AN EMPIRICAL ANALYSIS OF COVERED CALL STRATEGIES: PROFITABILITY ASSESSMENT ON NIFTY 50 STOCKS

Abstract

This study explores the performance of a covered call strategy applied to NIFTY 50 stocks. By combining a long position in the underlying stock with a short call option on the same stock, this strategy has the potential to generate higher returns with lower volatility than holding the stock alone. Specifically, it seeks to provide additional income by selling far out-of-the-money (OTM) call options on a monthly basis. The proceeds from selling these options serve as a supplementary income stream for investors. The process begins with purchasing shares of individual NIFTY 50 stocks in the cash market, in quantities that match the exchange-allotted lot sizes. These shares are then pledged with a stockbroker to obtain collateral margin, which allows for trading in futures and options. This collateral margin is used to sell the monthly OTM call options, thereby implementing the covered call strategy. The strategy is examined over a period of 12 months, covering all months in 2022, to assess its performance and potential benefits. By conducting this study, investors can gain insights into how a covered call strategy on NIFTY 50 stocks could enhance their returns from long-term holdings.