Risk Mitigation Strategies in Derivatives Trading: A

Comparative Study of Hedged and Unhedged Positions

Objective

To study how risk mitigation strategies impact the profit and loss (P&L) of
derivatives positions. The goal is to compare unhedged positions with hedged
ones using real market data.

Methodology

1. Select Instruments

From NSE historical data (we can pick dates together).

2. Unhedged Position

Take a long/short option or future position, and calculate basic profit/loss at

expiry for different price levels.

3. Apply Risk Mitigation Strategies

Apply each strategy (explained in next step) and compare:

Strategy Type Used Applies to

Delta Neutral Options + Futures Any position
Protective Put Options + Stock Long Stock or Futures
Covered Call Stock + Options Long Stock or Futures
Futures Hedge Futures Hedging underlying
Straddle/Strangle Options Only Volatility bets

4. Compare Outcomes

P/L of:

 Unhedged Futures
 Unhedged Options
 Each strategy applied on them

5. Conclusion

Which strategy provided:

  Maximum downside protection?
 Reasonable cost?
 Best balance of risk and reward?

Samples

 1 Index Future (NIFTY FUTURES)

 1 Index Option (NIFTY CE/PE)

 1 Stock Future (e.g., RELIANCE)

 2 Stock Options (e.g., RELIANCE, HDFCBANK)

Final Instrument List for Analysis

Expiry (Assumed:
Category Instrument Type
May 2025)
Index BANK NIFTY
Futures May Expiry
Future Futures
Index Option
NIFTY Call Option May Expiry
Option (CE)
Stock TATA POWER
Futures May Expiry
Future Futures
Stock RELIANCE Call Option
May Expiry
Option 1 Option (CE)
Stock Option
ITC Put Option May Expiry
Option 2 (PE)

Step-by-Step Checklist Before Uploading

While you wait for the upload limit to reset, cross-check these
in your Excel sheet:
1. Date Range
 Does each instrument have data from the same start
date (e.g., May 1) to May 21, 2025?
2. Columns for Each Instrument
Ensure you have columns like:
🔹 For Futures (NIFTY, TATA POWER):
 Date
 Spot Price (if available)
 Futures Price
 Entry Price (your assumed buy price)
 P/L (Unhedged) → leave blank for now
 P/L (Hedged) → leave blank for now
🔹 For Options (NIFTY CE, RELIANCE CE, ITC PE):
 Date
 Spot Price (of the stock/index)
 Strike Price
 Option Premium (Daily Closing)
 Entry Premium (your assumed entry price)
 P/L (Unhedged) → leave blank
 P/L (Hedged) → leave blank

🧮 What You Can Do Next

Even without upload, you can start these calculations:
➤ Calculate Unhedged P/L
For each day:
  Futures:
P/L = (Futures Price - Entry Price) × Lot Size
 Options:
P/L = (Option Premium - Entry Premium) × Lot Size
If you're not sure about lot sizes, I can give you standard NSE
lot sizes for each instrument.

Concepts,

✅ 1. Delta Neutral Strategy

🔹 What It Is:
A strategy where you balance your portfolio so the overall
Delta (sensitivity to price change) is close to zero.
🔹 Why Use It:
To neutralize directional risk. If the market goes up or down
slightly, the overall position stays stable.
🔹 Example:
You buy a Call Option (positive Delta) and short Futures
(negative Delta) in the right proportion to offset each other.
🔹 How It Works:
 Suppose NIFTY 22200 CE has Delta ≈ +0.6
 You buy 2 lots of calls → +1.2 Delta
 Then short 1 lot of NIFTY Futures → -1.0 Delta
➡️Net Delta ≈ 0.2 (close to neutral)

✅ 2. Protective Put
🔹 What It Is:
You buy a Put Option to protect a long stock or future
position.
🔹 Why Use It:
To limit downside losses. Think of it as insurance.
🔹 Example:
You buy 1 lot of TATA Power Futures, and also buy a Put
Option with a nearby strike.
🔹 How It Works:
 If TATA Power price falls, futures lose money
 But your Put option gains in value → hedges the loss
 If price rises, your profit is reduced only by the cost of the
Put

