This new ETF tries to squeeze income from zero-day options

Published Thu, Sep 14 20232:46 PM EDTUpdated Thu, Sep 14 20236:39 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

A new fund on the market is looking to capitalize on two of the biggest investment trends of 2023: income and short-term options. Investment firm Defiance announced Thursday that it launched the Nasdaq-100 Enhanced Options Income ETF (QQQY). The fund plans to generate income by selling put options that expire in less than a day. "What we've been hearing from clients is that, while they buy on the dips and dollar cost average on their tech and innovation types of plays, income is key," Sylvia Jablonski, CEO of Defiance, told CNBC. "And some of that income comes from these 5% cash-like Treasury products or even CDs from banks and things like that, but there are other ways to generate hopefully exaggerated income through the use of options." The use of options that expire in less than a day, sometimes referred to as "0DTE" trades, has grown rapidly over the past few years, apparently used heavily by both retail and professional traders. The average daily volume in zero-day contracts on the S & P 500 has been rising 58% a year since 2018 on average, according to a report from Cboe. In the first half of this year, zero-day options accounted for 43% of all the contracts on the S & P 500 according to the report. Total daily trading volume in zero-day options topped $1 trillion earlier this year . How it works The QQQY's primary strategy is to sell short-term put options on the Nasdaq-100. A put option gives the holder the right to sell an underlying asset at a predetermined strike price. The strike price of the puts in the fund will be 0% to 5% above the current price of the index when created, or "in-the-money," according to the fund's prospectus . Generally speaking, the value of a short-term put option that is in-the-money should be roughly equal to the gap between the market price and the strike price, plus a small premium that accounts for the risk of price moves before expiration. The QQQY's strategy of selling in-the-money puts means that its daily trades should make money when the index rises or stays close to flat, participating in some of the upside for the index. However, the trade can lose money if the Nasdaq-100 falls. Index options are cash-settled, meaning the fund will not need to actually buy and deliver the index as part of its operations. Similar strategies Income-generating options strategies, including writing puts, can be used to lower the volatility of an investor's portfolio. Cboe has a hypothetical PutWrite index on the S & P 500 , using at-the-money one-month options. The firm's historical data shows that index slightly underperforms the S & P 500 but has a much lower standard deviation than the equity index. While QQQY appears to be the first exchange-traded fund focused solely on zero-day options, it is not the only put-write fund on the market. The WisdomTree PutWrite Strategy Fund (PUTW) , which focuses on longer-dated options on the S & P 500, launched in 2016. Its total return over the past five years is less than half that of the S & P 500, according to FactSet. The QQQY plans to distribute income earned from these trades on a monthly basis. The fund comes with a management fee of 0.99%.