Hedging

Think of it like buying insurance for your portfolio.

If you own stocks (which you want to go up), you might buy a 'Put Option' (which makes money if market goes down).

If the market crashes, your stocks lose value, but your Put Option makes money, offsetting the loss.

The most common hedge in the Indian market is buying Nifty or Bank Nifty put options. If you hold a portfolio of large-cap stocks that broadly tracks the Nifty 50, buying a Nifty put acts as insurance against a market-wide crash. The cost of this put (the premium) is the price you pay for peace of mind.

Hedging does not mean you avoid all losses, it means you limit them. Think of it like paying for car insurance. You hope you never need it, but if an accident happens, the insurance prevents financial ruin. Similarly, a hedge costs you some money upfront but can save your portfolio during events like election results, RBI policy announcements, or global crises.

Indian investors can also hedge using asset allocation. Holding a mix of equities, gold (via Sovereign Gold Bonds or Gold ETFs on NSE), and government debt provides a natural hedge because these asset classes often move in opposite directions during crises.

SEBI requires that all F&O hedging positions be properly margined. If you buy a put option on Zerodha or Groww to hedge your stock portfolio, the margin required is just the premium you pay, making it an affordable way to protect a larger stock holding.