Options Overlay Strategy
InvestmentsOptions overlay strategies use derivatives (options contracts) alongside an existing portfolio to generate additional income or provide downside protection. Covered call writing is the most common -- you own shares and sell call options to earn option premium income.
In detail
Covered call strategy:nOwn 100 shares of Nifty ETF. Sell one call option (right to buy at strike price). Receive premium upfront.nIf market stays below strike: option expires worthless, you keep premium.nIf market rises above strike: ETF units called away, you miss upside above strike.nnSuitable for: large equity portfolios (typically Rs 20L+) as modest income enhancement in sideways/mildly bullish markets.nnNot suitable for: retail investors with small portfolios, volatile markets, or those who do not understand derivatives.nnIndia-specific: F&O (Futures and Options) requires minimum lot sizes. Nifty options: lot size 50 units. Margin requirements. Not recommended as a starting point for most investors.
Formula
Real-life example
Arun holds 500 units of Nifty 50 ETF (value Rs 11L). He writes one lot (50 units) of Nifty call at 500 points out of money for Rs 180/unit premium = Rs 9,000 income. If Nifty stays below strike: he keeps Rs 9,000 extra income. If Nifty rises 600 points: his ETF gains but the 50 units are called away at the strike -- he misses some upside. Monthly premium: approximately 0.8% of portfolio = 9.6% annualised extra income.