If you are new to the market, you may not be familiar with this term. However, if you have spent some time in the market and experienced both profits and losses, then you would have likely come across this term.
The term I'm referring to is "hedging." There is a person who engages in hedging and consistently earns profits because of it. This person never faces losses because they hedge their trades.
You may have heard the word "hedging" frequently and might be confused about its exact meaning and how it's done. You may have questions like whether hedging guarantees no losses and always ensures profits, regardless of market fluctuations.
I want to clarify this confusion right from the start. If my understanding is correct, please let me know in the comments if you still have any confusion about hedging.
Today, in this video, I will address various doubts related to hedging, such as why it is done, how to hedge equity, how to hedge a portfolio, how to hedge futures, and how to hedge options. I will also discuss how profits can be made and how to avoid losses through hedging.
However, I request your patience throughout this process.
So, let's begin. Hedging, a term that might be unfamiliar to you, but there is another term that is likely familiar to you—insurance. We are all aware of different types of insurance, whether it's for cars, health, or buildings. Insurance comes in various forms.
For example, if we have a car worth $10 or $15 lakhs, the insurance cost will not be the same as the car's value. The insurance premium might be around $50,000 or $70,000, but it will never be $12 lakhs for a $15 lakh car. By paying a small premium, we buy insurance, and if any unfortunate event occurs, the insurance company covers the losses partially or fully.
Now, let's connect this concept of insurance to the world of trading. This is where hedging comes into play. Whenever we take a trade, such as going long on a future, we can hedge our position with options. By purchasing the right options, we can protect ourselves from potential losses if the market goes down. The options act as a form of insurance for our trades.
Let's consider a scenario where I have taken a long position in the future. At the same time, I buy put options as a hedge. If the market goes down, the put options might offset the losses from the future position. Depending on the specific options chosen and market movements, we can potentially reduce our losses or even make profits.
Hedging is like buying insurance for our trades. It helps protect us from adverse market movements and minimizes potential losses. Just like in the example of a car insurance claim, where we may not receive the full amount but a portion to cover the losses, hedging provides a similar level of protection.
In this video, I will demonstrate how hedging is done on a trading platform, addressing various aspects and strategies involved in hedging. I will also explain the concept of margin benefit, which allows us to utilize our capital more efficiently while hedging.
I hope that by narrating this story and providing practical examples, I have helped you understand the basics of hedging. Now, I will guide you through the process of hedging on a trading platform and show you how it can be implemented effectively.
Please bear in mind that hedging is just one strategy among many, and it's important to consider your own risk tolerance and trading goals before implementing any strategy.
I hope this explanation has clarified the concept of hedging for you.
Assuming the market experiences a significant upward movement, the following actions can be considered:
In a bullish scenario, we should take advantage of the opportunity and consider buying a call option. This will protect our position in case the market continues to rise.
If the market goes up, my short position will result in a loss. However, by purchasing a call option, I can potentially profit from the upward movement.
To maximize potential gains, it is advisable to buy a call option that is out of the money (OTM) and has a distant expiry date. This will allow us to benefit from the market's upward momentum while keeping costs low.
When selecting a specific call option, we should consider a strike price that is slightly higher than the current market price. For example, a call option with a strike price of 42,000 could be suitable.
It is important to compare the prices of different call options before making a decision. For instance, if a call option with a strike price of 41,500 is priced at 7,000, it may be considered expensive. In such cases, it is advisable to explore other options.
Instead of buying the call option with a strike price of 41,500, it is better to opt for a call option with a strike price of 42,000. This is because the latter offers a longer expiry period and is relatively cheaper, with an additional expense of only 400.
By adding this call option, the total investment will automatically become 76,000, which can potentially yield profits of 80,000 or even 1.5 lakhs.
With this strategy in place, one can trade Bank Nifty with an investment of 80,000 or hedge Nifty with 5,000 for risk management.
To summarize, the approach described here involves buying a cheap call option first, preferably with a strike price slightly above the current market price. By doing so, we can benefit from market movements while minimizing costs. It is important to manage investments based on individual risk tolerance and consider alternative options if required.
