New Delhi, July 28 -- Choppy stocks, cloudy weather-how does one limit losses, protect capital and eke out some incremental gains in this market? Some fund managers have an answer: Covered call options.

A section of mutual funds is turning to a low-risk call options strategy to generate moderate returns and limit losses amid market turbulence. According to several mutual fund executives, arbitrage funds, equity savings funds and specialized investment funds (SIFs) are using this strategy when they expect stocks to decline or rise only a bit. The strategy, which involves buying stocks and selling call options on the underlying stocks, enables the fund to generate incremental returns and preserve capital in a volatile market.

"Arbitrage f...