Investors in the stock market often seek strategies to protect their equity portfolios from sudden downturns. One effective risk management tool is Long-Term Equity Anticipation Securities (LEAPS), which are nothing but a long-dated options (in derivatives segment) available on the Nifty 50 Index (stocks leaps are not available as of now in Indian markets). These Nifty LEAP options can help hedge against market volatility and limit potential losses, especially in case markets fall significantly.
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What are LEAP Options?
LEAP options are options contracts with expiration dates typically over one year away. They provide a cost-effective way to hedge a portfolio while allowing investors to retain upside potential. LEAPS have the same anatomy as shorter dated equity options in terms of amount of contracts, underlying security, strike price, and expiration date. In India, you have Nifty 50 LEAPS available for every quarter end, such as for Mar, June, Sep and Dec months, also for Mar-2026 and Dec-2026. In US markets, for example, you have LEAPS option available for stocks too.
LEAPS are still a derivatives products carrying higher risk, BUT it’s long term expiry makes it an excellent low cost, hassle free hedging tool. Think how do Mutual Funds hedge their portfolio now-a-days ?
1. Buying Put Options for Downside Protection (Lowest Margin – Higher Risk Strategy)
A common strategy involves buying a LEAP put option on the Nifty 50 Index. This allows an investor to lock in a selling price for the index, ensuring protection against sharp declines.
Example: Suppose an investor holds a diversified equity portfolio correlated with Nifty 50 at 23,000. To hedge, they buy a one-year, one lot, 23,000 put option, by paying some premium (say 500/- per lot). If the index drops below 22,500 (= 23000 – 500), for any reason, the put option starts to gain in value, offsetting losses in the portfolio. While if it closes above 22,000, then you lose all the premium paid (like a term plan insurance). Remember – the idea here is not to make profits, BUT to hedge against losses (see graph below)
In this simple scenario, your margin needed is ~ 37500/- (one lot), while your downside below 22,500 is completely protected.
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Strike : 23000 Put
Premium Paid : 500
Margin Needed : 37,500
Break Even Point : 22500
Max Loss : 37,500/-
Another way to use LEAPs is by selling long-term covered calls to generate income while holding stocks. This works well in sideways or mildly bullish markets or best on bearish markets.
Example: If an investor owns shares of top Nifty 50 companies, they could sell a one-year, one lot, 23,000 call option, by collecting some premium (say 1000/- per lot). If the market closes below this level, they collect the complete premium of 1000×75 (= 75,000) as extra income, to offset any portfolio losses. If for whatever reason, the Nifty goes up beyond 24,000 – then only you start to lose money, which is compensated by the rise in portfolio value. Many professionals OR large institutions with large positions, usually deploy this strategy. See Graph below.
In this scenario, your margin needed is ~ 3,60,000/- (one lot), while your downside below 24,000 is hedged by a maximum profit of 75000/- (i.e 20% return on margin !).
Strike : 23000 Call
Premium Received : 1000
Margin Needed : 3,60000
Break Even Point : 24,000
Max Profit : 75,000
Another way to use LEAPs is to create a Put Butterfly. In this strategy, you need use three options of different strikes. First, you buy one lot of a faraway OTM Put option, sell 2 lots of OTM Put option, and lastly, again buy one lot of closer ATM/ITM put option. This strategy gives the most benefit, if the Index closes within your desired range. Lastly, you can always make some adjustments overtime, to reduce or even make this strategy a zero loss.
Example: Suppose an investor holds a diversified equity portfolio correlated with Nifty 50 at 23,000. Then you can buy a 20,000 put option (1-lot), sell (2-lots) of 22,000 put option, and buy 24,000 put option (1-lot). Depending on the premiums you paid for these respective options, you will have a profitable range of Index close. If you have some knowledge of options trading, then you can even make some adjustments in this strategy and make it zero loss. See Graph below.
In this scenario, your margin needed is ~ 2,20,000/- (one lot), while between the two break-even points you earn profits (even @50% of max profit is ~ 67500/-).
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Strike : 20000@200 / 22000@500 / 24000@1000 Puts
Premium Paid : 200
Margin Needed : 2,20,000
Break Even Point : 20200 / 23800
Max Profit : 1,35,000
Benefits of Using LEAPs
The key risk in using LEAPS is that you are still using derivatives, to hedge against potential loss in equity portfolio, and you MUST have some education in handling options as an instrument (though it not that difficult- if you stick to above simple strategies).
LEAP options on the Nifty 50 Index offers a powerful risk management tool for long-term investors. Whether through protective puts or covered calls or put butterfly, they allow investors to mitigate downside risks while maintaining exposure to market growth. Understanding and implementing these strategies can enhance portfolio resilience in volatile markets, and offers decent protection against big losses in stock market downturn.
Disclaimer: This article is for information purpose only. It is NOT a stock recommendation and should not be treated as such. Read full disclosures here.
