Every Wednesday afternoon, Rahul met Ananya to review his portfolio.
Sometimes they spoke about markets.
Sometimes about businesses.
And sometimes about the hardest part of investing:
doing nothing.
This Wednesday, Rahul walked in smiling.
He opened his laptop and turned it towards Ananya.
Rahul:
“Look at this.”
“Six months ago, I invested ₹5 lakh in ABC Ltd. Today, it’s worth ₹7.5 lakh.”
“₹2.5 lakh profit.”
He paused.
“Should I sell before the market changes its mind?”
Ananya looked at the screen.
Then she asked him a question.
Ananya:
“When you bought the company, how long did you plan to own it?”
Rahul thought for a moment.
“Several years.”
“Why?”
“Because I believed the business could continue growing.”
“Has that belief changed?”
“No.”
“Has something fundamentally changed about the company?”
“Not really.”
“Then what changed?”
Rahul looked at the ₹2.5 lakh gain glowing on his screen.
“I have something to lose now.”
Ananya smiled.
“That’s different.”
She walked to the whiteboard and wrote:
GOAL: LONG TERM
FEAR: SHORT TERM
“Your investment view may still be long term.”
“But now you’re worried about what could happen in the short term.”
Rahul nodded.
“Exactly. What if the stock falls tomorrow?”
“What if ₹7.5 lakh becomes ₹6.5 lakh?”
“I’ll regret not selling.”
Ananya picked up the marker again.
This time she wrote:
PUT OPTION
Rahul looked puzzled.
“Options?”
“I thought those were mainly for traders.”
“They can be used for trading,” Ananya said.
“But options can also be used as part of a hedging strategy.”
She gave him an example.
“Suppose you own a bike worth ₹1 lakh.”
“You buy insurance for it.”
“Do you buy insurance because you expect an accident?”
Rahul laughed.
“Obviously not.”
“You buy it because you want some protection if something goes wrong.”
She pointed at the words PUT OPTION.
“A put option can play a somewhat similar role in a portfolio.”
“If an investor owns shares and is concerned about a possible decline, buying an appropriate put option can help limit downside risk for a defined period.”
Rahul looked interested.
“So I can continue holding the shares?”
“Potentially, yes.”
“But remember, protection isn’t free.”
“You pay a premium for the option. And how much protection you actually get depends on factors such as the strike price, expiry and number of contracts.”
Rahul nodded.
“So the decision isn’t simply…”
SELL or HOLD.
“Exactly.”
“Depending on the investment, the available contracts and your objective, hedging may be another strategy worth understanding.”
Rahul looked back at his portfolio.
A few minutes earlier, he had been ready to sell simply because he was afraid of losing a profit.
Now he was asking a different question:
“Has my investment thesis changed… or am I reacting to short-term fear?”
Ananya smiled.
“That is a much better question.”
