Markets are showing extreme volatility. Specially in stocks, we find a particular stock suddenly going down by 10% in the opening trade or some other stock going up by 6% in the opening trade.
In this kind of stock market scenario, how shall one invest. Although in long term , Indian markets seem to be quite bullish , but we all do not know , how much long can be this long term ?
It really pinches to see the capital erosion (at time its pretty fast) in the stocks one has purchased , whereas overall stock market may be going up. The only remedy to such a situation is , we must take benefit of hedging our positions through options. Basically , Options are created for the purpose of hedging the position.
So , isn't it a better idea that whenever we buy a future of a stock or a stock in cash , on which we are bullish, why not buy a lower put so that in case the stock falls sharply because of known or unknown reasons, unknown events and unknown announcements by management and government, at least my risk is limited.
Similarly , whenever I am bearish on particular scrip and trying to sell its future, better to cover the upside risk by buying a call. This again ensures that I am not trading with unlimited risk.
Yes, with these hedging techniques there will be a small reduction in the profit, but ultimately I am able to cut any substantial loss in my portfolio. In case you are able to apply different combinations as we explain in master strategy , it further improves the risk reward ratio, considerably. So always better to trade hedged positions rather than trading naked positions and risking all the capital. Hedging the position is just like buying insurance for the position, which in present times is a MUST.