ETF Chart of the Day: Put Selling in an ETF

ETF Trends

We recently had the opportunity to speak with a representative of a fund that launched in February of this year and is unique to the ETF landscape in terms of its makeup and investment strategy. HVPW (ALPS U.S. Equity High Volatility Put Write Index, Expense Ratio 0.95%) is classified as “Long/Short” by databases but this does not necessarily tell the whole story, and it tracks the NYSE Arca U.S. Equity High Volatility Put Write Index.

For those whom might not be intimately familiar with options and much less writing puts, a layman’s explanation of this index is as follows: The index contains large capitalization U.S. listed stocks (20 are held at a time and they roll over every 2 months) that have options listed on them, and selects those put options that have the highest volatility over time.

These options are identified and sold, generating premium income for the ETF investor. In a nutshell, “out of the money” puts are sold on select names within the index, which is a bet essentially that the stocks will not fall below the strike prices on the options themselves.

The specific terms of the put options that are sought out are that they are 60 day listed puts, and the assumption is made that the investor understands as according to fund literature, “Investors assume the risk that the underlying referenced equities may close below their strike price, and investors also give up the upside on the underlying equities above the income the fund receives from selling the options. The strike price of each put option included in the Index must be as close as possible to 85% of the closing price of the option’s underlying stock price as of the beginning of each 60- day period.”

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