Portfolio Hedging with Options
Portfolio Hedging with Options | Smart Risk Strategy 2025
Stock markets can be unpredictable. Even strong portfolios can face sudden drawdowns during volatile times. This is where portfolio hedging with options becomes a smart choice for traders and investors in 2025. Hedging doesn’t eliminate risk but helps control losses, allowing you to protect gains and sleep better at night.
What is Portfolio Hedging with Options?
Portfolio hedging means using derivatives (mostly options) to offset potential losses in your equity holdings. When your portfolio is exposed to downside risk, options hedging strategies act like insurance.
For example, if you hold a portfolio of large-cap stocks worth ₹10 lakh, you may fear a sudden market crash. Instead of selling stocks, you can use protective put options on the Nifty to safeguard your downside. This way, your risk is capped while your upside remains open.
👉 SEBI regulates derivatives to ensure transparency. Check SEBI derivatives guidelines here:
Why Use Options for Hedging?
Flexibility: Options can hedge entire portfolios or single stocks.
Cost-Effective: Buying an option premium is cheaper than exiting positions and paying taxes.
Liquidity: NSE and BSE provide highly liquid option contracts.
Peace of Mind: Hedging allows investors to hold positions during uncertain times.
NSE offers detailed contract specifications on their website.
Protective Put Strategy – The Classic Hedge
The most common way of portfolio hedging with options is the protective put strategy.
You own stocks (long position).
You buy put options on the same stock or index.
If stock price falls, put option gains offset your losses.
Example: You hold Infosys shares at ₹1,600. You buy a 1,600 strike put option at ₹20. If Infosys drops to ₹1,500, your loss on shares is ₹100, but your put rises in value, reducing net damage.
This is one of the best hedging strategies in the stock market for beginners.
Covered Call Strategy – Earning While Hedging
Another simple options hedging strategy is the covered call.
You own the stock.
You sell (write) call options at a higher strike.
If stock stays below that strike, you keep premium income.
Example: You hold HDFC Bank at ₹1,600 and sell a 1,700 call option for ₹30. If HDFC doesn’t cross 1,700, you earn the premium. If it rises, you sell shares at profit but cap your upside.
This strategy provides income and partial hedge against sideways markets.
Index Options for Portfolio Risk Management
Instead of hedging each stock, many investors hedge using Nifty or Bank Nifty options.
A protective put on Nifty safeguards diversified portfolios.
Lower cost compared to hedging each stock.
Useful for fund managers and retail investors alike.
👉 Global traders also use this. For deeper understanding, see basics on Investopedia.
Hedging for Beginners – Things to Remember
Start with simple strategies like protective puts.
Avoid complex spreads until you understand Greeks.
Always compare cost of premium vs potential protection.
Hedge only when volatility or uncertainty is high (e.g., elections, Fed meetings).
Don’t over-hedge — too much protection eats away profits.
This is why portfolio risk management is a balance of cost vs coverage.
Example of Portfolio Hedging with Options
Suppose your equity portfolio is worth ₹5,00,000. You worry about a 5% correction (₹25,000 loss).
You buy Nifty 50 puts worth ₹5,000 premium.
If market falls 5%, your portfolio loses ₹25,000, but your puts gain nearly ₹20,000.
Net loss = ₹5,000 (premium).
This insurance-like approach makes portfolio hedging with options a smart strategy in India.
Risks of Hedging in Stock Market
While effective, hedging has limitations:
Premium Costs: Buying puts repeatedly reduces returns.
Limited Upside: Covered calls cap gains.
Complexity: Misuse of strategies can lead to bigger losses.
Psychological Trap: Some investors hedge too often and erode profits.
That’s why proper education is key before using option contracts in India.
FAQ Section
Q1: How does portfolio hedging with options actually work?
It works like insurance. By buying options, you pay a small premium to protect against bigger portfolio losses.
Q2: Is options hedging suitable for beginners?
Yes, but beginners should stick to protective puts and avoid complex spreads until they gain confidence.
Q3: Which is the most common option strategy for risk management?
Protective puts and covered calls are the two most widely used strategies.
Q4: Can Indian investors hedge portfolios on NSE and BSE?
Yes, both exchanges offer liquid index and stock options for hedging.
Q5: What’s the biggest drawback of hedging with options?
The main drawback is cost — repeated premiums can reduce overall returns if markets remain stable.
Why Trading Shastra is Different
At Trading Shastra Academy, we don’t just teach what portfolio hedging with options means — we train you to apply it in live markets.
Practical hedging with protective puts and covered calls.
SEBI-compliant, transparent training.
Stipend-powered internships with real capital.
Algo tools that help track options Greeks automatically.
If you want to dive deeper into safer trading techniques, also read our blog on How Arbitrage Works in Indian Stock Market 2025.
Final Thoughts
Portfolio hedging with options is not about predicting the market — it’s about protecting yourself from the unknown. Whether you’re a beginner or seasoned investor, hedging can save your portfolio during volatility.
In 2025, with markets becoming faster and more global, smart hedging strategies like protective puts and covered calls are essential. Combine them with discipline, and you can safeguard wealth without giving up long-term growth.
Trading Shastra Academy
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Website: https://www.tradingshastra.com/
Email: info@tradingshastra.com
Phone: +91 9717333285
Disclaimer
This blog is for educational purposes only. Stock market investments are subject to risks. Please do thorough research before investing.