• Products
    Investment Suite
    Stocks
    Mutual Funds
    Future and Options
    IPO
    Exchange Traded Funds
    Commodity
    Stockcase (Stock Baskets)
    Non Convertible Debentures
    Sovereign Gold Bond
    Exclusive
    NRI Account
    Corporate/HUF Trading Account
    Private Client Group
    Features
    SipIt
    MTF
    Investment Suite
    Exclusive
    Features
    Stocks
    Mutual Funds
    Future and Options
    IPO
    Exchange Traded Funds
    Commodity
    Stockcase (Stock Baskets)
    Non Convertible Debentures
    Sovereign Gold Bond
    NRI Account
    Corporate/HUF Trading Account
    Private Client Group
    SipIt
    MTF
  • Platform
    Trading Platforms
    Kotak Neo App & Web
    Nest Trading Terminal
    NEO Trade APIs
    Trade From Charts
    Features and Tools
    MTF
    Securities Accepted as Collateral
    Margin Requirements
    Equity Screeners
    Payoff Analyzer
    Calculators
    SIP Calculator
    Lumpsum Calculator
    Brokerage Calculator
    Margin Calculator
    MTF Calculator
    SWP Calculator
    CAGR Calculator
    Simple Interest Calculator
    ELSS Calculator
    Step up SIP Calculator
    All Calculators
    Trading Platforms
    Features and Tools
    Calculators
    Kotak Neo App & Web
    Nest Trading Terminal
    NEO Trade APIs
    Trade From Charts
    MTF
    Securities Accepted as Collateral
    Margin Requirements
    Equity Screeners
    Payoff Analyzer
    SIP Calculator
    Lumpsum Calculator
    Brokerage Calculator
    Margin Calculator
    MTF Calculator
    SWP Calculator
    CAGR Calculator
    Simple Interest Calculator
    ELSS Calculator
    Step up SIP Calculator
  • Pricing
  • Research
    Research Calls
    Long Term calls
    Short Term calls
    Intraday calls
    Derivatives calls
    Pick of the week
    Top Monthly Picks
    Stock Research Recommendations
    MTF Stock Recommendations
    Research Reports
    Fundamental Research Report
    Technical Research Report
    Derivative Research Report
    Research Calls
    Research Reports
    Long Term calls
    Short Term calls
    Intraday calls
    Derivatives calls
    Pick of the week
    Top Monthly Picks
    Stock Research Recommendations
    MTF Stock Recommendations
    Fundamental Research Report
    Technical Research Report
    Derivative Research Report
  • Market
    Market Movers
    Share Market Today
    Top Gainers
    Top Losers
    Stocks
    Large Cap
    Mid Cap
    Small Cap
    Indices
    Nifty 50
    Bank Nifty
    FinNifty
    Nifty Midcap India
    VIX
    All Indices
    Mutual Funds
    SBI Mutual Funds
    HDFC Mutual Funds
    Axis Mutual Funds
    ICICI Prudential Mutual Funds
    Nippon India Mutual Funds
    All AMC's
    IPO
    Upcoming IPO
    Current IPO
    Closed IPO
    Recently Listed IPO
    Tata Capital IPO
    Amanta Healthcare IPO
    Quarterly Results
    Jindal Steel's Q1 FY 2025-26 Quarterly Results
    SRI LOTUS DEVLPRS N RTY L's Q1 FY 2025-26 Quarterly Results
    Aeroflex Neu's Q1 FY 2025-26 Quarterly Results
    PVP Ventures' Q1 FY 2025-26 Quarterly Results
    Market Movers
    Stocks
    Indices
    Mutual Funds
    IPO
    Quarterly Results
    Share Market Today
    Top Gainers
    Top Losers
    52 Week High
    52 Week Low
    Volume Shockers
    Large Cap
    Mid Cap
    Small Cap
    State Bank of India
    Reliance Industries Ltd
    HDFC Bank Ltd
    Infosys Ltd
    Tata Consultancy Services Ltd
    Hindustan Unilever Ltd
    ITC Ltd
    IRCTC
    NSE
    Nifty 50
    Bank Nifty
    FinNifty
    Nifty Midcap India
    VIX
    BSE
    Sensex
    BSE Bankex
    BSE Small Cap
    BSE Mid Cap
    BSE 100
    Indian Indices
    Global Indices
    Gift Nifty
    S&P
    Nikkei Index
    Hong Kong Index
    KOSPI Index
    Global Indices
    AMC's
    SBI Mutual Funds
    HDFC Mutual Funds
    Axis Mutual Funds
    ICICI Prudential Mutual Funds
    Nippon India Mutual Funds
    Schemes
    Parag Parikh Flexi Cap
    SBI Small Cap Fund
    SBI Contra Fund
    Nippon Small Cap Fund
    ICICI Pru Technology Fund
    Upcoming IPO
    Current IPO
    Closed IPO
    Recently Listed IPO
    Tata Capital IPO
    Amanta Healthcare IPO
    Rachit Prints Ltd
    Amanta Healthcare Ltd
    Optivalue Tek Consulting Ltd
    Goel Construction Company Ltd
    boAt IPO
    Hero Fincorp IPO
    LG Electronics India IPO
    Gold Plus Glass Industry IPO
    Jindal Steel's Q1 FY 2025-26 Quarterly Results
    SRI LOTUS DEVLPRS N RTY L's Q1 FY 2025-26 Quarterly Results
    Aeroflex Neu's Q1 FY 2025-26 Quarterly Results
    PVP Ventures' Q1 FY 2025-26 Quarterly Results
    NDR INVIT Trust's Q1 FY 2025-26 Quarterly Results
    Jaiprakash Associates' Q1 FY 2025-26 Quarterly Results
    Alps Industries' Q1 FY 2025-26 Quarterly Results
    Brightcom Group's Q1 FY 2025-26 Quarterly Results
    Visa Steel's Q1 FY 2025-26 Quarterly Results
    Coffee Day Enterprises' Q1 FY 2025-26 Quarterly Results
    Supreme Holdings & Hospitality's Q1 FY 2025-26 Quarterly Results
    Kavveri Defence & Wireless Technologies' Q1 FY 2025-26 Quarterly Results
  • Learn
    Stockshaala
    Basics of Stock Market
    Introduction to Fundamental Analysis
    Introduction to Technical Analysis
    Derivatives, Risk management & Option Trading Strategies
    Personal Finance
    Resource
    Market Ready
    Kotak Insights
    Infographic
    Podcast
    Webinars
    Youtube Channel
    Investing Guide
    Demat Account
    Trading Account
    Share Market
    Intraday Trading
    IPO
    Mutual Funds
    Events
    Budget 2025
    Muhurat Trading
    Share Market Holiday
    Market Outlook 2025
    Stockshaala
    Resource
    Investing Guide
    Events
    Basics of Stock Market
    Introduction to Fundamental Analysis
    Introduction to Technical Analysis
    Derivatives, Risk management & Option Trading Strategies
    Personal Finance
    Market Ready
    Kotak Insights
    Infographic
    Podcast
    Webinars
    Youtube Channel
    Demat Account
    Trading Account
    Share Market
    Intraday Trading
    IPO
    Mutual Funds
    Budget 2025
    Muhurat Trading
    Share Market Holiday
    Market Outlook 2025
  • Partner
    Business Associates
    Kotak Connect Plus
    Startup connect
    Business Associates
    Kotak Connect Plus
    Startup connect
  • Support
    FAQs
    Circulars
    Bulletins
    Contact Us
    Forms Download
    Get your Statement
    FAQs
    Circulars
    Bulletins
    Contact Us
    Forms Download
    Get your Statement
  • News

