Covered Calls on Diversified Portfolio

I was asked in one forum today about writing covered calls on diversified portfolio. I gave a thought to it but it appears that this will be difficult.

Theoretically, it should be possible to write options on nifty portfolio if you have some or all nifty stocks. The ideal way is you build a portfolio taking at least 80% weight age Nifty stocks and then write options on nifty. The other way is to take position in Nifty Future and hedge it by selling calls. However, there you need to be ready with margin calls money in case future drops dramatically.

In fact some point next year I will be doing that for a portfolio size of approx 10 lakhs. However, we need to continuously monitor nifty weight age and make some adjustments to stock positions.

However, there is bigger advantage in selecting individual stocks for covered call writing. Stocks tend to have higher volatility compared to Index, so you get better premium. Like in case of TTML, I was able to write option at strike price of 40 when stock was at 32. That is 25% higher than CMP. And to top it further, I got nearly 2% of stock price (65 paise) as premium. This gives us a lot of safety margin.

In fact many stocks which are active option stocks and are in sub 50 Rs price and total lot value of less than 4,00,000 Rs are good candidates for Covered call writing. However, one must be willing to hold these stocks for long period in case the market gets in downturn and hence the stock needs to be fundamentally a promising one.

I will do some calculations about Covered call writing on nifty portfolio over wek end and then post it here.