Hedging Mutual Funds with Put Options

F&O
1

Hi All,

Nifty is now at 24100 (November 29, 2024). I am considering buying December 2025 expiring 24000 PE . It is now available around Rs. 705.
In my mind I am thinking the following:

  1. Since the ratio of Rs. 705/24000 is about 2.9%, hence I am thinking if I give up 2.9% as Insurance money.

  2. I have a combination of Mutual funds like

-Balanced Advantage Fund - Rs. 10 Lakhs and hence Nifty equivalent about Rs. 4 Lakhs

  • Nifty Index Fund - Rs. 8 Lakhs
    Hence Total investment amount to be Hedged - Rs. 12 Lakhs
  1. Hence I buy 2 Lots (50 Quantities) of Dec 2025 PE 24000 and spend a total of Rs. 35250.

Questions:

  1. Are my calculations above correct? Will this provide me insurance as I think it will?
  2. I will leave the Dec 2025 PE to expire. If Nifty goes above I loose the value 2.9%, and if it goes above my gains reduce by 2.9%
  3. Are there any complications because of new Regulatory rules etc… What happens if the Lot size changes in January etc.

Thanks

2

All this put buying may be useful for hedging aggressive trading positions, but for a normal investor, I’m afraid it is simply going to eat into your returns in the long run.

If your risk appetite is low, consider allocating some of your portfolio to hybrid funds or debt funds instead.

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