A section of mutual funds is turning to covered call options strategies to navigate current market turbulence. According to several mutual fund executives, arbitrage funds, equity savings funds and specialized investment funds (SIFs) are using this strategy when they expect stocks to decline or rise only modestly. As reported by Stock Market News, Laukik Bagwe, chief investment officer - SIF at ITI Mutual Fund, stated that arbitrage funds are increasingly adopting covered call strategies on both individual stocks and the index, with the objective being to preserve capital while earning incremental income rather than generating outsized returns.
The covered call strategy involves buying stocks and immediately selling call options on the underlying stocks. According to Stock Market News, a fund manager buys a stock at ₹100 at the beginning of the month and sells someone the right to buy it at ₹105 at the end of the month. The buyer pays a premium for this right, which the fund manager keeps if the stock expires below or at ₹105. If the stock drops to ₹95, the buyer won't exercise his right, and the call option expires worthless, limiting the fund manager's loss to ₹3 instead of ₹5 without the covered call strategy.
Mutual funds held pure equity and hybrid assets worth ₹48.86 trillion as of June end, up 3% from February end, according to Association of Mutual Funds in India (AMFI) data. As reported by Stock Market News, prior to the war, covered stock call outstanding net sale positions of domestic institutional investors rarely exceeded 300,000 contracts, but after the war began, outstanding net DII sales have since exceeded 400,000 contracts, rising to as much as 556,084 on 24 March when the war was at its peak. The outstanding sales stood at 433,542 contracts as of last Friday, with the Nifty down one fifth of a percent month-on-month at 23,767.
Indian markets have turned choppy since the war began on 28 February, with the Nifty falling 5.6% since the war began through 23,767 on Friday, according to exchange data. As reported by Stock Market News, Harish Krishnan, CIO at Aditya Birla Sun Life AMC Ltd, noted that SIFs are a nascent category and adoption of different strategies will evolve as more funds are launched and managers observe what works over different market cycles. Nilesh Shah, managing director at Kotak Mahindra Asset Management Co, indicated that so long as the geopolitical situation remains uncertain, such covered call strategies could continue, especially by SIFs that have become active over the past few months.
