Nifty covered call - My experiment

A covered call strategy is one where an underlying stock is bought and then its ATM call option is sold. The value of underlying stock should be equal to 1 lot size of options e.g. if the stock's option lot has 25 shares then 25 shares need to be bought.  This trade can be taken on monthly basis using monthly expiring option. There are 3 possible outcomes after the call option is sold:

1. Stock goes up b/w previous expiry date and current expiry date- In this case any increase in stock value will be offset by loss in call option

2. Stock remains at same price b/w previous expiry date and current expiry date - In this case there will be no increase in stock value but the entire call option premium will be profit

3. Stock goes down by next expiry date - In this case there will be drop in stock value but the entire call option premium will be profit

This strategy works on assumption that over long term the underlying stock will give gains in spite of fluctuations in stock price over short term and idea is to pocket the call option premium on monthly basis.

Same kind of strategy can be run on Nifty options after doing investment in Niftybees whose value depends on Nifty. For selling 1 lot of Nifty call options equivalent amount of Niftybees should be bought. 

Taking an example assume Nifty is at 25000 and Niftybees is trading at 250. Now 1 Lot of Nifty has 75 options. Total notional value of 1 lot of Nifty then will be = Lot size * Nifty value = 25,000 * 75. Number of Niftybees to be bought will be = Nifty notional value/ Niftybees value = 25,000*75 /250 = 7500 so 7500 Niftybees need to be bought to do covered call strategy with 1 lot size

In my case I always took 3% away Nifty OTM call option for next monthly expiry on the expiry day of current month expiry around 3 PM. To explain say Nifty is trading at 25800 on monthly expiry day at 3 PM. So 3% away ATM option is at 25800 *1.03 = 26574 = 26550 . Now you can sell 26500CE or 26600 CE option also as options ending in 100 have more liquidity as compared to ones ending with 50. 

I am running this strategy from Jan 2025 monthly expiry and the results for various months are documented below for 1 Lot:

Year 2025 Returns

Expiry	Entry Date	Exit Date	CE Sold	Entry Price	Exit Price	PnL per Lot
Jan 25	26-Dec-24	30-Jan-25	24400	192.5	0	14,438
Feb 25	30-Jan-25	27-Feb-25	23900	214.8	0	16,110
Mar 25	28-Feb-25	27-Mar-25	23200	57.5	404	-25,988
Apr 25	27-Mar-25	24-Apr-25	24300	110	0	8,250
May 25	24-Apr-25	29-May-25	25000	181	0	13,575
Jun 25	29-May-25	26-Jun-25	25600	151.65	0	11,374
Jul 25	26-Jun-25	31-Jul-25	26300	107	0	8,025
Aug 25	01-Aug-25	28-Aug-25	25600	51.05	0	3,829
Sep 25	28-Aug-25	30-Sep-25	25350	81	0	6,075
Oct 25	30-Sep-25	28-Oct-25	25800	24.4	136.2	-8,385
Nov 25	29-Oct-25	25-Nov-25	26800	79.4	0.3	5,933
Dec 25	25-Nov-25	26-Dec-25	26800	105.25	1.5	7,781
Total						61,017

In Oct'25 the CE option was taken 6% away from ATM as past 6 months had given positive returns. 

2025 Overall Returns Breakdown

• Initial Capital Deployed (26-Dec-2024): ₹17,81,317 (6,705 units of NiftyBeES @ ₹265.67; Nifty @ 23,750.2)

• Holding Value at Year-End (26-Dec-2025): ₹19,74,421 (6,705 units @ ₹294.47)

• NiftyBeES Capital Gain: ₹1,93,104 (+10.8%)

• Call Option Premium Gain: ₹61,017 (+3.4%)

• Total Net Profit: ₹2,54,121 (+14.3% Total ROI)

Year 2026 Returns

Expiry	Entry Date	Exit Date	CE Sold	Entry Price	Exit Price	PnL per Lot
Jan 26	30-Dec-25	27-Jan-26	26700	60	0	3,900
Feb 26	27-Jan-26	24-Feb-26	26000	142.05	0	9,233
Mar 26	25-Feb-26	30-Mar-26	26300	121.75	0	7,914
Apr 26	Trade not taken					-
May 26	Trade not taken					-
Jun 26	29-May-26	30-Jun-26	24600	140	0	9,100
Jul 26	30-Jun-26	28-Jul-26	24700	101	0	6,601
Aug 26	29-Jul-26	25-Aug-26	24700	119	0	7,751
Sep 26	25-Aug-26	22-Sep-26	24900	97	1.4	6,214
Oct 26	30-Sep-26	27-Oct-26	24000	23.3	0	1,515
Nov 26	28-Oct-26	----	24100	26.1	-	Active
Total						52,228

Note (14-Apr-26): Because of high VIX the strategy is stopped for Apr'26 month as there is a high chance of Nifty bounce. 

Note (31-May-26): Strategy is restarted from June expiry

Note (30-Aug-26): After I got my hand on free version of Gemini pro through JIO subscription I ran the backtest for this strategy from 2021 onwards (2020 was a volatile year so left that out) and monthly option of 6% away from ATM provides optimal returns as shown below. 

