Algo Trading in India |
  • June 16, 2020
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Covered call is one of the widely used Option Trading strategy to generate a income month on month. Where we simply buy the underlying and short OTM options. The expectations behind Covered Call strategy is Market usually moves up like a snail and drops like a stone.

In this article, we will Buy Nifty Bees and Short OTM options of Nifty. That’s how a Index movements will be, it gradually moves up, so if when short OTM Call options and Nifty doesn’t make any wild up-move, our OTM options expire worthless and thus providing a profit for the trade. Even if there is a up-move, since we already hold the Nifty bees positions, the losses from shorting OTM calls would be offset by profits made by Nifty bees holding.

First we need to gather Nifty historical data and see how it performed month on month for last 10– 12 years to know the volatility of the index. So I checked the monthly returns of Nifty index from 2007 to 2020. This is how the scatter plot of returns looks like, as you can see most of the time Nifty movement was between -5% to +5%, it oscillated between this range only mostly. Out of 174 months, only 38 times, Nifty made more than 5% up move which means 80% of the time, if you short OTM call options that are 5% away, it would expire worthless and generates a income for you.

Out of 174 months, only 9 times, Nifty made more than 10% up move which means 95% of the time, if you short OTM call options that are 10% away from underlying, it would expire worthless and generates a income for you every month. But remember these far away OTM options will have lesser premium.

So we need to find out a optimal strike and keep shorting it every month. So that we get good premium. We considered OTM call options that are 3% away from spot, every month at the start of new expiry, we check this strike and short it.

The covered call strategy has given positive returns when tested with the 12 years of historical data, generating positive returns year on year, with only 2 years negative. Years like 2008 when the market tanked badly, options that we sold has yielded positive returns offsetting most of the losses we incurred by buying Nifty.


If we had invested only in Nifty we would have got 4.5 lacs profits, but with covered call strategy, we can pledge this Nifty that we bought and use that to short call options every month, so that it can generate additional returns over the years, where it generated additional 1.12 lacs with this strategy. So covered call is really a viable strategy to generate additional returns over the long term, provided we choose the right strikes, too far strikes might not have enough premiums, choosing the right strikes helps. 

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Lets us know what do you think about Covered Call strategy in the comments section

19 comments on “Nifty Covered Call Strategy

  1. Thank you very much for sharing with back-tested results. what to understand whats the pros and cons if we buy Niftybees vs stocks covered calls

    Thanks in Advance

    1. Yes, I am also confused with this point because inn some youtube videos they said to buy 1000 nifty bees quantity and in other videos they said 7500 nifty bees quantity. Please clarify this.

      That would be really helpful!!

      1. You have to buy 7500 qty nifty bees.
        Assuming that nifty is at 15000. Then the lot value of nifty is 15000 x 75 = 11,25,000/-.
        To equate the nifty lot value with nifty bees you have to divide 11,25,000/- ÷ one nifty bees cost. The you will get the qty of nifty bees. 1125000÷150 = 7500.
        It is always 7500.

        1. nifty bees price is 163 today on may 27th 2021. so to buy Nifty bees as collateral you have to pay 163x 1000- Rs-160000

  2. What if we sell an ITM put every week and keep till expiry? (One put sell for total contract value ie if nifty is 14500 and lot size is 75 then 10.87 lac)

    1. As the author said, market “moves up like a snail and drops like a stone”. Index might never gain 1000 points in a day buy it can surely fall that much in a day during a crash. When it crashes quickly, put option premium will not just rise linearly but multiplied with greeks, your loss can be too big.

  3. Can I sell weekly OTM Call options with covered call.. I think it will give more returns than monthly.. any downsides?

  4. if nifty fall 400 points than nifty bees also fall from 169 to 165 than OTM short call option will fail ??

    1. If the market falls your OTM call option will be in profit. So it will make up the fall in value of nifty bees.

  5. This looks good, but setup is not having much protection on downside. If nifty makes violent moves like COVID 1st wave our loss would be much more higher..

    1. where is the loss… are not booking will hold the bees and wait for a bounce which is sure sooner or for marriage cannot be invested bhai..

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