🛡️ Hedging with protective puts, collars and Nifty puts

🎯 In 30 seconds: A protective put is a put you buy on a stock you already own. It sets a floor: below the strike, every rupee the share loses, the put gains. You pay a premium for that, and the premium is gone if nothing bad happens. A collar adds a covered call to pay for the put, which caps your upside. Nifty puts do the same job for a whole portfolio, but one Nifty lot now covers more than ₹15 lakh of exposure, so the fit for small portfolios is poor. Hedging is real protection at a real, recurring cost.

Insurance, in options terms

Two-wheeler insurance has a premium, a deductible (the part of a claim you pay yourself) and a term. A protective put has the same three parts.

• Premium: what you pay for the put. Since 1 February 2025, SEBI requires brokers to collect the option premium from buyers upfront, so the whole amount leaves your account when you buy.
• Deductible: the gap between today's share price and the put's strike. You take losses down to the strike yourself.
• Term: the time to expiry. After that you are uninsured unless you buy another put.

A put gives you the right to sell the underlying at the strike at expiry (see Put options). If you own the shares, a put on them works like a promise that you can always get at least the strike price, whatever happens in between.

Protective put: the payoff

Hypothetical example. You own 500 shares of Sharma Foods Ltd, bought at ₹1,000, and the stock option lot is 500 shares (a made-up lot; real lots are set by the exchange). You buy one lot of the 940 put expiring in about two months for ₹16. The premium comes from a Black-Scholes model at 28% volatility, rounded.

• Maximum loss = (share price - strike + premium) x lot = (₹1,000 - ₹940 + ₹16) x 500 = ₹38,000, however far the share falls.
• Breakeven = share price + premium = ₹1,016.
• Maximum profit = unlimited, less the ₹8,000 premium.

Without the put, a fall to ₹800 would cost ₹1,00,000. With it, the loss stops at ₹38,000. If the share rises instead, you keep all the gain above ₹1,016. That ₹16 per share is the price of sleeping well for two months.

What happens at expiry in India

Stock options in India are European style and physically settled. If your 940 put is in the money at expiry, it is exercised automatically and you deliver 500 shares at ₹940. Since you own the shares, that is the hedge doing its job: the shares go out of your demat and ₹4,70,000 comes in through settlement.

If you want to keep the shares, sell the put before expiry instead. Its price will reflect most of the protection value. Brokers often have their own rules for in-the-money stock options near expiry, and positions that may end in delivery attract delivery margins in the last days, so read your broker's physical settlement policy.

Charges matter at both ends. STT is 0.15% of the premium when you sell an option, and 0.15% of the intrinsic value when an option is exercised (payable by the buyer), from 1 April 2026 (NSE circular, March 2026). Brokerage, exchange charges, stamp duty and GST come on top.

How much protection, and at what price

A closer strike means a smaller deductible and a bigger premium. Same share, same two months, same model:

Now the uncomfortable maths. If you bought the 940 put every two months at a similar price, you would spend about 1.6% x 6 = 9.6% of the holding a year. Many stocks do not earn that in a typical year. Permanent insurance on everything you own costs too much for most people. Hedges are usually bought for a reason and a period: a concentrated holding you cannot sell yet, a big gain you want to protect through results, or a known risky event.

Collars: paying for the put with a call

A collar is shares + a protective put + a covered call. The call premium pays for some or all of the put. In return you give up the upside above the call's strike. It is the protective put and the covered call combined.

Hypothetical example: own 500 shares at ₹1,000, buy the two-month 940 put for ₹16, and sell the two-month 1,080 call for ₹19.

• Maximum loss = (share price - put strike - net credit) x lot = (₹1,000 - ₹940 - ₹3) x 500 = ₹28,500.
• Maximum profit = (call strike - share price + net credit) x lot = (₹1,080 - ₹1,000 + ₹3) x 500 = ₹41,500.
• Breakeven = share price - net credit = ₹997.

The model used here has no volatility skew, so the call pays slightly more than the put. In real markets, out-of-the-money puts on stocks and indices usually cost more than calls the same distance away, because more people want protection than want lottery tickets on the upside. In practice a zero-cost collar often needs a call strike closer to the share price than the put strike.

