Smart Portfolio Hedging: Protect Investments in Market Downturns
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Moneycontrol•31-01-2026, 09:50
Smart Portfolio Hedging: Protect Investments in Market Downturns
- •Shubham Agarwal emphasizes smart portfolio hedging to manage risk and maintain upside potential during market downturns, like the Nifty's January tumble.
- •Determine the number of Nifty lots needed for hedging based on portfolio value and beta; large-cap portfolios (beta 1) need protection equal to their value, while mid/small-cap (beta 1.3) require 30% more.
- •Avoid over-hedging; institutions typically hedge 60-70% of their portfolio. For a Rs 20 lakh large-cap portfolio, one Nifty lot (Rs 16 lakhs) might suffice for partial hedging.
- •Choose longer-term expiries (three to six months out) and In-The-Money (ITM) puts to avoid time decay and ensure superior coverage, rather than current expiry options.
- •Recover hedging costs by selling Out-of-The-Money (OTM) weekly puts during market bounces, aiming to offset the premium paid for longer-term hedges and create liquidity for buying opportunities.
Why It Matters: Effective portfolio hedging protects capital, offers flexibility, and provides liquidity to buy quality stocks during market dips.
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