How Can Options Be Used to Hedge a Stock Portfolio?

Options can be used to hedge a stock portfolio through strategies like purchasing protective puts. An investor holding a portfolio of stocks can buy put options on an index that tracks their portfolio.

If the market declines, the value of the put options will increase, offsetting some of the losses in the stock portfolio. This strategy provides downside protection while allowing the investor to retain the potential for upside gains, minus the cost of the option premium.