Buy A Cushion When A Fall Is Imminent

With the Sensex at its current lofty levels of over 10,000 points, the main risk for most stock portfolios is market risk, also known as systematic risk. A question some investors may have at this point is whether it is possible to buy insurance for their exposure to the stockmarkets. After all, an adverse news development like an unfavourable budget announcement would certainly lead to a substantial price correction.

The good news is that there are several kinds of insurance policies available in the stockmarket. In fact, these policies have been running for some time now - since June 2000, to be precise, when equity derivatives were introduced to the Indian stockmarkets.

Insurance can be bought by investors for their stock portfolios, either by selling futures or buying put options. By selling futures, investors can gain when the market falls, which can offset the loss in their portfolio. The risk of the stock prices falling, therefore, is eliminated.

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