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.
Potential investors, though, should keep in mind that in a strong bear market, the put-write strategy may be exposed, especially for related ETFs. During periods of high volatility of underlying securities, more puts will have a higher probability of expiring in the money or being exercised early.
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On the other hand, the put-write strategy can be a good way for income-minded investors to increase their portfolio yields, especially in a low and rising rate environment that has sideways trending or bull market conditions. The high volatility of the underlying securities should benefit since the put-write strategy can benefit on inflated option premiums while taking advantage of fewer put payouts.
Potential investors who are interested in the put-write options strategy can take a look at the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEArca: PUTW). The WisdomTree PutWrite ETF tries to reflect the performance of the CBOE S&P 500 PutWrite Index, which implements a put write strategy on the S&P 500 Index. PUTW includes one- and three-month Treasury bills and sells or “writes” one-month, at-the-money, S&P 500 Index puts. Investors can use PUTW “to help lower portfolio beta and reduce downside risk,” according to WisdomTree.