Pre-Budget Derivative Strategy for Investors

Any major announcement in the upcoming budget may cause significant volatility in the markets. Some significant changes were made in capital gains tax last year. Therefore, minor changes are expected in the upcoming budget with regard to tax rates. Indian stock markets have corrected by around 12% from their peak levels. But they are still up from their March 2020 lows by around 200%. From the June 2022 lows they are still up by around 50%.

In this scenario, it is prudent for large investors to have a hedging strategy for their portfolio, for the budget. Our recommended strategy is:

BUY NIFTY 23000 PUT AT RS 240 (6^TH FEB EXPIRY). LOT SIZE: 75. CONTRACT VALUE: RS 17,25,000

The quantity of put options that you need to buy will depend on the size and composition of your portfolio.

Suppose your portfolio consists of mainly large cap stocks. Such a portfolio is likely to move in sync with the index, it has a Beta of around 1. Assume that the size of your portfolio is Rs 1 crore. So the number of lots of Nifty Put options that you need to buy for completely hedging your portfolio:

Rs 1 crore / 17.25 lakhs = 6 lots

Total premium that you need to pay for 1 lot with a size of 75 = 240 * 75 = Rs 18,000

Total premium you need to pay for 6 lots = 18000*6 = 1,08,000 or Rs 1.08 lakhs.

So the cost of hedging your portfolio is approximately Rs 1.08 lakhs. (1.08% of portfolio value at Nifty 23000 levels).

Disclaimer: Markets are subject to various risks. There is no guarantee regarding the outcome of any investment or trading recommendation.