Hedging With Futures & Options: Protecting Your Positions
Hedging uses derivatives to offset risk in a position or portfolio. Here's how futures and options hedges work, with practical examples for Indian traders.
Short answer: Hedging means taking an offsetting derivatives position to reduce the risk of an existing holding. A futures hedge locks in a price; an options hedge (like a protective put) caps downside while keeping upside — for the cost of a premium. The goal isn't profit, it's protection.
Why hedge
Markets gap, results surprise, and portfolios carry directional risk. A hedge limits the damage from an adverse move so one event can't undo months of work.
Common hedges
- Protective put — own a stock/index position, buy a put. Below the strike, the put gains offset the loss. Downside capped, upside intact, cost = premium.
- Covered call — own the underlying, sell a call to earn premium (caps upside, cushions small drops).
- Futures hedge — short a futures contract against a long portfolio to neutralise market risk (and vice versa).
- Collar — protective put funded by a covered call: cheap, defined band.
Options vs futures hedges
| Futures hedge | Options hedge (protective put) | |
|---|---|---|
| Cost | Margin, no premium | Premium |
| Upside kept? | No (locks price) | Yes (above strike) |
| Best when | You want certainty | You want protection + upside |
Delta hedging
Active traders hedge an options book's directional exposure dynamically — keeping net delta near zero as spot moves. That's delta-neutral trading, and it's ideal to automate so re-hedges never lag.
FAQ
Does hedging cost money? Options hedges cost a premium; futures hedges cost margin and give up upside. Think of it as insurance against a larger loss.
Should beginners hedge? Defined-risk and protective structures are excellent training wheels — they cap the worst case while you learn.
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