Last week was an emotional rollercoaster for political enthusiasts and stock investors in India.
The benchmark Indian index rose by 3% on Monday, fell by over 5% the next day, and then recovered over the next two days.
For context, the average index movement over a year is only about 11-12%!
Retail investors felt a gut punch when their portfolios plummeted on Tuesday, following Monday’s emphatic gain. I wouldn’t be surprised if quite a few Indian retail investors who watched the TV news that day wound up in cardiac intensive care units —TV news anchors love sensationalism, and days like these, when commentary can give you heart attacks, come only once in years.
Last week reminded me why I cancelled all my TV financial channel subscriptions four years ago and never looked back. For investors or positional traders like myself (I started participating in stock markets in 2007), TV analyst noise distracts one from real opportunities or risks.
When all experts would have emphatically celebrated the stock market highs following exit poll forecasts, wary investors and traders paid attention to the volatility index at almost 30, which was a warning and hedged their portfolios (a risk mitigation strategy). There were opportunities aplenty to do so.
Then came the record drop! When friends and colleagues lamented about the huge drop on Tuesday, my only question was did you have any risk mitigation strategy or a hedge?
Few did. 🤦♂️
Hedging a portfolio in times of huge uncertainty protects one’s investments and stops one from making bad decisions based on headline news (think about all those who sold on Tuesday after a 5% fall, only to miss the rally the next day).
Hedging is like insurance—it’s cheap when nobody wants it, but by the time you realise you need it, it’s too late.
Here’s what I spotted last weekend when looking for ways to protect my portfolio from sudden drops. Would you buy this ‘insurance’ if you knew about it?
The option spread in the picture (screenshot taken on 28th May) had a Risk: Reward Ratio of 1:7. You could buy a position for just ₹1,566 and if the market corrected between 4-8% in the next few days, your return would be ₹10,933!
Even if your overall portfolio fell sharply, your hedge would compensate for that drop.
The market corrected to precisely within that range on 4th Jun.
Those who purchased insurance using options that day would’ve made gains far exceeding any portfolio dip.
Successful traders and investors seldom follow the crowd’s voices; they go by what the data states, what the charts show, connect the dots, and then take action.
And of course, they buy insurance when few think of doing so!
PS: No assistants, and no AI-generated content. Just a pair of eyes that read, a head that learns, and two hands that type away on weekends amidst chores. Like what you read? Let me know. Or better still, share this with another soul. ✍
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Six Strings For Supper 