✅ 3. Covered Call
🔹 What It Is:
You sell a Call Option while holding the underlying stock or
future.
🔹 Why Use It:
To generate income from a position you think will be flat or
mildly bullish.
🔹 Example:
You buy 1 lot of RELIANCE stock/future, and sell a 2900 CE
option.
🔹 How It Works:
 If RELIANCE stays below 2900 → option expires worthless
→ you keep premium
 If RELIANCE goes above 2900 → you profit till 2900 +
premium
 But your upside is capped beyond strike price
✅ 4. Futures Hedge (Delta-1 Hedge)
🔹 What It Is:
Use futures to hedge an option position, usually a portfolio
of calls/puts.
🔹 Why Use It:
To protect against price movements in the underlying.
🔹 Example:
You hold NIFTY 22200 CE (long) → to hedge, you short
NIFTY Futures.
🔹 How It Works:
 If NIFTY falls → Futures gain, call loses → net effect
reduced
 If NIFTY rises → Call gains, futures lose → net effect
controlled
Same logic applies if you have short puts and buy futures to
hedge.

✅ 5. Straddle / Strangle
🔹 What It Is:
Buy both a Call and a Put (Straddle = same strike, Strangle =
different strikes)
🔹 Why Use It:
When you expect big movement, but unsure of the direction.
🔹 Example:
You buy:
 NIFTY 22200 CE
 NIFTY 22200 PE (Straddle)
OR
 22300 CE + 22100 PE (Strangle)
🔹 How It Works:
 If NIFTY moves big in either direction → one option gains
a lot
 The other becomes worthless → but net profit is high if
move is large
 If market stays flat → you lose premium on both sides

🧠 Summary Table:
Instruments Best When
Strategy Main Goal
Used You Expect…
Neutralize Options +
Delta Neutral No clear trend
price moves Futures
Limit Long Futures + Slightly bullish,
Protective Put
downside Long Put need safety
Generate Long Futures + Flat to slightly
Covered Call
premium Short Call bullish
Options + Moderate
Futures Hedge Hedge options
Futures direction risk
Straddle/ Profit from Long Call + Big move,
Strangle volatility Long Put unsure direction

Type Instrument Details

Index Bank NIFTY Entry Price: ₹54,920 (as per
Future Futures market)
Index Strike Price: 24,800 (Call
NIFTY 24800 CE
Option Option)
Stock TATA Power
Entry Price: ₹400
Future Futures
Stock RELIANCE 1400 Strike Price: 1,400 (Call
Type Instrument Details
Option 1 CE Option)
Stock
ITC 435 PE Strike Price: 435 (Put Option)
Option 2

🔹 1. Delta Neutral Strategy

Concept:
Delta neutral means creating a position where the overall delta
of the portfolio is zero — i.e., small changes in the underlying
price don’t affect the portfolio’s value significantly.
How it works:
 Options have delta: call options have positive delta (0 to
+1), puts have negative delta (0 to -1).
 To neutralize delta, you balance long and short positions in
the underlying asset and options.
 Traders use this strategy to hedge directional risk while
benefiting from time decay or volatility changes.
Example:
 Suppose a call option has a delta of +0.5.
 You can sell 50 shares (or an equivalent futures position)
to offset the directional exposure of one long call (100
shares equivalent).
Used by: Market makers, neutral-volatility traders.

🔹 2. Protective Put
Concept:
It is like buying insurance for your stock/futures position. You
hold a long position and buy a put option to protect downside
risk.
How it works:
  Buy stock or future.
 Buy a put option on the same stock/index with a strike
price near or below current price.
Outcome:
 Limited downside (protected by put).
 Upside remains open (minus premium paid for put).
Used by: Investors wanting downside protection.

🔹 3. Covered Call
Concept:
You own the stock/futures and sell a call option on it to earn
extra income.
How it works:
 Buy/hold stock or future.
 Sell a call option at a higher strike (usually out-of-the-
money).
Outcome:
 Earn premium.
 If price rises above strike, gains are capped.
 If price stays below strike, you keep premium + value of
position.
Used by: Yield-seeking traders, range-bound market traders.

