Smart Portfolio Hedging: Protect Investments in Market Downturns

• Shubham Agarwal emphasizes smart portfolio hedging to manage risk and maintain upside potential during market downturns, like the Nifty's January tumble.
• Determine the number of Nifty lots needed for hedging based on portfolio value and beta; large-cap portfolios (beta 1) need protection equal to their value, while mid/small-cap (beta 1.3) require 30% more.
• Avoid over-hedging; institutions typically hedge 60-70% of their portfolio. For a Rs 20 lakh large-cap portfolio, one Nifty lot (Rs 16 lakhs) might suffice for partial hedging.
• Choose longer-term expiries (three to six months out) and In-The-Money (ITM) puts to avoid time decay and ensure superior coverage, rather than current expiry options.
• Recover hedging costs by selling Out-of-The-Money (OTM) weekly puts during market bounces, aiming to offset the premium paid for longer-term hedges and create liquidity for buying opportunities.

Why It Matters: Effective portfolio hedging protects capital, offers flexibility, and provides liquidity to buy quality stocks during market dips.