Hedging with options means using an option position to limit the damage an existing investment can suffer. Most commonly, buying a put option so that a fall in your stock is offset by a rise in the put's value. It works like insurance: you pay a known premium today to cap an unknown loss tomorrow.
How does a protective put work? Meera's example
Meera holds 500 shares of Kaveri Motors, bought long ago and now trading at ₹520, about ₹2,60,000 of her portfolio. Earnings season is coming, and she's worried about a sharp fall, but she doesn't want to sell a holding she believes in long-term.
Think of what she does next exactly like buying vehicle insurance. She buys one lot (500 shares) of the Kaveri Motors ₹500 put at a premium of ₹10. A one-time cost of ₹5,000 for protection until expiry.
- If the stock crashes to ₹420: her shares lose ₹100 each, ₹50,000. But her right to sell at ₹500 is now worth ₹80 per share — ₹40,000. Net damage: about ₹15,000 including the premium, instead of ₹50,000. Below ₹500, every further rupee of fall in the stock is matched by the put.
- If the stock rises to ₹580: the put expires worthless, like an unused insurance policy. Meera "loses" the ₹5,000 premium but her shares gained ₹30,000. She keeps the entire upside minus the premium.
- If the stock goes nowhere: the premium is simply the cost of having slept well through earnings.
That's the shape of every protective put: downside capped near the strike, upside intact, premium paid regardless. The strike is the "deductible". A ₹480 put would have been cheaper than the ₹500 put, but would leave Meera bearing more of the first leg of any fall. (For the mechanics of puts themselves, see What are call and put options?)
What about covered calls?
The other commonly cited hedge-adjacent strategy is the covered call: holding shares and selling a call against them, pocketing the premium. If the stock stays flat or dips a little, the premium cushions you slightly; if it rallies past the strike, your shares effectively get called away at that price and you miss the further upside.
Be clear-eyed about what this is: a covered call is only a sliver of protection (a big fall in the stock hurts almost as much with or without it) and the premium is compensation for giving up upside, not free money.
Does hedging make options safe?
No. Hedging transfers risk for a price; it doesn't remove it. Premiums paid month after month add up and drag on returns. Insuring a portfolio constantly can cost more than the falls it ever absorbs. Mis-sized hedges (protecting ₹2,60,000 of stock with two lots of puts, say) quietly become directional bets. And every option position, hedge or not, carries the product's usual risks. Read What are the risks of trading Futures and Options (F&O)? alongside this.
If you want to see how a hedge changes your payoff before committing money, you can model combinations like stock-plus-put in How to create options strategies with Strategy Builder?
Things to keep in mind
- A protective put caps downside near the strike for a known cost; the premium is spent whether or not the fall comes. That's insurance, not a flaw.
- Match the hedge to the holding: same underlying, and lot size roughly matching the shares you own.
- Covered calls trade away upside for premium and barely protect against a real fall. They are not a safe-income scheme.
- Hedging is a cost-management tool, not a profit strategy; nothing here is a recommendation to enter any position.
Read next
What are the risks of trading Futures and Options (F&O)? — Before trading any of it, an honest account of what can go wrong.