Creating Resilience in Portfolio Management by Effective Hedging with Derivatives

Abstract

The quest for efficient portfolio management has baffled investors and fund managers alike. The fact that only 20% of the mutual fund schemes are able to beat the benchmark index, makes a case for passive investments through ETFs. However index funds or ETFs also have their own downsides. Hence risk management becomes imperative. In the stock market, if you protect yourself from losses, profit is a by-product. Risk management can be done through many instruments and methods. In this paperI discuss the impact of protecting the portfolio through Put options. The fun fact is that a long portfolio and a long put option can be a Synthetic Call option. Thus by using Options, one can take the advantage of risk management as well as leverage. In conclusion I have proved that risks can be eliminated by using long dated options. This method of investing can prove to be highly effective for a retail investor, who wishes for long term passive investments without much drawdowns.