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)
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 | 9,084 |
| 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 | 24900 | 97 | - | Active | |
| Total | 44,483 | |||||
Strategy Backtest Comparison: 3% OTM vs 6% OTM (2021 – 2026 YTD)
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 (YTD) | 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. |
Hi just curious to know, what was the reason behind choosing 6% for October? I get the point that past 6 months 3% distance gave return but what was the mathematical logic to take the decision for October and let’s say August or something and why 6%?
ReplyDeleteNo specific logic to change it to 6%. Just that the probability of bounce becomes higher along with the profitable months. Somehow the bounce came in same month in which change was done. If someone can back test various %ge away OTM to see which one gives best result over the years, then that will be better than taking 3% away OTM
DeleteDid you purchased PE options to protect the Nifty Bees from downside risk?
ReplyDeleteNo. This is based on the assumption that over long term Nifty will end positive so holding Nifty Bees is the key even if it goes down.
DeleteHi. Do you sell the BEEs when the call option ends in negative or you take the loss and sell another higher call for next month? Have you thought of selling the BEEs to offset the call loss and buy them again next day?
ReplyDeleteI retain the bees and sell a higher call option in case previous month call options ended in loss. If I sell the bees and buy them again the value will be same but additional trading charges (brokerage, STT, Stamp duty, transaction charges) will be there so no benefit in doing that
DeleteThanks a lot for replying. Usually when the BEEs are in loss the index or stock would be in profits higher than the loss in the call. In that case will it not make sense despite the other transaction charges? If you don't sell them and then in the next month let us say Nifty goes down, the CE sell only gives you so much, right? I am sorry if i am not asking the right question.
DeleteThanks a lot for the reply. Let's say you don't sell the BEEs and by next month Nifty falls, your BEEs value goes down. At least had you sold the BEEs last month, you would have made money on the BEEs though the CE sell would have been in loss despite the transaction charges. Not sure if i am making sense?
DeleteHere we need to sell next month CE option on current month expiry on month over month basis and need to have NiftyBeES as underlying holding for that so NiftyBeES holding has to be continuously maintained
Delete