to use it on the Power side of the circuit. (IE small enough that gravity on the chuck key would activate it.)
You could use the switch to run a relay, OR.. Maybe a meaty reed switch (See edit) mounted on the side (So that pushing the bar in would turn it on) could work... youd probably have to push the chuck key in against some resistance rather than just dropping it but in practice it shouldnt make a difference.
Theres also an issue with the serial interlock part of it. If, for some reason the power switch was on already the lathe would start up when you slid the chuck key home... not sure Id want that.
If your machine has a magnetic switch (Designed so the machine will NOT turn back on after a power outage even if the switch is left ON) you could use the energizer (Keep alive) side of the circuit, which is low power and even a small switch would be OK on. The problem with that (at least on mine.. HF 8x14) is that even if an interlock is Open when I press the ON switch the lathe still comes on while I physically apply pressure. In my case I have an interlock on the DC motor overheat switch, and on a HEY DUMMY! Dont reverse the motor while its running! interlock for the reverse switch so using that circuit works OK for my purposes.
Just some food for thought. Still a good idea in general... just takes some thinking to figure out the best way.
{Edit} I looked it up, apparently wthe type i meant was "Snap action" not reed switch...
http://www.mouser.com/ProductDetail...=sGAEpiMZZMumBvQ1hY/fBa0rKDzVGhP3yQ6dl/W4a7o=