New Delhi: The Nifty index has rallied 8% in the month of March on expectations that the Narendra Modi-led National Democratic Alliance would win the Lok Sabha Elections 2019. As expectations are high, any disappointment would cause a sharp drop in the markets, say, analysts. Market experts say investors should buy put to hedge their portfolio against any unexpected fall in the market on unfavourable outcome in elections. The strategy they advise to follow is 'protective put'- a hedging strategy wherein the owner of the underlying asset buys a 'put' option to safeguard against a drop in the price of the underlying asset.
Jayesh Bhanushali of IIFL told “The protective put strategy is used when the options trader is bullish on a portfolio that he holds but wants to safeguard against near-term uncertainties,”. He added “Let’s consider a hypothetical equal-weighted portfolio of 10 stocks worth 8.62 lakh with a portfolio beta of 0.97x. As the portfolio comprises many stocks, creating a hedge on all of them would be cumbersome. Instead, an investor can simply buy one lot of Nifty 11,600 Put (May 30, 2019) at ₹317 to approximately get his downside risk covered,” said Bhanushali. “The insurance does come with a cost of 2.7%, but remember, it is worth taking a marginal hit to avoid a bigger plunge”.
Rajesh Palviya, head technical & derivatives research, Axis Securities told “Portfolio hedging is an investment hedging strategy that can help you avoid losses or cut them if the market falls as it involves buying stocks in the cash market and put option,”. “So, if there’s a rise in the stock price, you will gain from it and, if the price starts falling, you can exercise your put option to sell stocks at the strike price, thus limiting your losses”. During general elections in 2004 and 2009, markets have swung widely in both directions causing massive loss to investors.
The Source report citing technical analysts said Nifty has next resistance in the 11,760-11,800 zones while on the downside, support remains at 11,550 then 11,333 and 11,118 zones. Chandan Taparia of Motilal Oswal Financial Service told one can either directly buy 11,500 Put or a Bear Put Spread to hedge the position till 11,000. “One could buy one lot of 11500 Put and Selling 1 lot of 11000 Put at the net premium cost of around 70 points,” said Taparia.