The short call needs margin. Your shares do not automatically cover it, because the call sits in the F&O segment. You usually pledge the shares as collateral, and the clearing corporation applies a haircut. The long put and short call together can reduce the total margin compared with the call alone, since SPAN looks at the combined position, but how much depends on the scenario numbers on the day. Check your broker's margin calculator. Margin in India explains pledging.

Hedging a whole portfolio with Nifty puts

If you own many stocks, buying a put on each is costly and many of them have thin option markets anyway. Index puts let you hedge the broad market with one trade. Nifty 50 options on NSE are European style and cash settled. Besides weekly and monthly expiries, NSE lists quarterly and half-yearly Nifty contracts (its October 2025 lot-size circular covers them), which suit a hedge that should last months. See Index options in India.

The key fact is size. SEBI's October 2024 circular set the value of a new index derivative contract at no less than ₹15 lakh when introduced, with lot sizes reviewed so the contract value stays between ₹15 lakh and ₹20 lakh. NSE set the Nifty 50 lot at 65 from January 2026 contracts (NSE circular, 3 October 2025). Lots are revised periodically, so check the current number on NSE.

Step 1: measure what you are hedging. Suppose you have ₹16.25 lakh in large Indian companies that, over the past couple of years, moved roughly one-for-one with the Nifty. That sensitivity is called beta. A beta of 1.0 means a 10% Nifty fall tends to come with a 10% portfolio fall. Use a hypothetical Nifty level of 25,000.

Step 2: count lots. One lot covers 25,000 x 65 = ₹16,25,000 of index exposure. Your ₹16.25 lakh with a beta of 1.0 needs exactly one lot. With a beta of 1.2 you would need ₹19.5 lakh of cover, about 1.2 lots. You can only buy whole lots, so you choose between under-hedging (1 lot) and over-hedging (2 lots).

Step 3: choose the deductible. You buy one lot of the three-month 23,750 put, 5% below the index, at a hypothetical ₹200. Cost: ₹200 x 65 = ₹13,000, about 0.8% of the portfolio.

Step 4: see what happens. If the Nifty falls 20% to 20,000 by expiry:

The put pays (23,750 - 20,000) x 65 = ₹2,43,750 in cash after expiry. The portfolio lost about ₹3,25,000. After the ₹13,000 cost, the net loss is about ₹94,250 instead of ₹3,25,000. If the Nifty instead rises, the put expires worthless and you are out ₹13,000.

Choosing between them

The last row matters. If you want protection every month, the cheaper fix is usually a different mix of equity, debt and cash. See Diversification and correlation and A plan for a young person.

Tax, briefly

General information only. A put bought as a hedge is still an F&O trade, and its gain or loss is generally treated as business income, while your shares remain capital assets taxed under capital gains rules. The two do not automatically offset each other the way an investor might expect. Read Taxes for traders and investors in India and talk to a chartered accountant if the amount you are protecting is large.

Try it

Write down the value of your real or paper portfolio and estimate its beta against the Nifty. A rough way: in a spreadsheet, take three years of monthly returns for your portfolio (or the funds or stocks in it) and the Nifty 50, and use the SLOPE function with the portfolio as y and the Nifty as x. Then work out:

1. Beta x portfolio value = the index exposure to hedge.
2. From NSE's Nifty contract details, the current lot size and the current index level. How many lots is your exposure? Is it even one?
3. From the Nifty option chain, the cost of a three-month put about 5% below the index, as a percentage of your portfolio.
4. What that cost would add up to over a year if you rolled it every quarter at the same price.

Then decide whether that yearly number is worth paying. There is no right answer, but there should be a number.

Sources

• SEBI circular, 1 October 2024: Measures to strengthen equity index derivatives framework (upfront premium, contract size)
• NSE circular, 3 October 2025: Revision in market lot of derivative contracts on indices
• SEBI circular, 26 May 2025: Final settlement day (expiry day) for equity derivatives contracts
• NSE: Equity derivatives on individual securities (European style, physical settlement)
• NSE: Securities Transaction Tax in equity derivatives (value for exercised options)
• NSE circular, 31 March 2026: Changes in rates of Securities Transaction Tax