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Hedging is an insurance of a trade which comes into action when the original trade starts losing money. Hedging is a great way to protect your capital when trading or your portfolio as a whole.
Do you know that HIIs (High-Net-Worth Individuals) and DIIs (Domestic Institutional Investors) & FIIs (Foreign Institutional Investors) always hedge their portfolio against any odds. It does not matter they pay a price for hedging but they know very well the importance and necessity of hedging. They have crores at stake they are not fools to trade derivative naked (without hedge).
Options are a great hedging tool. The Institutional Investors use it perfectly to keep their account protected.
Hedging makes sure the losses if any are small and negligible. Institutional Investors DO NOT trade intraday, they are positional traders so they always use hedging to ensure smooth growth of their portfolio.
Its unfortunate that retail traders pay price for DIIs and HIIs hedging. Retail traders trade blindly while DIIs and HIIs take their money away.
Let me give you a simple example of hedging to help you understand how peaceful it can be.
Suppose you have a big portfolio of Nifty 50 stocks. More than 5 lakhs and they are in good profit but you do not want to sell. In that case how do you protected your profits? You can buy puts to protect a huge fall in Nifty. If your stocks fall, its obvious that the stocks in your portfolio will also fall. But since you have bought hedging you do not have to bother much. The put you bought will make you some money. But by chance Nifty does not fall the put will expire worthless. I hope you can understand that hedging comes into action only when your hard earned money is in threat of going away. Otherwise they keep quite.
But as in above example if stocks fall the person who has bought puts will make some money out of it and his loss will not be as big as someone else loss who did not hedge.
This is just a small example of how hedging can help you survive the volatility of the markets. Hedging is a must for positional traders. Without hedge you will not be able to save your capital if anything goes wrong in your trades. 2 or 3 big losses may wipe out your capital.
Therefore in the ever uncertain markets it is very important to learn hedging. You can do my Nifty option course to learn how to hedge properly options, futures and equities to make a monthly income.
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