A common misconception that many market participants have is that the premium that pays to buy puts to hedge our portfolio reduces the overall returns from the portfolio.

While this may seem to be true in the first glance, why Puts certainly serves a greater purpose. We need to understand why you should buy puts and what are the various benefits of buying quotes to hedge our portfolios.

A. Puts Protect your portfolio against market crashes

When we buy Put options to hedge our existing portfolio of stocks, futures, etc., we do end up paying a premium. At first glance, it looks like these premiums will reduce the overall returns That we will earn from the portfolio.

However, you must understand that you are buying these Put options for protecting your portfolio against big and small market crashes that are inevitable.

This is like buying health insurance like Mediclaim. There will be many years when there will be no claims and you may feel that the premium amount got wasted. However, if someone falls sick in the following year then the insurance company will pay all the medical bills on your behalf. Often, this amount will be much more than the total premium that you paid in the previous years.

Similarly, when you hedge your position with Puts, there will be many times when the markets will go up and those Puts will expire worthlessly. However, if the market falls, the same Puts will protect your portfolio against the crash and save you huge amounts of money.

B. Puts increase returns in volatile markets

The protection given by the Put options does not only cover us from the losses, but it also helps us to increase our returns.

Say Nifty50 is currently at 10,000 you are holding a portfolio of ₹10,00,000. You have also bought Put options to hedge the portfolio.

Shortly thereafter, the market crashes to 5000, resulting in the value of your portfolio getting reduced to ₹5,00,000.

However, the Put options that you have bought will increase in value by ₹5,00,000. You can use this profit of ₹5,00,000 from the Puts to buy more shares.

Hence the value of portfolio again becomes ₹ (5,00,000 + 5,00,000) = ₹10,00,000, i.e. its original value.

Now, When Nifty50 goes up again from 5000 to 10000, your portfolio of ₹10,00,000 can also go up to ₹20,00,000.

This would not have been possible if you had not bought the Puts to hedge your portfolio earlier. You would have wasted your time in waiting for the value of the portfolio to go up from ₹5,00,000 to ₹10,00,000. You can now earn returns instead of having to recover any losses.

This has only been possible because you had bought Put Options to hedge the position wisely, instead of looking at the premium as a cost.

These are some of the great benefits of buying Puts. Buy them to hedge your portfolio and get complete peace of mind.

This article is for education purpose only. Kindly consult with your financial advisor before doing any kind of investment.