Selling put options is a frequently used income-generation tool by options traders. Now income-starved investors can harness the power of selling puts under the umbrella of a new exchange traded fund, the ALPS Enhanced Put Write Strategy ETF (NYSEArca: PUTX).
“PUTX seeks to achieve its investment objective by (i) selling listed one-month put options on the SPDR S&P 500 ETF (NYSEArca: SPY) and (ii) investing the premium income received from selling such options in a portfolio of investment grade debt securities. Put options are financial instruments that give the owner/buyer the right, but not the obligation, to sell a specified quantity of a security at a set price called the “strike” price on or before an agreed upon expiration date,” according to ALPS.
PUTX can provide income as SPY, the world’s largest ETF, remains flat or rises, but the new ETF could incur losses if SPY and the S&P 500 decline because those declines would increase the value of the puts sold by PUTX. As the new ETF is short puts, if those options rise in value, PUTX would likely decrease.
“Accordingly, the Fund is intended for investors who seek “income” when the investor believes SPY will remain flat or rise in value in a manner intended to provide at least some downside “defensive” protection when SPY (and thus the S&P 500) declines in value,” notes ALPS.
Selling puts can reward investors in a stagnant or rising stock market as the trader would collect premiums, or yields, if the strike price remains below the current market price of a security.
PUTX is not the first “put write” ETF from ALPS. The issuer also sponsors the ALPS U.S, Equity High Volatility Put Write Fund (NYSEArca: HVPW) is an income-generating fund that produces yields by selling two-month 15% out-of-the-money put options on 20 diversified stocks with the highest implied volatility.
HVPW sells 60 day listed put options every 2 months, or 6 times per year, on 20 stocks. The ETF will try to pay out net investment income of about 1.5% of the fund’s net assets at the end of each 60-day period. [A Put Write ETF for Prudent Income Investors]
ETF Trends editorial team contributed to this article.
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