What is Naked & Hedged Short? Difference explained | What is Hedging?| Intermediate Level (in Hindi)

If you want to earn money from the falling market then you can do so through short selling. In the market, you sell first and buy later. But the question is, how will you short a stock or index that you do not even own? Hello everyone, I am Aastha Khurana, and welcome to Zerodha Varsity videos. To answer your question, how you can sell a stock that you don't have? You can, and it's called naked short. In naked shorts, you first sell the stock you do not own intraday and buy it later. But only re

tail investors can do this, institutional investors are not allowed to do short selling even in intraday. For example, Vineet has 100 shares of Tata Motors which he has shorted at Rs 940. Now Vineet will have to square off his position on the same day i.e. intraday itself. This is because in India, you cannot hold overnight short-sell positions. You have to square it off on the same day whether you have profit or loss. We have covered this in detail in this video and also explained the meaning o

f short-sell, so do check that video. You can short the stocks intraday only in the spot market, but when we talk about Futures and Options, you can hold the short sell overnight. In the case of stocks, the expiry of Futures and Options is monthly, but in the case of index, you can see both monthly and weekly expiry in Futures and Options. For example, if we talk about Vineet who had shorted Tata Motors shares, now he is shorting futures on one lot of Tata Motors, and he took this trade on 4th M

arch 2024, and the monthly expiry in March is 28th March. So Vineet will have to square off his position before 28th March, or if Vineet wants, he can also roll over his position. To understand rollover better, do watch this video. Another alternative to naked shorts is that you can borrow stocks and hold it in your demat account. Then you short sell that stock and later when you buy it at a lower price, you keep the profit but you can now return the borrowed shares to the lender. But for this,

the lender charges you some fees, and this process is called SLBM, which means Stock Lending and Borrowing Mechanism. SLBM in itself is a big concept that we will discuss sometime in the future. So let us now understand what hedging and hedge shorts are. Hedging means reducing the risk caused by adverse price movements. Now let us understand hedging with the simple example of car insurance. You take car insurance on the contingency that if it ever meets with an accident, the insurance company wi

ll pay you the claim for which you have paid the premiums. This means that you hedge the financial risk arising from an accident with insurance. Now, to hedge shorts means reducing the risk from your short position. Now what will be the risk in a short position? To protect yourself if the price starts rising instead of falling, you take a long position on the counter. Let us understand with an example. As we had talked about, Vineet had shorted a future lot of Tata Motors, but some positive news

came from Tata Motors, and Vineet feels that this stock may go up a bit before the expiry of March 28, and he wants to protect the value of his portfolio. So what can Vineet do now? He can buy one lot of Tata Motors call option. If the price of Tata Motors rises, then Vineet will undoubtedly suffer a loss on his shorted future lot but will make a profit on the call option he had bought, due to which the impact on his portfolio will be nullified. If the price of Tata Motors starts falling, Vinee

t, who had shorted his futures contract, will see a profit, but the premium of the call option will start falling. But despite all this, the value of his portfolio will remain protected. This means we hedge so that we can protect the value of our portfolio. Now if you are thinking that hedging is a good strategy then it is better to take hedge shorts rather than naked shorts because in naked shorts the profits are limited and the risks are unlimited. So before this, you should know some challeng

es of hedging. First of all, you may have to pay extra brokerage charges, extra capital is required, returns get reduced, etc. So in such a situation, whether you should take hedged bets or naked shorts, it depends on your risk-taking capacity and your capital. So let's conclude this video and understand what we learned from this video. Naked short means that first you sell even if you don't have the stock and later you can buy it, but all this happens intraday only, and institutional investors

can not do short sell intraday. The second point is that hedging means how to protect your portfolio from adverse price movements. Hedge shorts means taking long positions on the counter to protect your short position. And lastly, which type of shorting you can do, hedged or naked, depends on your risk-taking capacity and your capital. I hope you found this video informative. See you in the next video, till then happy investing.