Are Options Trading Strategies Really Effective for Hedging in the Indian Derivatives Market?

Hedging being a predominant financial concern, is considered as a robust method of managing investment risks. Literature evinces that the covered call strategy provides nominal returns alongside effective hedging. However, studies have not compared the hedging effectiveness of covered call, covered put, collar, and synthetic long call strategies in the equity segment. The study evaluates the hedging effectiveness of option trading strategies by applying them to the companies of the top six National Stock Exchange (NSE) sector indices for twelve years, from 2009 to 2020 under volatile and neutral market conditions. The study collects data of 18,720 option contracts and considers 3744 observations for each strategy. The panel regression analysis approach is being incorporated into the study. Hausman test results determine the appropriate model between fixed and random effects. Furthermore, the study compares the mean scores of selected strategies to identify significant differences between the groups using the Games-Howell Post Hoc Tukey Test. The study recommended covered call and covered put strategies effectively hedge the investment in both market conditions. The study’s findings help retail investors choose a better hedging strategy and employ the same in their trading, specific to the market condition. Future studies can apply and compare the effectiveness of these strategies in other emerging derivative markets.