Option trading for hedging loss of portfolio

dr_tejas_shah · #1 18th March 2008, 01:57 AM

Hi,

Just wondering since markets are falling every day, most of the portfolios are in great loss.

If put option is used, can it hedge effectively against loss in cash portfolio?

I am aware that F&O are for experienced traders, but I feel bit distressed sitting on hugh loss in delivery portfolio and the F&O seems promising to hedge (after some research and knowledge).

Any ideas from more experienced traders around?

rajsingh · #2 18th March 2008, 09:42 AM

It would have helped if it was done in a systematic manner with reference to your risk profile, at this point in time I don,t know how much it could help.

You could also use nifty futures to hedge the beta of your portfolio.

beginner_av · #3 18th March 2008, 09:13 PM

yes it is good only if you know how to use it. else you will be paying hedging costs unnecessarily. Bad technical ability cannot be covered by a good hedge.

AW10 · #4 5th May 2008, 10:06 PM

Hi,
Options give you great flexibility to hedge your stock portfolio.
In simplest form, you can buy put options of NIFTY and pay small premium.
So in case of fall in the market, your PUT will gain in value and componsate for the loss.
For eg - Say portfolio size is 5 Lacs. Value of one NIFTY contract (size =50) at strike price of 5000 = 5000*50 = 2,50,000. So you need to buy 2 nifty contract to cover the portfolio of 5 Lac. Premium required to buy NIFTY 5000 Put = say 100 rs. That means you will pay 2contract*50*100 = 10,000 rs.
As NIFTY falls, the PUT premium will increase.

In theory, option price is impacted by DELTA. In simple terms, DELTA of 0.5 means that for 1 Rs. change in NIFTY, the option premium will chage by 0.5 Rs.
to accomodate that, you might like to buy 4 contracts of value 10 lac to cover portfolio of 5 lac. Atleast thats what I practice to protect my protfolio. When I sense that market is due for correction then I use this approach to protect my mutual fund portfolio as well.

Hope this helps.

Happy protecting your capital..

nehal · #5 18th May 2008, 08:27 PM

Quote:

Originally Posted by AW10

Hi,
Options give you great flexibility to hedge your stock portfolio.
In simplest form, you can buy put options of NIFTY and pay small premium.
So in case of fall in the market, your PUT will gain in value and componsate for the loss.
For eg - Say portfolio size is 5 Lacs. Value of one NIFTY contract (size =50) at strike price of 5000 = 5000*50 = 2,50,000. So you need to buy 2 nifty contract to cover the portfolio of 5 Lac. Premium required to buy NIFTY 5000 Put = say 100 rs. That means you will pay 2contract*50*100 = 10,000 rs.
As NIFTY falls, the PUT premium will increase.

In theory, option price is impacted by DELTA. In simple terms, DELTA of 0.5 means that for 1 Rs. change in NIFTY, the option premium will chage by 0.5 Rs.
to accomodate that, you might like to buy 4 contracts of value 10 lac to cover portfolio of 5 lac. Atleast thats what I practice to protect my protfolio. When I sense that market is due for correction then I use this approach to protect my mutual fund portfolio as well.

Hope this helps.

Happy protecting your capital..

nice info..
i learning option trading so it will be helpful for me

once again thanx