A put option provides the buyer the right to sell the underlying index to the put seller at a specified price within a specified time period. In the event of a decline in the underlying index, the put may help reduce the downside risk. Consequently, the put option becomes more valuable as the underlying market weakens relative to the strike price.
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 purchased the chance to sell stock to the put writer. 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.
“As the fund is designed to be a hedge against market declines and rising volatility, Cambria expects the fund to produce negative returns in the most years with rising markets or declining volatility,” according to the issuer.
For more on smart beta strategies, please visit our Smart Beta Channel.