Hedging uses options to limit downside on positions you already hold. Like insurance, it costs a premium — but it can keep a bad week from becoming a disaster.
Protective put
Buy a put against a holding. If the stock/index falls, the put gains and offsets the loss below the strike; your downside is capped, your upside stays open. Cost = the put premium.
Collar
Buy a protective put and sell an OTM call to fund it. The call premium reduces (or removes) the hedge cost, in exchange for capping your upside at the call strike. A popular low-cost hedge.
Index hedge
Hedge a basket of stocks with NIFTY/BANKNIFTY puts instead of buying a put on each name — cheaper and simpler, though it only covers broad-market moves, not stock-specific risk.
How much to hedge? Match the hedge's delta/notional to what you want protected. Over-hedging drags returns; under-hedging leaves a gap. There's no free lunch — a hedge trades some upside or some cash for peace of mind.
Model a protective put or collar in House of Trading to see the exact protected level, the cost, and the net payoff before you act.