logo
Derivatives, Risk management & Option Trading Strategies
13 Modules | 43 Chapters
Module 4
Hedging and Risk Management
Course Index
Read in
English
हिंदी

Portfolio Risk Management with Derivatives

In the previous chapter on Leverage and Payoff, we discussed how leverage amplifies the potential returns and risks in derivative trading. Let's look at using derivatives to manage and hedge against risk in your investment portfolio, which shall help you manage market volatility.

There is a risk in investing, but the way you manage that risk will determine your success. Derivatives could be a key factor for investors in portfolio risk management by providing ways to hedge against the volatility of markets while attempting to achieve returns.

In simple terms, the derivatives are financial contracts whose values are derived from the underlying asset, which may be a stock, commodity, or indices. They come in different versions like futures, options, and swaps. They enable an investor to speculate on the movement of the prices without necessarily holding an actual asset, but it can be used to hedge the risks.

By incorporating derivatives into your portfolio, you can hedge against adverse market movements and protect your investments.

1. Hedging Against Market Downturns

The main use of derivatives in portfolio risk management is hedging. Hedging involves taking a position in a derivative that offsets the risk in your main investments. For instance, if you are heavily invested in stocks, you hedge with Nifty futures or options. In case the market falls, your derivative position will increase in value to partly offset the losses in your equity portfolio.

Assuming a 5% fall in Nifty Index would present a loss in the equity portfolio, a shortsided hedge position in Nifty futures or buying put options can prevent the loss.

2. Protection against fluctuations in currency

Investors with international exposure, or investors in foreign stocks, do carry substantial currency risks. The volatility in the Indian rupee impacts the value of their investments abroad. Here derivatives on currencies like forwards or futures will help in hedging that risk. You lock in an exchange rate well in advance to cushion your portfolio from adverse movements in the values of currencies.

3. Reduction of Stock-Specific Risk

If you have a big position in one stock, that means it's certain that it involves risks, such as poor earnings reports or regulatory changes. This is the stock specific risk that options can reduce. You could use a protective put, wherein you buy a put option against stock you already own, to give you downside protection in case the stock suddenly falls. This will let you limit your losses while retaining potential for gains if the stock appreciates.

4. Enhancing Returns with Covered Calls

Other portfolio risk management approaches include the covered call strategy, whereby one sells calls of stocks that one already owns. In using this strategy, premiums collected from the sale of these calls add to a sort of income that may buffer the volatility of your portfolio. However, this comes with the disadvantage that your upside potential will become capped if the stock's rise goes beyond the options' strike price.

Conclusion

Derivatives represent some of the powerful tools that hedge portfolio risks in the market, mitigating market downtrends, currency fluctuations, and events occurring in specific stocks. By incorporating derivatives into your investment strategy, you can better protect your portfolio while continuing to pursue growth. Now in the next chapter, we’ll dive into volatility and its impact on derivatives, exploring how market fluctuations influence derivative prices and how you can leverage this for better risk management.

Is this chapter helpful?
Share
What could we have done to make this article better?

Leverage & Payoff
Volatility and its impact on derivatives

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.

Leverage & Payoff
Volatility and its impact on derivatives

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.

Beyond Stockshaala

Discover our extensive knowledge center

Kotak Insights

An insightful weekend read on market trends, company stories, and historical events.

Neo Shorts

A visual spotlight on buzzing sectors and rising stars of the Indian stock market.

Investing Guide

Comprehensive library of blogs focussed to build your financial confidence.

Market Ready

Stay ahead of the game with daily market trends, global insights, and key investment updates.

Webinars

Live sessions with industry leaders for in-depth market knowledge.

Podcast

Latest trends, strategies, and market updates with our seasoned experts.