It is common to invest in an asset and then fear that the market might fall. We’ve all been there. But here’s the trivia- there is no escape from this fear as long as you want to be an investor. However, there are certain ways you can hedge your investments using the power of futures and options.
Both futures and options are important concepts in the world of stock market investment. But if you want to know how both of them can help protect your investments on time, keep reading.
This is a simple procedure. You only have to focus on buying or selling your options to safeguard your position. Let’s take an example-
You own 100 shares of a company called (Global Tech) at Rs. 300 each share. Due to the decline in the shares prices, you’ve had to settle for the purchase of a lower put option. Now that the equity amount is falling, too, the cost of the option is bound to accelerate. This means your strike rate has to be Rs. 290 for each share. But this will be at a premium of Rs. 3 each share. Now, you can be sure that no matter what the situation is, your loss will not go anywhere below Rs. 300 or Rs. 290.
So, when you are practicing the art of hedging, your losses are clearly defined. In case you make a notional loss, put options will help make up for it. But this is only for when your price drops down to anything lower than Rs. 290. In case the stock price shoots up above Rs. 303, you will have to cover the premium you need to pay when you buy the put options. So, if you do not practice your options, you are likely to gain a lot more in this situation.
Against whatever portfolio you hold, you can choose to sell off your Index futures. Here’s how to do it-
Step 1- Create a strong portfolio.
Step 2- Map out an index future that is well-related to the portfolio.
Step 3- Sell the lots of index futures that are equal to the portfolio value you hold.
Certain formulas can help you make the most of your future and options investments. Remember that when the market falls, your portfolio value is also likely to fall. On the contrary, your index futures value is likely to shoot up.
That is why this type of financial instrument is very useful for investors of today who wish to safeguard their investments using a hands-on strategy. If you are smart enough and learn the tactics of hedging, you can protect your portfolio without any external assistance.
About options, we can go on to say that they can safeguard your portfolio from many market drawbacks. If you implement the strategies of put and call, in this case, you can make lump sum profits. In fact, you can also make the most of the option of cutting your losses in need. Are you ready for this?