Nifty Cracks 10% from High; How ‘Married Put’ Protects your Portfolio!
The new concerns regarding the sustainability of Credit Suisse Bank (SIX:) have jittered the global markets as investors have again been caught off-guard after the US bank runs. Why fell sharply today or what is the issue with Credit Suisse has been explained in my previous write-up (link at the bottom).
Most of the investors would be getting a loss on their portfolio which I believe was difficult to avoid this time, no matter how good of a stock picked one is. As loss cannot be avoided but still can be minimized, here’s a strategy to protect your long-term holdings from severe crashes.
There are multiple strategies one can deploy in the derivatives market to hedge their positions, here I am going to talk about one such strategy called ‘Married Put’.
Most investors would be knowing that a put option increases in value when the underlying asset falls (inverse correlation). If investors are holding equity positions which are in the F&O space, then they can buy an ATM put option (having roughly 50 delta). Now you hold long equity holdings with a long put option which will hedge your equity holding on the downside, as if the stock falls, the put option would start giving profits. This strategy is called Married put.
One thing to remember, as hedging has a cost associated with it, it is advisable that investors deploy this strategy when they expect extreme bearishness. In this case, the profit on the put option would be realized, while the loss on equity holdings would only be notional. So essentially, you are grabbing realized profits against unrealized losses. However, if the stock rallies, the put option would incur losses which you also have to book before the maturity. It is just like insurance, in case an unwarranted event happens, you are protected, or else your premium goes to 0.
Experienced traders can also look at different delta options to skew their degree of the hedge, which can increase/decrease the premium depending upon the aggressiveness of hedging. A tip, you can also noticeably reduce the cost of hedging by converting the put option into a put debit spread by buying a lower strike price.
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