How to Hedge a NIFTY Portfolio with Puts
If you hold stocks or index funds, buying a NIFTY put option is like buying insurance: you pay a small premium now, and if the market crashes, the put gains value and offsets your losses. This lesson shows how to size that hedge for an Indian portfolio, what it costs, and why you usually shouldn't hedge all the time.
You have a ₹10 lakh equity portfolio and you're nervous about a correction. A protective put on NIFTY is the cleanest hedge available to a retail investor in India. The hard parts are sizing it correctly and accepting that insurance has a cost. Here's the practical playbook.
Why NIFTY puts hedge an equity portfolio
Most Indian equity portfolios are highly correlated with NIFTY — when the index falls, the portfolio tends to fall with it. A NIFTY put gains value as the index drops, so it offsets those paper losses. Because index options are cash-settled and liquid, one instrument can insure a whole basket of stocks without touching your holdings.
Sizing the hedge — how many lots
Match the rupee value you want to protect to the notional of the put. NIFTY's lot size is 65, so one lot's notional at 24000 is 24000 × 65 ≈ ₹15.6 lakh. To hedge a ₹10 lakh portfolio you'd need roughly 0.6 of a lot — i.e. one lot slightly over-hedges. For finer control, some investors use a lower-delta put or hedge only the portion they most want to protect.
Go deeper — the technical detail
A beta-weighted hedge is more precise: notional to hedge = portfolio value × portfolio beta to NIFTY. A high-beta small-cap portfolio needs a larger hedge than its rupee value suggests; a low-beta large-cap book needs less. Delta-adjust too — a 0.30-delta put only offsets ~30% of a move at first.
What it costs — and choosing the strike
An at-the-money put is expensive but responds immediately; an out-of-the-money put (say 5% below spot) is cheaper but only kicks in after the market has already fallen that far — a deductible. As a rough feel, a monthly ~5% OTM NIFTY put often costs on the order of 0.5–1% of the notional it covers, depending on IV. Over a year of continuous hedging that adds up, which is the whole point of the next section.
Don't hedge all the time
Permanent hedging is a permanent drag: you pay theta every month, and markets rise more often than they fall, so a constant put buyer slowly bleeds. Most sensible use is tactical — hedge around known risk events (Budget, election results, an over-extended market) or use a collar (sell a call to fund the put) to cut the cost. A cheaper, zero-cost alternative for many investors is simply holding less equity.