ALPS Portfolio Solutions has launched a new exchange traded fund that provides investors with income through selling put options on the largest U.S. stocks with the highest volatility.
The U.S. Equity High Volatility Put Write Index Fund (NYSEArca: HVPW) tries to reflect the performance of the NYSE Arca U.S. Equity High Volatility Put Write Index, which tracks a portfolio of exchange-traded put options on the largest capitalized stocks that have listed options with the highest volatility, according to ALPS. HVPW has a 0.95% expense ratio.
Put options are a type of financial instrument used to provide the owner the right, but not the obligation, to sell the security at a set price, or “strike” price, on or before an expiration date.
Traders who write put options have essentially sold the right to another investor to sell shares at an agreed-upon price. On the other hand, the buyer has the purchased the chance to sell stock to the put writer. [How ETF Call and Put Options Work]
In other words, the party who writes puts acts as an insurance provider for the portfolio’s downside but gains access to premiums, or income. High-volatility stocks have bigger premiums because they are viewed as riskier.
“Selling a put is advantageous to an investor because he or she will receive the premium in exchange for committing to buy shares at the strike price,” Investopedia explains. “If the price of the stock falls below the strike price, the put seller will have to purchase shares from the put buyer when the option is exercised. Therefore, a put seller usually has a neutral/positive outlook on the stock or expects a decrease in volatility that he or she can use to create a profitable position.”
The ETF will sell 60 day listed put options every two months on 20 stocks. HVPW will also distribute out 1.5% of the ETF’s net assets at the end of each 60 days.
Rich Investment Solutions, LLC is the subadvisor to the ETF, which was launched under the ALPS ETF platform.
Kevin Rich of Rich Investment Solutions in a telephone interview said the ETF sells puts that are 15% “out of the money.” The fund tries to earn income through the options premiums.