How can I hedge my investments using options?

Options are one of the best ways to hedge investments and protect your portfolio from market volatility. By using options strategies like protective puts, covered calls, and spreads, you can minimize risk while maximizing returns.

1. Use Protective Puts to Limit Losses

A protective put is like insurance for your stocks. It allows you to lock in a minimum selling price, protecting against major downturns.

For example, if you own shares of a company and buy a put option at ₹1,500, you have the right to sell the stock at ₹1,500 even if the market price falls to ₹1,200.

• Best for: Investors who want downside protection while holding stocks.
• Risk: The cost of buying the put option.

2. Sell Covered Calls for Extra Income

A covered call strategy allows you to generate income from stocks you already own while providing partial downside protection.

You sell a call option on your stock, agreeing to sell it at a set price. If the stock price remains below this level, you keep the premium earned from selling the option.

• Best for: Investors who want additional income from their holdings.
• Risk: Your stock may be sold if the price rises above the agreed level.

3. Use Collars for Balanced Protection

A collar strategy combines a protective put and a covered call, allowing you to hedge risk while reducing costs.

This involves buying a put option and selling a call option at the same time. The income from the call helps offset the cost of the put.

• Best for: Investors who want protection without high costs.
• Risk: Limited upside potential due to the sold call.

4. Buy Put Spreads for Cost-Effective Hedging

A put spread is a lower-cost alternative to a protective put. It involves buying a put option and selling another put at a lower strike price.

This strategy reduces the cost of hedging while still offering protection against losses.

• Best for: Investors looking for cost-effective protection.
• Risk: Limited protection due to the sold put.