As the number of exchanged-traded funds begin to saturate the capital markets, it’s important for firms to offer ETF solutions that differentiate themselves to capture market share. One such ETF is the Invesco S&P 500 Buy-Write ETF (NYSEArca: PBP), which eponymously incorporates a buy-write strategy that tracks the CBOE S&P 500 BuyWrite IndexSM.
The buy-write strategy incorporated by PBP consists of an option strategy that features a purchase of securities comprised within the underlying index in conjunction with the sale of an at the money index option–in general, known as call options. The call options mitigate risk by offsetting the downside an investor can experience when owning equities through the premium of the option.
The primary objective of the buy-write strategy is to produce income through the premium earned when the option contracts offered are retained if the options are not exercised. In times of volatility, the propensity for the options to go unexercised are low, but during times of economic doldrums when markets are stagnating, unexercised options are more prevalent.
“The strategy does benefit from a sideways market,” vice president and portfolio manager of Invesco’s S&P 500 Downside Hedged Portfolio Ted Samulowitz told ETF Trends, referring to PBP’s strategic use in a range-bound market where investors can cushion themselves during moderate market downturns or use the ETF to supplant riskier high-yield fixed income investments.
The risk to the investor heightens if the price of the securities that comprise the index increases, thereby placing the options into the money–the chances that the options are called are higher, leaving the writer of the options with the premium and possibly more. Should the value of the index option decline, the call premium realized will help shield any losses.