InvestorQ : How do I use options to hedge my shares when I have purchased in the cash market?
Sam Eswaran made post

How do I use options to hedge my shares when I have purchased in the cash market?

Answer
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swati Bakhda answered.
2 years ago


Let us assume that you had purchased 1500 shares of Tata Motors at Rs.380. However, the stock subsequently corrected to Rs.320 resulting in a notional loss of Rs.90,000/-. Since you are a long term investor you do not believe in stop losses but is there a better way you could have protected yourself. The answer is in using put options to hedge your risk. The word “Hedge” here means “to protect your risk”. Let us consider an illustration…

Bought 1500 shares of Tata Motors at Rs.380 & one 370 Put Option @ Rs.4

Market Price Scenarios

Profit/loss on stock

Profit / loss on option

Total Profit / Loss

Rs.300

-80

+66

-14

Rs.310

-70

+56

-14

Rs.320

-60

+46

-14

Rs.330

-50

+36

-14

Rs.340

-40

+26

-14

Rs.350

-30

+16

-14

Rs.360

-20

+6

-14

Rs.370

-10

-4

-14

Rs.380

00

-4

-4

Rs.390

+10

-4

+6

Rs.400

+20

-4

+16

Rs.410

+30

-4

+26

Rs.420

+40

-4

+36