A fund that is new to the market aims to take advantage of two of the most important investment trends for 2023: short-term options and income. Defiance, an investment firm, announced on Thursday the launch of Nasdaq 100 Enhanced Options Income (QQQY) ETF. The fund will generate income from selling put options with an expiration date of less than one day. Sylvia Jablonski is the CEO of Defiance. She told CNBC that clients are buying on dips, and using dollar cost averaging to buy their tech and innovation plays. Income is important. “Some of that income is generated by these Treasury products that pay 5% in cash or CDs issued by banks, but you can also generate income using options.” Over the last few years, both professional and retail traders have been using options that expire within a day. These trades are sometimes called “0DTE”. Cboe’s report shows that the average daily volume of zero-day contracts for the S & P 500 is increasing by 58% averaging since 2018. According to the report, in the first half this year zero-day contracts accounted for 43 percent of all S & P 500 contracts. Zero-day option trading volume topped $1 trillion per day in the first half of this year. It works by selling short-term put option on the Nasdaq 100. Put options give the option holder the right of sale on an asset at a set price. According to the prospectus, the strike price for the puts will be between 0% and 5% higher than the current index price when the fund is created. This is called “in-the money”. In general, the value of an in-the money short-term option should roughly equal the difference between the strike price and market price plus a small amount of premium to account for price movements before expiration. QQQY sells in-the money puts, which means its daily trades will make money if the index increases or remains close to level. This allows them to participate in the index’s upside. The trade may lose money, however, if the Nasdaq 100 falls. Index options have a cash settlement, which means that the fund does not have to buy or deliver the index in order to operate. Writing puts and other income-generating strategies can help lower volatility in an investor’s portfolio. Cboe offers a hypothetical PutWrite Index on the S & P 500, which uses at-the money one-month options. Historical data from the firm shows that the index underperforms S & P 500, but has a lower standard deviation. QQQY may be the first exchange traded fund to focus solely on zero day options, but it’s not the only one. WisdomTree PutWrite Strategy Fund, which focuses primarily on longer-dated S & P 500 options, was launched in 2016. FactSet reports that its total return in the last five years was less than half of the S & P500. The QQQY intends to distribute the income from these trades monthly. The fund has a 0.99% management fee.
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