How a Trader Hedged Using Nifty Options

Case study — “Rahul” hedges a long NIFTY exposure

Scenario & assumptions (clear & simple)

Instrument: NIFTY index derivatives. (Note: NSE revised index lot sizes in 2025 — NIFTY market-lot is 75 units now; see the NSE circular/product page for details.)
Position: Rahul is long 2 NIFTY futures contracts (he could equally be long a portfolio that tracks NIFTY; hedging logic is same).
Entry futures price: 22,000 (this is Rahul’s entry).
Lot size per contract = 75 units → total units = 2 contracts × 75 = 150 units.
Hedge horizon: 1 month (single expiry).
Example option prices (hypothetical for demonstration):
- Buy 2 × NIFTY 22,000 puts (ATM) at ₹180 per index point.
- Sell 2 × NIFTY 23,000 calls (OTM) at ₹80 per index point (used for a collar example).
  (Premiums are shown per index point; option cost in rupees = premium × units per contract × number of contracts.)

Step 1 — compute exposure (explicit arithmetic)

A 1-point move in NIFTY changes Rahul’s P&L by: ₹150 (because 150 units × ₹1).

Unhedged P&L at expiry (index = Sᴛ) formula:
P&L_unhedged = (Sᴛ − 22,000) × 150.

Step 2 — protective put hedge (what Rahul actually did first)

He bought 2 ATM puts (K = 22,000) at ₹180 per point.

Premium paid total = premium × units × contracts
= ₹180 × 75 × 2 = ₹180 × 150 = ₹27,000.

Put payoff at expiry (per index point) = max(0, K − Sᴛ).
Total put payoff in rupees = (K − Sᴛ if positive) × 150.

Net P&L with protective put at expiry:
P&L_protective = (Sᴛ − 22,000) × 150 + max(0, 22,000 − Sᴛ) × 150 − 27,000.

Two regimes simplify the algebra:

If Sᴛ ≥ 22,000 (put worthless):
P&L = (Sᴛ − 22,000) × 150 − 27,000.
Break-even point (solve P&L = 0): Sᴛ = 22,000 + 180 = 22,180.
If Sᴛ ≤ 22,000 (put pays):
Put payoff cancels downside of futures, so net = (22,000 − 22,000) ×150 − 27,000 = −₹27,000 (i.e., worst-case loss = premium paid).

Interpretation: Protective put gives a floor (max loss = premium paid) and leaves unlimited upside minus premium.

Step 3 — numeric payoff table (examples)

I’ll compare three P&L lines at expiry for sample final NIFTY prices Sᴛ:

Parameters recap (used below)

Here are the computed outcomes (all in ₹):

(How these numbers were computed — one example row shown)

For Sᴛ = 19,000:
- Unhedged: (19,000 − 22,000) × 150 = (−3,000) × 150 = −₹450,000.
- Put payoff = (22,000 − 19,000) × 150 = 3,000 × 150 = ₹450,000.
- Protective-put net = −450,000 + 450,000 − 27,000 = −₹27,000.
- Collar net = same but you received call premium (₹12,000), so net = −450,000 + 450,000 − 15,000 = −₹15,000.

Takeaways from the table

Protective put caps maximum loss at the premium paid (here ₹27,000) — good downside insurance.
Collar reduces the premium cost (net ₹15,000) by selling upside via the call, but caps upside above the short call strike (here 23,000 → top payout is limited).
Unhedged gives the best upside but exposes full downside.

Step 4 — other hedge variants (short, medium & long notes)

OTM put (cheaper, partial protection)
- Buy 21,000 put instead of 22,000 → lower premium but protection only below 21,000. Cheap but leaves you exposed in the 21,000–22,000 gap.
Put spread (buy a near-ATM put, sell a deeper OTM put)
- Example: Buy 22,000 put @ ₹180, sell 20,000 put @ ₹60 → net premium = ₹120/pt.
- Cheaper than a naked put, but if market crashes below 20,000, your protection stops at 20,000 (you’ve limited downside for limited cost).
Delta-sized hedge (dynamic / synthetic hedges)
- If you want a delta-neutral hedge instead of a floor, use option delta.
- Example: ATM put delta ≈ −0.5. To neutralize +1 underlying delta you need 1 / 0.5 = 2 puts per lot. In Rahul’s case (2 lots), full delta hedge ≈ 4 put contracts.
- Caveat: option deltas change with price & time, so delta-hedges require rebalancing.
Futures + options mix
- If a lot mismatch exists (your portfolio not perfectly divisible by lot size), you can combine futures (which are granular at contract level) with options to tune exposure.

Step 5 — practical considerations & implementation checklist

Match expiries: pick the option expiry matching your risk horizon. Shorter expiry = cheaper premium but faster theta decay.
Liquidity: use strikes/expiries with good volume / tight bid-ask to avoid slippage.
Margin & cost: buying options requires only premium; selling calls requires margin and carries assignment risk. Consider margins in capital planning.
Implied volatility (IV): high IV = expensive puts. Consider collars/put spreads when IV is high to reduce cost.
Lot size rounding: if your exposure doesn’t map exactly to integer lot counts, combine futures or size your hedge conservatively (round up/down) and document residual exposure. (NSE guidance and circulars affect lot sizes; check live contract specs before trading).
Rolling: if you need protection beyond expiry, plan how you’ll roll the hedge (cost, slippage).
Tax & accounting: options and futures P&L treatment may differ — factor in taxes/transaction fees.

Quick decision guide (which hedge to pick?)

Want full protection regardless of how far the market falls → Protective put (pay the premium).
Want cheaper insurance and are OK capping upside → Collar (buy put, sell OTM call).
Want limited protection with lower cost → Put spread.
Want partial, dynamic protection and can rebalance → Delta hedge / dynamic hedging.

Final notes & offer

The numeric example above used hypothetical option premiums to illustrate the mechanics — replace the premiums with live quotes and the same formulas to compute exact costs & break-evens for your trade.
I pulled the lot-size / contract info from NSE circulars and exchange pages so you don’t get tripped by the recent lot-size revisions. (Always re-check the contract specs before placing orders.)