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

swati Bakhdaanswered.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.4Market Price ScenariosProfit/loss on stockProfit / loss on optionTotal Profit / LossRs.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