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Dec 08, 2017 02:55 PM IST | Source: Moneycontrol.com

Market likely to be volatile till Gujarat polls outcome, hedge your portfolio: Expert

The Nifty, so far, in current calendar year rallied nearly 23 percent and to take the rally ahead from here on needs a strong reason (may be one-sided win for BJP in state elections apart from corporate earnings and economic growth).

After hitting a record high of 10,490 on November 6, the 50-share NSE Nifty has been volatile and that volatility is likely to continue till the outcome of Gujarat assembly elections.

The state will go for polling in two phases - November 9 and November 14. The result of the Gujarat’s election will be declared on December 18. Exit polls are expected to start from the December 14 evening.

"Therefore market is likely to be very volatile till the actual outcome on December 18. Depending on the election result outcome Nifty may swing wildly on either side," HDFC Securities said in its research note.

The Nifty, so far, in current calendar year rallied nearly 23 percent and to take the rally ahead from here on needs a strong reason (may be one-sided win for BJP in state elections apart from corporate earnings and economic growth).

"So it’s always advisable to hedge portfolio ahead of the big event like Gujarat election outcome. However one should keep in mind, hedging always comes with cost," HDFC Securities said.

It further said, "If one hedges portfolio, and market rises, he/she will lose only to the extent of premium paid while value of portfolio will rise along with the markets."

So the research house suggested a hedging strategy - Buy Nifty December 10000 put at Rs 115 and simultaneously sell 9700 put at Rs 40 to reduce the cost of buying put.

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"Strategy will be profitable if the Nifty closes below 9,935 on the December expiry day. Cost of the strategy is 65. Maximum profit is achieved (Rs 235 per lot), If Nifty closes at or below 9,700 level. However here we do not get additional benefit If Nifty falls further from 9,700 level and our profit remains at Rs 235 per lot even If Nifty falls further below 9,700 level," HDFC Securities said.

The brokerage house further said these strategies will help to reduce the loss of portfolio value.

And if the market rises sharply, one will lose only to the extent of premium paid while value of portfolio will rise along with the markets, according to the report.

However, it is possible that if market were to fall, profit from above protective strategies will not give perfect hedge against portfolio as beta of his/her portfolio might be different from the Nifty, it said.

The report further said if portfolio is heavily loaded with midcaps and small caps, it may behave differently from the benchmark indices and buying protection in Nifty may not be the ideal hedge.
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