The Securities and Exchange Board of India
(Sebi), in a circular on Wednesday, said that mutual funds (MFs) may write call options under a covered call strategy.
Covered calls are a strategy in which an investor holds a long position in an asset and sells call options on that same asset to generate an income. A call option is a contract where the holder has the right, but not the obligation to buy the underlying asset.
The MFs will only be able to write call options of stocks that are part of the benchmark indices. Sebi
laid down the conditions under which the call writing would constitute as a breach. The total notional value (taking into account strike price as well as premium value) of call options written by a scheme shall not exceed 15 per cent of the total market value of equity shares held in that scheme.
In addition, the underlying shares shall not exceed 30 per cent of the unencumbered shares of a firm held in the scheme. Unencumbered shares are those that are not part of the Securities Lending and Borrowing Mechanism, margin or any other kind of other encumbrances.
In case of any passive breach, the scheme will have seven trading days to re-balance the portfolio.
During such a period, no additional calls can be written in the scheme where the breach has occurred.