Hedging with Futures

intermediate7 min read

Protecting a portfolio by taking an offsetting futures position — the original use case.

This brings futures back to their original purpose: hedging. If you hold a portfolio of stocks and fear a near-term market drop, you can *short index futures* to offset the risk — without selling a single share you own.

A hedge works by deliberately holding two positions that move in opposite directions, so a loss on one is cancelled by a gain on the other. If you’re long ₹11 lakh of stocks and short ₹11 lakh of Nifty futures, a market crash hurts your stocks but your short future profits by roughly the same amount — your net exposure is near zero. The beauty is you keep your portfolio intact (no selling, no tax event, no exit from good long-term holdings) while temporarily neutralising the downside. The cost: you also give up the upside during the hedge — protection cuts both ways. A hedge isn’t a profit strategy; it’s insurance you switch on when you want to ride out a storm without dismantling what you’ve built.

Short futures to hedge a long portfolio — gains on the short offset losses on your holdings in a fall.
Keeps holdings intact — no selling your stocks (avoiding tax events and exiting good positions); just an overlay.
Symmetric cost — the hedge also caps your upside while it’s on; you’re trading away gains for protection.
Hedge ratio — match the futures value to the portfolio value you want to protect (beta-adjusted for a closer fit).

ExampleYou hold an ₹11 lakh stock portfolio and worry about a budget-week dip but don’t want to sell. You short one Nifty future (~₹11 lakh notional). The market falls 5%: your stocks lose ~₹55,000, but your short future gains ~₹55,000 — net roughly flat. After the event, you close the future and resume full upside exposure, never having touched your shares.

Key takeawayHedging with futures means shorting index futures against a long portfolio so gains on the short offset losses on your holdings in a fall — insurance that keeps your stocks (and avoids tax events) but also caps upside while on. Match the futures value to what you want to protect.

FAQs

Why hedge with futures instead of just selling my stocks?

Selling triggers taxes, transaction costs, and exits good long-term positions you’d have to rebuy. A futures hedge is a quick, cheap, reversible overlay that neutralises downside *temporarily* without disturbing your portfolio — ideal for riding out a specific known risk (an event, a feared correction) you expect to be short-lived.