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Protective put, covered call and index hedge — and the truth that a hedge is not free
Published by The Retail Trader · AUG 09, 2026 · Features
The purpose of hedging is not to make money. Its purpose is that on the day everything goes wrong, the loss isn't so big that you're out of the game. Whoever treats a hedge as a profit centre loses on both counts.
You hold stock or index exposure and you fear a fall. You buy a put option. If a fall comes, the gain on the put covers some part of your portfolio's loss.
Its cost is the premium, and it is paid every time — whether the fall comes or not. Exactly like an insurance premium that goes out every year whether or not there is an accident.
You own shares that you don't want to sell right now, but you think they won't go very high either. You sell a call option on them and earn the premium.
Its cost isn't visible, but it exists: if the stock runs above that strike, your upside gain stops right there. You have taken rent, and in return sold off a part of the upside.
Putting a separate hedge on every stock is expensive. So people hedge the whole portfolio on the index. It is cheap and liquid.
Its shortcoming is clear: if your portfolio moves differently from the index, the hedge won't work. If the index stays flat and your midcaps fall 8% — the hedge saved nothing, only the premium was lost. This is called basis risk.
An honest checklist:
• A hedge makes sense when the exposure is so large that one bad day would wreck your planning.
• A hedge is pointless when its cost eats a big part of your expected return. On a small portfolio, a constant hedge is often a loss-maker for this very reason.
• Don't put on a hedge in panic. On the day everyone is scared, the premium is at its most expensive. Insurance is not bought after the fire has started.
• A hedge has an expiry. Putting it on and forgetting is the most common mistake — the protection quietly ends and you don't even know.
And one last thing: the cheapest hedge is often not an option. It is a smaller position size. If you can't bear the cost of the hedge, perhaps the exposure itself is too large.
This article is for educational purposes only — it is not a buy or sell recommendation, makes no claim of guaranteed returns, and is not advice. Rules, rates and mechanics are changed from time to time by the exchanges, SEBI and RBI, so verify every number yourself with your broker or an official source.