Hedging Strategies — Protective Put, Covered Call, Beta Hedge
Hedging strategies neutralise or reduce specific price risk. Protective Put = long stock + long put (downside insurance). Covered Call = long stock + short call...
Three Core Equity Hedges
Hedging strategies neutralise or reduce specific price risk. Protective Put = long stock + long put (downside insurance). Covered Call = long stock + short call (income + capped upside). Beta Hedge = short index futures against a long equity portfolio sized by beta.
Protective Put is portfolio insurance — you keep upside, cap downside at strike minus premium. Covered Call earns premium income but caps upside at the strike of the call sold. Beta hedging uses index futures to offset market-wide (systematic) risk in a stock portfolio. Hedge ratio for beta hedge = (Portfolio Value × Beta) / Index Futures Contract Value. A perfect hedge is rare; most hedges reduce risk materially without eliminating it.
Pay a small premium, cap your downside loss
Earn monthly "rent" from selling calls on stocks you own
Short index futures to cancel market-wide risk
No hedge is perfect — basis risk remains
A Practical Example
Rohit holds 250 Reliance shares purchased at ₹2,400 (value ₹6,00,000). He worries about a 1-month correction but doesn't want to sell.
Hedge A — PROTECTIVE PUT: Buys 1 lot Reliance 2400 Put @ ₹60 → pays ₹15,000 premium. Downside floor: ₹2,400 − ₹60 = ₹2,340 (3.5% max loss) regardless of crash. Upside still intact.
Hedge B — COVERED CALL: Sells 1 lot Reliance 2500 Call @ ₹45 → earns ₹11,250 premium. If RIL closes under 2,500 → keeps stock + full premium. If above 2,500 → shares called away at ₹2,500 (capped upside).
Hedge C — BETA HEDGE: RIL beta to Nifty = 1.1. Shorts Nifty futures worth ₹6,60,000 (= 6,00,000 × 1.1). If Nifty falls 5%, portfolio loses ~5.5% ≈ ₹33,000 but short futures gain ₹33,000 — net near zero.
What Makes This Important
Beta-Hedge Sizing
Hedge Ratio (Beta) = (Portfolio Value × Portfolio Beta) / (Index Futures Price × Lot Size)
Frequently Asked Questions
Only minimally. The premium you collect cushions a fall equal to the premium amount. If the stock drops 15%, and you earned 1.5% premium, you still lose roughly 13.5%. Covered calls are for income + mild downside buffer, not protection — use Protective Puts for real downside insurance.
🧠 Quick Quiz
2 questions to check your understanding