Use Put as a portfolio Hedge?
Assumption: You are concerned about a downturn in the short term in the market and its effect on your portfolio. The portfolio has performed well and you expect it to continue to appreciate over the long term but would like to protect existing profits or prevent further losses. Possible Action: Buy Nifty puts. Example: You held a portfolio with say, a single stock, HLL valued at Rs. 10 Lakhs (@ Rs.200 each share). Beta of HLL is 1.13. Current Nifty is at 1880. Nifty near month puts of strike price 1870 is trading at Rs. 15. To hedge, you bought 3 puts 600{Nifties, equivalent to Rs.10 lakhs*1.13 (Beta of HLL) or Rs. 1130000}. The premium paid by you is Rs.9000, (i.e.600 * 15). If at expiration Nifty declines to 1800, and Hindustan Lever falls to Rs.
Assumption: You are concerned about a downturn in the short term in the market and its effect on your portfolio. The portfolio has performed well and you expect it to continue to appreciate over the long term but would like to protect existing profits or prevent further losses. Possible Action: Buy Nifty puts. Example: You held a portfolio with say, a single stock, HLL valued at Rs. 10 Lakhs (@ Rs.200 each share). Beta of HLL is 1.13. Current Nifty is at 1880. Nifty near month puts of strike price 1870 is trading at Rs. 15. To hedge, you bought 3 puts 600{Nifties, equivalent to Rs.10 lakhs*1.13 (Beta of HLL) or Rs. 1130000}. The premium paid by you is Rs.9000, (i.e.600 * 15).
