does market know its direction?

In the long run equity markets behave in a certain way and historically we observe a certain trendline- Indian markets growing approx. 12% per annum. So based on historical and macro-economic data  trendline can be extended to fairly estimate the course of the market and make returns at least equal to the market growth. But in the short and medium term there are many course corrections which give an opportunity to increase ROI which fairly low additional risk. 

One options strategy to increase our returns is covered-call strategy.

Assume we are long-term invested in NIFTYBANK. One of the easiest method is to buy NIFTYBANK ETF and hold for long term. To implement covered call strategy we need to have NIFTYBANK ETF equal to 1 lot size of NIFTYBANK. (There can be other ways like holding one lot of Futures)

1 lot size of NIFTYBANK 15

Index value, 49600 at the time of implementation,

Nippon ETF trade price INR 503 (i.e. 100 ETF per index), there is slight premium in ETF compared to index value so ETF price is not 496.

so quantity of ETF to have 15x100 = 1500; INR value at current price 1500x503 ~ INR 7.5 lacs (this is in holding already)

Covered-call strategy to take benefit of call premium decay (called theta decay / time decay)

During expiry day on 30th April, following transactions took place:

underlying: NIFTYBANK

sell Call option: 08-May-2024 CE 50000 @362 INR

square off price: 08-May-2024 CE 50000@262 INR

profit: 15 x (362 - 262) = INR 1500

Explanation

Next week call option was sold as 30th April is expiry day, so if market goes opposite of the expectation, one can wait for a week for it to come down and need not settle the position at loss immediately. Alternatively if current week call is sold, then one can roll over in case of loss.

strike CE 50000 was chosen as it is out of money next-week call with maximum premium at the time of selling. 1500 ETF position is already there, so this is not naked call selling and position is protected on the upside. As we have long term positive view on the market, downside risk is not important for consideration.

It can happen that market still goes up and call selling end in loss, but next weekly call has more premium so next weekly call can be sold at profit. Call premiums have theta decay i.e. time decay, so next weekly call has more premium and rolling-over results in profit. In the short to medium term market keep on fluctuating and gives an opportunity to exit at net profit. ETF position is long term investment so continue to hold

Worst case: Market does not come back at previous level for quite long and impatience prevail, then both ETF position and call can be squared off. ETF will make a profit and call selling will make a loss, but due to premium eating profit figure will be bigger than loss figure. Then other strategies can be used for re-entry at suitable time.

Disclaimer: This example is for illustrative purposes only and should not be considered as financial advice. Options trading involves risks and requires careful analysis and understanding of market dynamics. Do your own research before investing.