Sebi allows mutual funds to write call options under certain conditions

Here is the actual document.

I don't think this will change anything, until and unless they change the weird margin requirements. Covered Calls should be without margin, as the rationale for blocking margin is to force the writer to honour their obligation but in a covered call shares are being transferred thus there is no risk of dishonouring the obligation.

Covered calls are used to generate income in range bound markets.

In case of falling markets they are coupled with a long put option to "collar" (yes MF were allowed to buy options earlier to hedge but never did, as cash settlement defeats the whole purpose of hedging. Because say you bought Reliance at 1100 + 1080 put option for 20 at expiry it settles at 1000 you will make 60, but will keep shares which have an effective cost of 1040, which can just keep on falling instead of offloading the shares to the writer who assumes the risk of further fall.) where the sold call acts as a finance to the bought put else the premium paid for the put would just be a draw-down.

But this has already been defeated given that they allowed calls to be written on only those shares which aren't hedged using another option.

In case they don't change the margin requirements, the funds can just sit on sidelines, closet index, get market returns and when the fall stops just average down the holdings using the cash which otherwise would be locked in the margin.

Overall though it feels like an attempt to allow active funds to generate some alpha and get people to put money in those instead of ETFs and Index Funds.

/r/IndiaInvestments Thread