Hedging Against Equity portfolio

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.

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