Options

How to Hedge a Portfolio Using Options: Hedging in Practice

Astron Team · 09/24/2026 · 4 min read

Hedging is the name given to any trade made with the goal of reducing the risk of another existing position, not of generating profit on its own. In the options market, the most common form of hedge for someone holding stock is the use of protective puts — insurance with a defined price against the asset falling.

The scenario: a portfolio exposed to a drop

Suppose you hold 500 shares of a company, bought at R$ 40.00 each, totaling R$ 20,000.00 invested. You believe in the company's long-term potential, but fear a sharp short-term drop because of a specific event — a quarterly earnings release, for example. Selling the shares would mean giving up the long-term position; doing nothing means accepting the full risk of the drop. Hedging with options offers a middle ground.

Setting up the protection with puts

You buy 5 put contracts (covering the 500 shares, considering lots of 100 shares each), with a strike of R$ 38.00 and a premium of R$ 1.00 per share, totaling R$ 500.00 in cost (500 shares × R$ 1.00). This premium is the price of the insurance: regardless of what happens, you've already spent that R$ 500.00.

How the result plays out in different scenarios

If the stock falls to R$ 30.00, your stock position loses R$ 5,000.00 (500 × R$ 10.00). But the puts, with a R$ 38.00 strike, are worth at least R$ 8.00 each (38 − 30), generating a gain of R$ 4,000.00 (500 × R$ 8.00) that offsets much of the loss on the stock. Deducting the R$ 500.00 premium paid, the net loss on the combined trade comes to R$ 1,500.00, much smaller than the R$ 5,000.00 you would have lost without the protection.

If, on the other hand, the stock rises to R$ 46.00, your stock position gains R$ 3,000.00 (500 × R$ 6.00). The puts expire worthless, and you lose only the R$ 500.00 premium paid for them. The net result comes to a R$ 2,500.00 gain — smaller than the R$ 3,000.00 without protection, but still positive. That R$ 500.00 difference is, in practice, the cost of the insurance, paid regardless of whether the scenario plays out or not.

What the hedge actually delivers

Notice that the hedge doesn't eliminate the risk of loss — in the drop to R$ 30.00, you still lost R$ 1,500.00 net, just a much smaller amount than without the protection. What it does is cap the maximum possible loss at a value known in advance, trading part of the upside potential (the premium cost) for that predictability in the worst-case scenario. It's a risk management decision, not a way to eliminate market uncertainty.

When it makes sense to consider this type of protection

• Before events with the potential to generate high, concentrated volatility, like an earnings release.
• When you don't want to give up a long-term position, but recognize elevated short-term risk.
• When the premium cost, calculated in money, is compatible with the amount of protection you're seeking — a hedge that's too expensive may not be worth it relative to the risk being protected against.

Using options to hedge a portfolio requires understanding that this protection has a certain cost and a conditional benefit — it only "pays back" the premium, and more, if the downside scenario actually materializes. Even so, for anyone who wants to keep a long-term position without being fully exposed to a specific short-term event, it's a concrete tool, with a result you can calculate even before applying it.

Adjusting the size of the protection to the risk you want to cover

It doesn't always make sense to protect 100% of the position. Buying puts for only half of the 500 shares, for example, cuts the premium cost in half, but also cuts the compensation received in case of a drop in half. This decision depends on how much risk you're willing to leave uncovered: partial protection costs less and still reduces the impact of the worst-case scenario, without eliminating exposure entirely — a middle ground many investors prefer over the cost of full protection.