Hedging Equity Portfolios

Short answer: a floor under the loss, for a price. The two Puts cover 130 assumed units and cost 150 × 130 = ₹19,500. At expiry each Put pays max(24,300 − final NIFTY level, 0) per unit, so the cash received is that amount × 130. Take off the premium once to get the Put result, then add the change in the portfolio. A gain on the Put does not mean the whole position gained.

Short answer: start from the value you want to protect, divide by the value of one lot, then round to whole lots and accept the mismatch. Beta is an estimate of how much a portfolio moved with the index over a stated past period. A beta of 1.2 suggests the portfolio moved about 1.2% for each 1% in the index on average in that sample. It is not a promise for each move, it can change, and it leaves company and sector risk unexplained.

The index-equivalent quantity is portfolio value × beta ÷ (index level × lot size). At beta 1, ₹31,85,000 ÷ (24,500 × 65) is exactly two assumed lots. At beta 1.2, the answer is 2.4: two lots under-match, three over-match, and the choice depends on your aim and the cost. A ₹10 lakh portfolio gives only about 0.63 lots, which shows how a minimum lot can be too big for a small portfolio.

This count is a common starting point for a short-futures hedge, and it can describe an expiry Put scenario. It does not make a Put delta-neutral today. Delta measures how the option price reacts to a small move right now. At a supplied delta of −0.40, offsetting 130 index units locally needs 130 ÷ (65 × 0.40) = 5 theoretical Put lots. That has a different cost and a different payoff at expiry from the two-lot example.

Short futures give a roughly straight-line offset and give up the broad-market gains on the matched part. They also need margin and daily cash settlement of gains and losses. Bought Puts keep the upside after the premium, but their protection is curved and runs out at expiry. Name your aim before you compare quantities, and check the real contract and lot size. The 65-unit lot is our assumption. Margin, leverage and pledging covers what a short future ties up.

Short answer: the upside above the Call strike. A collar combines a bought Put and a sold Call against something you own, usually with the same quantity and expiry. The money from the Call helps pay for the Put, but you now owe the Call buyer the gain above the Call strike. The lower net cost is the trade.

Keep the 130-unit tracking model. Buy the 24,300 Put at ₹150 and sell the 25,000 Call at ₹120. The net premium is (150 − 120) × 130 = ₹3,900. Below the Put strike, the combined loss at expiry is ₹29,900. Above the Call strike, the combined gain is ₹61,100. Both include the net premium once, and leave out costs and dividends.

Short answer: cash, margin, expiry and tax records do not disappear because the payoff looks protected. NSE NIFTY options are European-style: they are exercised at expiry and settled in cash under the exchange procedures. You can still sell them before expiry, but an early sale is a market trade, not exercise. Individual stock options on NSE are also European-style but settled by delivery, so an exercised long Put can require shares you can deliver. A NIFTY hedge does not deliver your portfolio shares.

Check premium cash, short-option margin, collateral and settlement funds one by one. A portfolio that looks protected at expiry can face cash pressure while the hedge is open. If you close or change one leg, what remains is a new position, and the original collar no longer describes it.

Protection ends when the contract ends. To extend it you must trade again at the terms on offer then. Repeated premiums, spreads and charges reduce your returns. A lower-strike Put may cost less in some comparisons but leaves more downside unprotected, so premium alone does not measure the quality of a hedge.

Tax depends on the facts. Shares held as investments and eligible exchange derivatives can fall into different categories, and shares held in a trading business have their own treatment. Do not assume your hedge result nets off for tax. Keep fills, expenses and settlement records, and check the taxation lessons for the period concerned.

To review, look at both positions at one time: what exposure is left, what it cost, when it expires and what cash or shares are needed. The next lesson asks what happens when the market moves further or faster than any plan assumed. For the basic habit of sizing the loss first, see risk management 101.