Have you ever wondered whether there is some way you can protect your downside while investing in the equity markets? In the same way, in which we can minimize the risk of unexpected losses by buying insurance policies on our life, health, property machinery etc., we should be able to ensure our investments as well. Right?

The good news is that yes, you can protect your equity market investments from unwanted losses when the markets crash by buying Put Options. This is known as ‘Hedging’.

Hedging your investments with Put Options

Put Options are option contracts that give you a right to sell an asset at an agreed upon price (Strike Price) within a future date (Expiry Date). Whenever you invest in equity shares, you can get the right to sell it at an attractive price by buying a Put Option.

To Buy the Put Option you will have to pay a premium to the person who sells it to you. If the market crashes below the Strike Price within the expiry date, you will get the difference in price from the seller of the Put Option.

On which assets are Put Options available?

Put Options are available on certain stocks and Indices that are traded in the stock exchanges. If Put Options are available on the stock that you own, then it is best to go for those.

However, Put Options are not available on all stocks. If you have bought a stock on which options are not available, then you can buy Index Put Options. However, this will require you to do some calculation regarding the correlation between the beta of your stock and the index whose Put Options you are buying.

Which maturity dates are available?

There are monthly Puts available on individual stocks. In the case of Indices, weekly, monthly, and yearly contracts with an expiry date of up to 5 years are available.

What amount of premium will I pay?

The premium that you will have to pay to the seller will depend on 5 factors: spot price, strike price, time to expiry, volatility, and interest rate. Since these factors keep varying, you must look at the live market prices to understand with the premium that you will have to pay while buying the Put Option.

Can individuals buy Put Options?

Yes. Any individual can buy Put Options and protect his/her portfolio.

Are there any restrictions?

The only restriction is the quantity of the underlying asset that you will have to buy (known as the lot size). The Lot size for each underlying asset is clearly defined and in NSE the value of each lot hovers around Rs 5 lacs. If the number of equity shares that you have bought is below the lot size specified, then it will be costly for you to buy the Put Option.

Buying Put Options is a great strategy whenever you feel that markets are going to fall. Provide downside protection to your equity portfolio with Puts and gain complete peace of mind.

Finideas provide a long term investment solution in Index with hedging of Put Option. We are using leverage to boost the profit that beat Nifty Index Returns. To know more about secured investment, just click on following button.

Thank You. 

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