Hedging Against Equity portfolio

Recently observed that GOLD has started going up . Gold Buying indicates that investors are gauging that the current equity markets are overvalued and so they Buy gold to hedge their equity portfolio or purely for investment purpose. Also this year Gold has been allready staging a bull rally . Last time it stopped at 1272-1276 $ . Currently at 1252 $ .

This is how I hedge my portfolio.

Currently market is overvalued and I don’t want to sell my stocks. So what I do I sell nifty futures in lot to hedge my portfolio. If nifty rises 2-3% I again hedge with more shorting and that MTM will be settled or adjusted with rise in portfolio value.

this strategy I only use when Nifty PE is above 23.5 not before that.

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Sir, Why not just partially sell the portfolio instead of taking leveraged risk? My understanding is that hedging is done with assets with negative correlation. As diversification is done with non-correlating assets. It is very good point of using Nifty PE as a level of market over or undervalue. As a similar idea was prescribed by Benjamin Graham also.


Gold has a negative correlation with Nifty. However the negative correlation has come down since past 1 year. But I will still prefer gold as it gives my portfolio the diversification with a real commodity . For example. I buy GOLDBEES , just like a share ,goes to my DEMAT and gives me the same appreciation as spot gold. So it acts both as an investment and a hedge.

I’m much more paranoid (no-thanks to various Gold-Bugs). What if the credit bubble bursts and they close the stock exchanges for sometime (days,months)? Investment in precious metals is a hedge or insurance against the system (Govt., Stock Exchanges, central banks etc.)
I always keep about 15% of my net-investible amount in Physical Bullion. 75% in equity/trading account. And 10% as cash in banks (to catch those fast moving elephants!!).

To hedge, I buy far month (or even further) out of money nifty put options, typically 10-15% below current underlying price. These are very cheap. Since market is overheated, if it falls, it will fall a lot, so you can easily sell off half your options at double the price and keep the rest of the optionality for free.
This doesn’t exactly hedge the portfolio against declines, it just hedges against dramatic declines. But at 20 per unit (say), a lot can be had at Rs 1500 so Rs 15000 can buy 10 lots, i.e. protection for about Rs 60L approx.
It’s insurance against catastrophes basically


Another strategy came to me. Instead of buying put options, You can sell call option OTM ofcourse. These will net you a positive cash also. Think of it as a synthetic dividend. But liquidity in indian option markets with far OTM options is sh*t.

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typically , in these kind of doomsday scenarios governments intervene and make substantial gold holding illegal or downright unattractive… Plus , where do you keep this bullion tucked away ? Keeping it at home will make you a marked man in a economic depression and widespread employment ;keeping it in a bank will risk confiscation from the authorities.

Nice point… I’ll try keep my mouth shut on public forums from now on :wink:

Alot of people avail service of safe lockers in obscure location throughout Delhi. You know no questions asked types.

Yeah, that too is an option. However, I maintain a healthy skepticism towards the same.
Mainly because of the fact that there is no insurance there. While we think the deposit box to be very safe and foolproof, it is not really so. In the event of a mishap, riots/looting etc., whatever is taken from the bank safety deposit box is gone for good. No bank would listen to any claim regarding the same, since, they do not know what was inside that box.

P.S.: I may/may not be wrong. Would love to be corrected.

You are correct, I could not find one insurance cos that will insure a deposit box without knowing contents. We should all hire this gentleman. http://www.hiddenpassageway.com/

I always wanted to start a service like this with someone. It would be a big damn hit with you know who.

IMO, your method is the most logical method i.e buying cheap put options (very very out of the money). Nassim Taleb advocates the same strategy to hedge against catastrophe. BTW, you can mimic a put option by combining a short + call option.

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If you’ve read as far as Taleb, I strongly suggest reading Spitznagel as well. The Dao of Capital. That’s the inspiration for my method.


Will do :slight_smile: I am also taking Taleb’s class here in NYU this semester on extreme risk. Will have to see how it goes.

With the money printing that’s going on around the world, central banks have essentially sold a put option to even the smallest risk takers for free (at the cost of risk averse investors) by implying that they will not let asset markets melt down. Google the term Greenspan Put and you will know what I mean. So I don’t think you need to insure the equity portfolio.
In general, I think insurance is meant for risks that you cannot manage or avoid. Risks in equity markets can be managed by proper due diligence, diversification etc or avoided by staying out of the market if you think markets are overvalued.

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Exactly Yogesh. In other words, insurance are meant for “black swan” event.

Yogesh, the overvaluation risks which are you talking about here is what Nassim taleb terms as “Grey Swans”.Grey swans are relatively predictable compared to “black swans”. There is no point of buying put options when everybody thinks that the market is overvalued because the put options sellers price them in before selling. In one of the seminar organised by Taleb which I attended, Taleb explicitly said that “Do not buy Put options when you see a reason to buy.” Thus, he was saying that put options is specifically meant for risks which one can’t predict despite doing all the due diligence. These are risks which are really known as “Black swans” rather than “grey swans”.

warmest regards

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Deep out of the money options are low cost but they also have a low delta. i.e. their price moves by a small margin compared to the price of the underlying. For a hedging entire downside risk, one needs to buy a large number of these options. If you subtract cost of such insurance from upside potential of the portfolio (which should be low, otherwise why would you insure?), you get close to risk free rate. That means, a completely hedged portfolio has the expected return of a risk free portfolio (which sounds logical).

I think more appropriate hedging will be to use a collar (long put + short call). but over here also, you are protecting downside by giving up much of upside. This is same as a risk free portfolio.

The only reason why I think hedging is used in US (other than speculation) is to avoid selling underlying portfolio and paying capital gain tax. In India, long term capital tax is 0 so I don’t see a strong reason for this kind of hedging (other than a desire to avoid cash market transactions). If you want to protect from a short term downside, ask yourself if you are an investor or a speculator.
I think Investor needs to hedge their portfolios from their own greed and fear. There is no technical solution to a management problem.


I do not think this needs to be true. I would rather prefer exiting/changing my stocks when I really know that there is limited upside potential.

Regarding investor vs speculator, I think it is not necessary to play one role. One can live with the paradox that one thinks one knows what is the future gonna look like, and still have no faith whatsoever on the future. I guess it’s difficult to execute this strategy unless one is operating one’s equity portfolio with the help of an experienced advisor and meanwhile being engrossed in hedging via options, or the other way around.

I think Warren buffet and Nassim Taleb belong to opposite ends of the investment methods. Irrespective of whether one disregard the other, both methods work. One gains from long term upsides whereas the other gains from infrequent but nevertheless, significant short term downsides.

I have come across a curious phenomenon in GSFC options
Hello everybody
I am invested in GSFC Limited. The results are due tomorrow evening. I have one more day to decide whether to hold or exit before the results. With that in mind I was looking at the options of GSFC, when I came across something very odd. I want to share it with the experienced members of VP, with the hope that somebody will be able to demystify it.

An options chart is attached for ready reference. The Friday closing price of GSFC is 132.5. On that day there was more than one lakh open interest addition in call options at an extraordinarily high strike price of 195 @ Rs. 2.85. While on the same day at strike price of 150, there was increase of 31500 in open interest @ Rs. 1.25. Why should somebody buy at a strike price of 195 at an extraordinarily high rate? that is my question.
If one looks at the chart, highest open interest addition is at the strike price of 195 to call options. I am really intrigued by this. Thanks in advance to somebody who throws light on this.