🔹 4. Futures Hedge (Delta 1 Hedge)

Concept:
Using futures to offset a position's price movement entirely, as
futures have a delta of ~1.
How it works:
 For long positions: short futures to hedge.
 For short positions: long futures to hedge.
Outcome:
 Perfect hedge if ratio is right.
 Gains in one leg offset losses in the other.
Used by: Corporates, institutions, arbitrageurs.

🔹 5. Straddle/Strangle
Concept:
Volatility strategy. You bet on large movement in either
direction.
Straddle:
 Buy a call and a put at the same strike and expiry.
Strangle:
 Buy OTM call and OTM put (different strikes, same expiry).
Outcome:
 Profit if price moves significantly up or down.
 Loss is limited to total premium paid if price stays near
strike.
Used by: Event-based traders (earnings, elections, etc.)

✅ Next Steps: Instrument Mapping

You've provided 5 instruments:
Instrument Type Underlying
Bank NIFTY Futures Bank NIFTY
Futures (Index) Index
NIFTY 24800 CE Call Option NIFTY Index
TATA Power Futures
TATA Power
Futures (Stock)
RELIANCE 1400 Reliance
Call Option
CE Industries
Instrument Type Underlying
ITC 435 PE Put Option ITC Ltd.

To proceed, please confirm the current market prices of the

underlying assets for the above instruments. Alternatively, you
can provide the entry prices and option premiums you used
for each position so we can compute pre- and post-hedge P/L.’

Strategy to
Instrument Why It Fits Well
Apply
Futures are directional, and
TATA Power Protective
protective puts limit downside
Futures Put
risk
RELIANCE You "hold" the stock and write a
Covered Call
1400 CE call to generate income
Straddle or Works best on options for
ITC 435 PE
Strangle volatile/neutral views
3.
Futures
Bank NIFTY Ideal for hedging index options
Hedge (Delta
Futures or positions using futures
1)
NIFTY 24800 Delta Neutral Delta-neutral works best with
CE Strategy index options due to liquidity
✅ Objective of Long Straddle:
You buy both:
 ATM Call Option
 ATM Put Option
You profit if NIFTY moves significantly, up or down.
So, we want to enter before a big move, ideally when:
 VIX is about to rise
 PCR indicates uncertainty
 Option premiums are still low (so your cost is low)
 A sharp move in Bank Nifty is expected

🔍 Reviewing Your Data:

NIFTY 28500 PC VIX % Bank
Date VIX
CE R Chg Nifty
02-May- 1.3 18.2
₹212.1 +0.21% 55209.8
25 7 6
05-May- 1.3 18.3
₹247.1 +0.45% 55080.6
25 7 4
06-May- 1.3 19.0
₹186.6 +3.61% 54363
25 9 0
 NIFTY 28500 PC VIX % Bank
Date VIX
CE R Chg Nifty
07-May- 1.3 19.0
₹192.7 +0.34% 54671
25 4 6
08-May- 1.2 21.0
₹147.05 +10.23% 54288.6
25 4 1
09-May- 1.2 21.6
₹89.95 +2.96% 53732
25 2 3
12-May- 1.3 18.3
₹449.9 -14.99% 55599.2
25 1 9

📌 Best Entry Point:

✅ Entry Date = 06-May-25
 VIX jumps 3.61% from 05 to 06 May — shows rising
volatility.
 Option premium (₹186.6) is reasonable.
 PCR still > 1 — shows market indecision (perfect for
straddle).
 Bank Nifty drops sharply → signal of potential continued
movement.

📌 Best Exit Point:

✅ Exit Date = 12-May-25
 VIX falls sharply (-14.99%) → shows end of volatile
phase.
 Option premium rose to ₹449.9 → your position would be
highly profitable.
 Bank Nifty rebounded from 53732 → 55599.2 → big move
= straddle works!

✅ Final Answer:
Actio
Date
n
06-May-
Entry
25
12-May-
Exit
25
You can now calculate P/L based on:
 Cost: Sum of Call and Put premiums on 06-May
 Exit Value: Combined value of Call and Put on 12-May