An Empirical Investigation into Performance of Covered Call Strategy on S&P CNX Nifty

Abstract

The purpose of this article is to assess the petf'ormance of covered call strategy on the S&P CNX Nifty index. Index based covered call strategy entails writing ofa call option on an equity index against a long position in the same underlying equity index. The study was carried out using daily closing prices of call options on the S&P CNX Nifty available on the National Stock Exchange of India, for the period of ls/October 2005 to 30th September 2010. Depending on the moneyness of the call option,five types of'calls namely, ATM, 2%ITM, 5%1TM, 2%OTM, and 5%OTM were employed; options had expily of one month, two months, and three months respectively. On eve,y trading day, the index was purchased at the closing price, and the five types of the call options (with different maturities) were sold. On the next trading day, all the positions were squared- off at the closing prices; and a new cycle was started, which was squared-off on the next trading day and so on. Returns are calculated on daily basis. Overall, results suggest that the 5%ITM covered call strategy outpe,forms the index under standard pe,formance measures for all expirations. This au/performance is robust to measures which specifically take into consideration the non-normality of returns distribution.