Note (1-Nov-26): Now my Niftybees investment is equivalent to 3 lots of NIFTY so I am now taking 3 lots of position. 

Note (7-Nov-26): In Nov, the market has already run 10% from the time the OTM option was taken and it is running a loss of 63k per lot. 

We have to understand here that covered call position is not in a loss; it has reached its maximum profit cap for the November cycle.

When trading covered calls, looking at the short CE in isolation creates the illusion of a massive deficit (₹988 vs ₹26 premium received). Because we hold the underlying NiftyBeES, every rupee lost on the call above 24,100 has been matched 1:1 by capital appreciation on units. Net position has achieved the exact maximum outcome designed when entering at 24,100: all the upside of Nifty up to 24,100, plus the 26 points of premium.

Why "Rolling to Recover Losses" is Dangerous

Rolling a deep in-the-money (ITM) call to "recover" premium usually leads to structural errors:

1. Delta is near 1.0 (Almost pure intrinsic value): The 24100 CE at 988 contains virtually zero extrinsic (time) value. Cannot extract meaningful theta decay from it anymore.
   
   
2. Rolling up requires paying a massive debit: To move the strike from 24,100 up toward the current spot (e.g., December 25,200 CE), we must pay out a large net cash debit. We are effectively realizing a ₹960+ loss on the call and betting that Nifty will not pull back.
   
   
3. The Whip-Saw Trap: If we pay a large debit to roll up to December and Nifty corrects downward, NiftyBeES drops in value, while the cash debit paid to close the Nov call is gone forever. We turn a capped winning month into an actual net loss.
   
   

Practical Management Approaches

Approach	Execution	Best Used When	Trade-off
1. Hold to Expiry & Reset	Let November expire. Close or let the CE settle against cash, then sell a fresh OTM call for December at the new market levels.	We run a mechanical, long-term buy-and-hold index strategy.	Caps November gains at 24,126, but avoids paying premature debits or friction.
2. Roll Out at the Same Strike (Calendar Roll)	Buy back Nov 24100 CE and sell Dec 24100 CE only if we receive a net credit (extrinsic value of Dec > extrinsic value of Nov).	We want to lock in additional premium without taking on any downside basis risk.	Keeps upside heavily capped at 24,100 through December, delaying spot participation.
3. Roll Up and Out for Flat / Small Credit	Buy back Nov 24100 CE and sell a slightly higher December strike (e.g., Dec 24300–24400 CE) where premium received>= debit paid.	We want to gradually raise ceiling without paying out-of-pocket cash.	May only move the strike up 100–200 points due to low extrinsic value on deep ITM strikes.

The Recommended Play

If our systematic plan is to hold NiftyBeES for long-term compounding and harvest monthly yield, do not panic-roll for a large debit. Treat November as a completed maximum-gain cycle:

1. Wait until expiry week (when time value hits zero and tracking error between future and spot diminishes).
2. Square off the ITM call at expiry, absorbing the call settlement with NiftyBeES unrealized gains.
3. Write a new monthly out-of-the-money (OTM) call for December based on prevailing spot and delta rules (e.g., 6% OTM).

Strategy Backtest Comparison: 3% OTM vs 6% OTM (2021 – 2026 Oct end)

A historical comparison of selling 3% OTM versus 6% OTM Nifty monthly Call Options on monthly expiry day (at 15:00) carried till the next expiry:

Year	Trades	3% OTM PnL (₹)	3% Win Rate	6% OTM PnL (₹)	6% Win Rate	Key Takeaway
2021	12	-₹3,056	9 / 12 (75%)	+₹16,131	11 / 12 (92%)	6% avoided capping during sharp post-budget & autumn rallies.
2022	12	-₹1,493	8 / 12 (67%)	+₹30,115	10 / 12 (83%)	Volatile market; 6% captured rich premiums with 0 intrinsic drag.
2023	12	-₹48,749	8 / 12 (67%)	-₹13,875	10 / 12 (83%)	6% reduced late-year breakout losses by ~70%.
2024	12	+₹24,637	10 / 12 (83%)	+₹14,975	11 / 12 (92%)	11 full zero-decays; consistent stress-free returns.
2025	12	+₹61,017	10 / 12 (83%)	+₹9,267	12 / 12 (100%)	Low-volatility consolidation favoured higher premium 3% strike.
2026 (Oct)	8	-₹44,945	5 / 8 (62%)	+₹13,153	7 / 8 (88%)	6% avoided major drawdowns during spring bounce.
Total (2021-2026)	68	-₹10,590	73.5%	+₹69,766	89.7%	6% OTM generated +₹80,356 higher alpha.

Conclusion: While 3% OTM collects higher upfront premium, sharp +5% to +8% monthly rallies regularly wipe out accumulated profits. Moving to 6% OTM delivers an 89.7% win rate, protects underlying NiftyBeES compounding, and yields superior risk-adjusted net returns.