New ETF looks to tap hot market for zero-day options

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NEW YORK (Reuters) – An exchange-traded fund (ETF) that started trading on Thursday offers investors a new way to participate in the hot market for short-dated equity options, a risky trading strategy that has enthralled markets over the last year.

Miami-based ETF sponsor Defiance ETFs LLC launched the Defiance Nasdaq-100 Enhanced Option Income ETF on Thursday, the first ETF to use daily options income generation, the ETF sponsor said in a press release.

The ETF seeks to tap into the dual popularity of short-dated options contracts and the heightened interest in ETFs that seek to generate income through a combination of selling options and investing in U.S. large cap stocks.

Short-dated options contracts, with a day or less to expiry – dubbed 0DTE (zero days to expiry) options – have grown popular with investors over the past year, often making up as much as half the daily trading volume in the options on major ETFs and indexes, including the S&P 500 and the Invesco QQQ ETF.

Their increased usage has sparked concerns about their risks and the potential for a volatility shock that could ripple out to the broader stock market.

Investors have also flocked to ETFs that look to generate income and reduce portfolio volatility by selling options against stocks.

One such ETF – the JPMorgan Equity Premium Income ETF – has grown its assets to about $29.5 billion from about $12.4 billion a year ago. Assets at another, the Global X Nasdaq 100 Covered Call ETF, have grown to $8.1 billion from $6.9 billion a year ago. “If there is one thing that investors are eager to receive, it is a steady stream of income, and we hope to provide just that,” said Defiance ETFs’ Chief Executive Officer Sylvia Jablonski.

The new actively managed ETF, QQQY seeks monthly yield for investors by combining Treasuries and short-dated Nasdaq-100 index options. The fund will seek to generate income by selling 0DTE put options looking to capture the premium in these highly volatile derivatives contracts, the ETF sponsor said. “QQQY is attempting to timely scratch two itches, potential income from an asset that doesn’t typically generate income and exposure to the sudden popularity of trading ODTE options,” said Lois Gregson, senior ETF analyst at FactSet Research Systems. Gregson, however, warned the ETF’s reliance on the highly volatile 0DTE options could leave it vulnerable to losses.

“The fund is ‘betting’ the market will rise more often than fall,” Gregson said, noting that the portfolio manager would have to buy back the short put options potentially at a loss.

“The strategy is similar to picking up dimes in front of a bulldozer. The income potential is there, but there are times you could also get run over,” Gregson said.

Defiance ETFs is set to launch two other ETFs – the Defiance S&P 500 Enhanced Options Income ETF and Defiance R2000 Enhanced Options Income ETF, which will employ a similar strategy with exposure to the S&P 500 and the Russell 2000 Indexes, respectively. The success of the new ETF may hinge on continued growth of interest in short-dated options, said Seth Golden, president of investment research firm Finom Group. Golden said he will be watching liquidity and trading volume for the new product to gauge its viability. The ETF’s shares were trading about flat at $20.13 at 12:45 p.m. (1645 GMT) with about 7,000 shares changing hands.