Equity Advisory

Are you looking for an honest, transparent and independent equity research and advisory? www.intelsense.in is run by Abhishek Basumallick for retail investors. Subscribe for long term wealth creation.

Wednesday 27 June 2012

Using derivatives to manage portfolio volatility

This post in response to a query by Kiran on one of my previous posts. I sometimes use put options in my portfolio. Since, this is more a call on absolute levels of the market and its likely future direction, I use it sparingly.


Even when I do buy a put option, I buy a far out-of-the-money one so that I pay a low premium. Since, my portfolio is long-only, I don't need to buy call options for hedging. Also, I don't employ complicated option strategies like straddles, strangles or other such esoteric ones. My thoughts are simple, I buy puts with little premium so that if the market suddenly collapses, then I will make up for some of the loss in the stock values. And I am ready to write-off that premium if the market does not fall off the cliff.


And for this reason I use options only when we are close to a important event which has a large risk or a long term market top. So, for example, I might but a put option close to the 2014 elections or when Nifty goes to 6000.


Personally, I do not think small investors should try their hand at options. The certainty of losing money is much much higher than the possibility of making it over a period of time. It is much better to buy, hold (and pray!!) than to speculate on the future direction of the market.

2 comments: