In the world of investing, risk management is an important part of building and maintaining a successful portfolio. Option chain can be an effective tool for investors to reduce risk and protect their investments. A common use of options is hedging. This involves taking positions to offset potential losses within your portfolio. In this guide, we examine how to use options to effectively hedge your portfolio.
Understanding portfolio hedging
Portfolio hedging involves using financial instruments to protect investments from adverse price movements. There are many ways to hedge your portfolio, and options offer a flexible and customized approach. Checks more on demat account kaise khole?
Protective puts are one of the simplest and most common ways to hedge a portfolio. This involves purchasing put options on the same assets you hold in your portfolio. A put option gives you the right, but not the obligation, to sell the underlying asset at a specified strike price before or on the expiration date. Checks more on demat account kaise khole? By purchasing a put option, you set a lower bound on the value of your portfolio. If the value of the asset declines, the gain from the put option can offset the loss. This is often referred to as “portfolio insurance.”
2. Covered call
Another widely used hedging strategy is covered calls. This involves writing call options on assets you already own in your portfolio. Covered calls generate income by selling call options and provide a cushion against possible price declines.
Covered calls limit potential upside profits, but can significantly reduce downside risk. This strategy is ideal for investors who are satisfied with their current portfolio and want to limit their potential gains in exchange for a safety net.
3. Collar strategy
A collar strategy combines both protective puts and covered calls to create a range over which the value of your portfolio can fluctuate. You purchase protective puts to limit losses and sell covered calls to generate income. The strike prices of the put and call options define the range within which your portfolio’s value remains relatively stable. Checks more on demat account kaise khole?
This strategy is highly effective when you anticipate moderate price fluctuations and want to maintain the current value of your holdings.
4. Long Straddle
The long straddle is a more complex hedging strategy and is typically used when you expect significant price movements, but you’re uncertain about the direction. This involves buying a call option and a put option at the same time with the same strike price and expiration date. Checks more on demat account kaise khole?
In a long straddle, losses on one side of the trade are offset by gains on the other side. It is a good option in uncertain market conditions as it allows you to profit from price fluctuations.
5. Long put spread
The long put spread is an options strategy that is useful in mildly bearish market scenarios. It involves buying a put option with a lower strike price and selling a put option with a higher strike price. The premium received from selling the higher strike. Check here for more on -demat account kaise khole?