We Tested Covered Calls on 10 Indian Stocks | The Long & Short Ep. 54

Start your investing journey for free! Open a zero-brokerage Demat and trading account with Zerodha to invest in Stocks, Mutual Funds, ETFs, and Bonds: https://zerodha.com/open-account/?c=Z... Is there really such a thing as "free money" in the markets? And if covered calls are one of the most popular option strategies ever sold to investors, why was the man who co-created the Black-Scholes formula not convinced? We start with how covered calls are pitched to investors, as a way to earn "free money" on stocks you already own, and why even Fischer Black, co-creator of the Black-Scholes formula, was skeptical of the idea. We then look at the history of the strategy, how it was sold by brokers over the decades, and what a behavioral study on Dutch investors revealed about why people find it attractive in theory but less so when they actually see the payoff. The episode breaks down the mechanics of a covered call with real numbers, what happens when the stock falls, stays flat, or rallies, and why the strategy has a capped upside but nearly full downside. Finally, we run a backtest on 10 of the most liquid large-cap Indian stocks from January 2022 onward, selling a 5% out-of-the-money call every month, and compare the results stock by stock to see whether covered calls actually add value to a buy-and-hold portfolio in India. Welcome to The Long and The Short, a show where you can expect an honest take on trading and investing, something you won't hear elsewhere. I'm your host, Sandeep Rao (SEBI Registered Research Analyst - INH000013059). ⏱️ Chapters 0:00 – Introduction: covered calls sold as "free money" and why the pitch is everywhere. 02:29 – What a covered call is: owning a stock and selling a call, naked calls vs covered. 05:03 – The history: from an 1877 London pamphlet to the 1973 Chicago Board Options Exchange. 07:24 – Why it's popular: a behavioral study showing how presentation changes investor preference. 10:00 – The backtest setup: 10 large-cap stocks, selling 5% OTM calls monthly from Jan 2022. 12:30 – Stock-by-stock results: HDFC Bank gains, Adani loses, and everything in between. 15:05 – The standout case: Reliance's stock up 23% but covered calls returned 70%. 17:17 – Conclusion Resources: PPFAS Mutual Fund, Note on Covered Call Options: https://amc.ppfas.com/schemes/parag-p... Note: Some image(s) may have been created using Al, no copyright infringement is intended. If you prefer reading, we've written a post about this episode here: https://inthemoneybyzerodha.substack.... Do check out our newsletter "Aftermarket Report" where we do a quick daily wrap-up of what happened in the markets, both in India and globally. here: https://aftermarketreport.substack.com/ Check out Varsity Live, a hands-on way to learn finance with experts. Instead of only listening, you practice in real time through activities like personal finance planning, technical charting, balance sheet analysis, and more: https://varsitylive.zerodha.com/home Disclaimer: Investments in securities are subject to market risks. Please read all related documents carefully before investing. SEBI registration does not guarantee the performance of the intermediary or assure returns to investors. The securities mentioned are for illustrative purposes only and do not constitute a recommendation. By proceeding, you acknowledge and agree that any returns shown on this platform are solely for informational purposes. They are not intended to serve as advertisements or promotional material, nor should they influence your investment decisions. Trading and investment decisions should be made at your own discretion, and it is strongly advised to consult a qualified financial advisor before acting on any information provided. About Zerodha At Zerodha, we simplify complex financial topics to empower you with the knowledge to make smarter investment choices. Whether you're just getting started or looking to sharpen your skills, we're here to help you navigate the financial world with clarity.