Investors can utilize a put-write exchange traded fund strategy to generate attractive returns in a slightly downward trending or sideways market.
Put writing has been used by many market participants for decades as a way to potentially increase the yield and smooth out the ride of equity returns over various market cycles.
Put options allow a buyer the right, but not the obligation, to sell a specific quantity of a security at a set strike price, or exercise price, on or before an agreed expiration date. The put option buyer would pay the seller a premium for this right to sell. The put write strategy would generate income through these premiums.
Selling puts can reward investors in a stagnant stock market as the trader would collect premiums, or yields, if the strike price remains below the current market price of a security. Traditionally, investors would benefit from the the put write strategy during sideways trending markets as people just pocket the premiums or income generated. Additionally, the strategy may outperform the S&P 500 when the market is declining, but it can underperform when the market is rising.