As markets rise and hopefully all the portfolio's maybe its a good time to start hedging your portfolio.
In ideal situation i would like protect all my gains by buying rights to sell shares in my portfolio at a designated price.
Unfortunately, none of my stocks are in the F&O category. This leaves with only one option of buying rights to sell NIFTY at a certain price and assume it to act as proxy to my shares.
How do we buy right to sell NIFTY at a price we like? For that we need to enter the maligned territory of derivatives :)
To do this we will take assistance of what is known as PUT option. Essentially, a put option gives you a right to sell at a pre-determined price. But, for getting this right you need to buy it by paying a price. ( Known as premium).
To summarize you need to buy a PUT option to get rights to sell a stock/nifty at a pre-determined price.
Let me try and explain this through an example:-
1) Portfolio Size= INR 30 lacs
2) Portfolio composition= Mid-Caps/Small Caps who don't have options enabled for them by exchanges
3) Assume that a bad event happens ( 3rd Front coming to power). In such an even i can assume that my portfolio to go down by around 20% quickly. Beyond that i actually might start buying my existing ideas :)
So the money @ risk is around INR 6 lacs
4) To hedge assume that NIFTY will fall from present levels falls by 20% (6800 to 5440). Basis this lets check what is the Price (Premium) i need to pay if i want to buy rights to sell NIFTY at say price of 5500. That price is around Rs. 10. By paying this I get to buy 1 lot of nifty ( 1 lot=50 NIFTY). So by paying Rs.10*50= Rs. 500 i get to buy rights to sell 50 NIFTY @ price of 5500.
5) Now if NIFTY falls....2 things will happen
7) This means that by outlaying Rs. 10*120*50= Rs. 60000 you are able to hedge the portfolio.
Though, this sounds very simple it is sometimes difficult to implement as there are no gains in this. You simply are allowing this money to go down the drain if NIFTY doesn't fall :)
Your broker will never recommend this, as it eliminates chances of trading, which is detrimental to your broker.
Regards,
PS- Disc.have bought put options.
Unfortunately, none of my stocks are in the F&O category. This leaves with only one option of buying rights to sell NIFTY at a certain price and assume it to act as proxy to my shares.
How do we buy right to sell NIFTY at a price we like? For that we need to enter the maligned territory of derivatives :)
To do this we will take assistance of what is known as PUT option. Essentially, a put option gives you a right to sell at a pre-determined price. But, for getting this right you need to buy it by paying a price. ( Known as premium).
To summarize you need to buy a PUT option to get rights to sell a stock/nifty at a pre-determined price.
Let me try and explain this through an example:-
1) Portfolio Size= INR 30 lacs
2) Portfolio composition= Mid-Caps/Small Caps who don't have options enabled for them by exchanges
3) Assume that a bad event happens ( 3rd Front coming to power). In such an even i can assume that my portfolio to go down by around 20% quickly. Beyond that i actually might start buying my existing ideas :)
So the money @ risk is around INR 6 lacs
4) To hedge assume that NIFTY will fall from present levels falls by 20% (6800 to 5440). Basis this lets check what is the Price (Premium) i need to pay if i want to buy rights to sell NIFTY at say price of 5500. That price is around Rs. 10. By paying this I get to buy 1 lot of nifty ( 1 lot=50 NIFTY). So by paying Rs.10*50= Rs. 500 i get to buy rights to sell 50 NIFTY @ price of 5500.
5) Now if NIFTY falls....2 things will happen
- The price you paid of Rs. 10 will increase as more and more people will try to hedge these options.
- In case the NIFTY falls below 5500 to say 5400, by exercising your right to sell you make Rs.100*50= Rs. 5000/-
7) This means that by outlaying Rs. 10*120*50= Rs. 60000 you are able to hedge the portfolio.
Though, this sounds very simple it is sometimes difficult to implement as there are no gains in this. You simply are allowing this money to go down the drain if NIFTY doesn't fall :)
Your broker will never recommend this, as it eliminates chances of trading, which is detrimental to your broker.
Regards,
PS- Disc.have bought put options.
