Mr A hold 500 shares @ 1200 Rupees of Reliance Industries & feeling discomfort due to quarter result which is not as per their expectation. For Minimize risk in spot price Mr A take Contrary position in Option by taking 1 Contract of Reliance Put Option strike price of Rs 1200 & pays a premium of Rs 35. Now we Analyze the scenario after 1 month.
Case 1 – Reliance Spot Price is 1400. Profit in Spot Price = (1400-1200)*500 = 100000 Loss in Put Premium = (35*500) = (17500) Net Profit & Loss = (100000-17500) = 82500 Rs
Case 2 – Reliance Spot price is 1050. Profit & Loss in Spot Price = (1200-1050)*500 = (75000) Loss in Put Premium = (1165(BEP)-1050)*500 = 57500 Net Profit & Loss = (57500-75000) = (17500) Rs
Hedging Futures Markets with Options (Protective Put)
For Example:
Mr Long Nifty @ 11800 /- Rupees lot Size of 75 & feeling discomfort due to Economic Data result which is not as per their expectation.
For Minimize risk in Future price Mr A take Contrary position in Option by taking 1 Contract of Nifty Put Option strike price of Rs 11800 & pays a premium of Rs 115. Now we Analyze the scenario after 1 month.
Case 1 – Nifty Future Price is 12200. Profit in Nifty Future Price = (12200-11800)*75 = 30000 Loss in Put Premium = (115*75) = (8625) Net Profit & Loss = (30000-8625) = 21375 Rs
Case 2 – Nifty Future price is 11200. Profit in Nifty Future Price = (11200 – 11800)*75 = (45000) Profit in Put Premium = (11685(BEP)-11200)*75 = 36375 Net Profit & Loss = (45000 – 36375) = (8625) Loss
Hedging Futures Markets with Options (Protective Call)
For Example :
Mr Short Nifty @ 11800 /- Rupees lot Size of 75 & feeling discomfort due to Economic Data result which is not as per their expectation.
For Minimize risk in Future price Mr A take Contrary position in Option by taking 1 Contract of Nifty Call Option strike price of Rs 11800 & pays a premium of Rs 115. Now we Analyze the scenario after 1 month.
Case 1 – Nifty Future Price is 12200. Profit in Nifty Future Price = (11800-12200)*75 = (30000) Loss in Call Premium = (11915(BEP)-12200)*75 = (21375) Net Profit & Loss = (30000- 21375) = (8625) Rs
Case 2 – Nifty Future price is 11200. Profit in Nifty Future Price = (11200 – 11800)*75 = 45000 Profit in Put Premium = (115)*75 = (8625) Net Profit & Loss = (45000 – 8625) = 36375 Profit
Portfolio Hedge with Options
For Example:
Mr A have 16 lac portfolio contain 17 stocks and have a portfolio beta of 2 .For Minimize risk in portfolio value . Mr A take Contrary position in Option by taking hedge ratio of 2 . 1 Contract of Nifty Put Option strike price of Rs 11800 & pays a premium of Rs 90 have a contract size of (11800*75)= 885000.
Now we Analyze the scenario and hedge with put option equivalent to 1600000 portfolio with hedge ratio of 2 = 3200000 equivalent in put option.
Mr A take 4 lot of Nifty Put option have a contact size of (11800*75*4)= 3540000 Rupees.
Case 1 – Nifty Future Price is 12200. Percentage increase in Nifty = (12200-11800)/11800 = 3.39% Portfolio Increase in Value = 1600000*3.39%*2(Beta) = 108480 Loss in Put Premium = (90*75*4) = (27000) Net Profit & Loss = (108480- 27000) = 81480/ – Profit
Case 2 – Nifty Future price is 11200. Percentage Decrease in Nifty = (11200-11800)/11800 = 5.08% Portfolio Increase in Value = 1600000*5.08%*2(Beta) = (162560) Loss in Put Premium = (11710(BEP)-11200*75*4) = 153000 Net Profit & Loss = (162560 – 153000) = (9560) / – Loss
