Hedging Strategies Using Index
Praveen Dubey (SEBI Registered RA)
SP RESEARCHVIA PVT. LTD. (INH000015808)
Protecting Long-Term Equities Against Market Contractions
Market volatility is an inherent part of equity investing. The risk desk at SP RESEARCHVIA PVT. LTD. analyzes hedging frameworks designed to limit drawdown impact using liquid index contracts.
How do you construct an effective portfolio hedge with index puts?
By calculating your portfolio's beta relative to the index (e.g., Nifty 50) and purchasing out-of-the-money (OTM) put options. This establishes a floor price, mitigating losses during sudden market corrections.
The Cost of Hedging (Premium Drag)
Constant hedging acts like an insurance premium, drag-loading overall returns during bull runs. Applying hedges tactically when volatility indexes (like India VIX) are low is key to cost efficiency.
Implementing Collar Strategies
To offset the cost of put options, investors can sell covered out-of-the-money call options. This collar structure caps upside potential but offers structured downside protection at little to no net cost.
Written by Praveen Dubey
Chief Research Analyst | SEBI Reg: INH000015808
Statutory Warning & Risk Disclaimer: Investment in securities market is subject to market risks. Read all related documents carefully before investing. Registration granted by SEBI and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Content provided on this blog is for informational and educational purposes only.