If you own a portfolio of Indian stocks, the biggest risk you share with every other investor is a broad market fall. One way to protect against it, without selling your shares, is to buy NIFTY put options. A put gains value when NIFTY falls below its strike, so a fall in your portfolio is partly offset by a gain on the put.
This is the portfolio version of a protective put. Using index options instead of options on each stock is simpler, uses liquid contracts, and settles in cash. The trade-off is that the hedge follows NIFTY, not your exact holdings.
Step 1: measure how much market risk you have
A portfolio does not always move one-for-one with NIFTY. Beta measures how much a portfolio tends to move when the index moves. A beta of 1.0 means it moves about the same; 1.2 means about 20% more (common for portfolios heavy in mid caps or banks); 0.8 means less (common for defensive stocks such as consumer goods or pharma). Your broker or portfolio tools may show beta; it can also be estimated from past returns. It changes over time, so treat it as a rough figure.
Lots to hedge = portfolio value × beta ÷ (NIFTY level × lot size)
A worked example
You hold a ₹20 lakh portfolio with an estimated beta of 1.1, so your market exposure is about ₹22 lakh. NIFTY is at 25,000. Assume a lot of 75 units for the arithmetic (lot sizes change; check the current figure on NSE): one lot then covers 25,000 × 75 = ₹18.75 lakh of NIFTY. You need 22 ÷ 18.75 ≈ 1.17 lots. You cannot buy part of a lot, so you choose one lot and accept that about 15% of the exposure is unhedged.
You buy one monthly 24,000 put, about 4% below the market, at ₹150. Cost: ₹150 × 75 = ₹11,250, about 0.56% of the portfolio for one month of protection. Here is what happens at expiry in different markets, assuming the portfolio moves exactly 1.1 times NIFTY:
| NIFTY at expiry | NIFTY move | Portfolio change | Put result | Net |
|---|---|---|---|---|
| 26,000 | +4% | +₹88,000 | −₹11,250 | +₹76,750 |
| 25,000 | 0% | ₹0 | −₹11,250 | −₹11,250 |
| 24,000 | −4% | −₹88,000 | −₹11,250 | −₹99,250 |
| 23,000 | −8% | −₹1,76,000 | +₹63,750 | −₹1,12,250 |
| 22,500 | −10% | −₹2,20,000 | +₹1,01,250 | −₹1,18,750 |
Three things stand out. First, the first 4% of a fall is not covered at all: that is the "deductible" you chose by picking a strike 4% below the market. Second, below 24,000 the put gains ₹75 for every NIFTY point, cutting the loss sharply; without it, a 10% fall would cost ₹2,20,000 instead of about ₹1,19,000. Third, because only one lot was bought, the hedge covers less of the fall than the portfolio's full exposure. Two lots would cover more than the exposure and cost twice as much.
Choosing the strike
- At the money (25,000 in the example): protection starts immediately but costs much more, often two to three times an out-of-the-money put.
- Out of the money (3% to 8% below): cheaper, with a deductible. Most portfolio hedgers use this range because they are worried about large falls, not small dips.
- Far out of the money (10% or more below): very cheap, a hedge only against a crash. It often expires worthless.
The live NIFTY option chain below shows put premiums at each strike, so you can see how the cost drops as you move further below the market:
Look at the put side below the ATM row. Divide each premium by the NIFTY level to see the monthly cost as a percentage, which is the number to compare with how much protection you need.
Choosing the expiry
Weekly options are cheap per contract but decay fast and need constant renewal. Monthly options are the usual choice for portfolio hedges. Longer-dated NIFTY options exist and cost less per month of protection, but they trade less, so check the bid-ask spread before using them. Read the expiry guide for how the cycle works.
When protection is cheap or expensive
The price of a put depends heavily on implied volatility, which for NIFTY is summarised by India VIX. When markets are calm, puts are cheap; after a fall, when everyone wants protection, they are expensive. The box below compares current implied volatility with its past year:
A low IV rank means protection is cheaper than usual. A high one means you are buying insurance after the storm has started, when it costs the most. The India VIX guide explains the index behind this.
The real cost over a year
At around 0.5% a month, renewing a hedge every month for a year costs roughly 6% of the portfolio, and in most years the puts expire worthless. That is a large drag compared with typical long-term equity returns. This is why many investors hedge selectively: around specific risks (elections, a budget, a period of very high valuations), when volatility is low, or after a large gain they want to protect. Others reduce the cost by:
- Put spreads. Buy the 24,000 put and sell the 23,000 put. Cheaper, but protection stops below 23,000.
- Collars. Sell a NIFTY call above the market to pay for the put, giving up some upside. See the collar guide.
- Smaller hedges. Hedge half the exposure, accepting a partial cushion for half the cost.
Managing the hedge while it is open
A hedge is not a set-and-forget order. If NIFTY falls sharply and the put gains a lot, you face a choice: keep the put in case the fall continues, or sell it and lock in the gain that offsets your portfolio loss. Some investors sell part of the put after a large fall and buy a new, lower strike, which keeps some protection while taking money off the table. If NIFTY rises instead, the put becomes almost worthless; there is usually little point in selling it for a few rupees, but the portfolio's value has grown, so the next hedge may need to be larger.
Write down the rules before buying: how much protection you want, when you renew, and what you do after a big fall. Hedging decisions made during a panic tend to be the most expensive ones.
Limits of an index hedge
- Basis risk. If your portfolio falls for reasons NIFTY does not share, such as a mid-cap sell-off or bad news at one company, the NIFTY put will not help.
- Beta changes. In a crash, correlations often rise and beta can behave differently from its long-run estimate.
- Timing. A fall that starts right after your put expires is not covered. Rolling the hedge is a continuing decision, not a one-off.
- Tax and margin. Bought puts need no margin beyond the premium, but option gains and losses may be taxed differently from your shares. Check with a tax adviser.
Before hedging, decide what you are protecting against and how much a fall would really hurt. The position sizing guide covers the same question from the other side: holding only as much risk as you can carry without a hedge.