Options-based

Options-based funds and ETFs invest a substantial portion of their assets in... Options-based funds and ETFs invest a substantial portion of their assets in either put or call options. A put option gives an investor or fund the right to sell a security at a specified price at a specified date. Puts offer downside protection in the event that the market falls. A call option, on the other hand, gives an investor the right to buy a security at a specified price at a specified date. Options-based funds and ETFs can employ various strategies. Some attempt to generate income by selling options. For example, a Covered Call ETF will own a basket of stocks, and sell (write) call options against them, collecting the premium in the process. The risk here is that the stock rises substantially and gets “Called”, meaning that the fund won’t benefit from a large rise in its basket of stocks. On the other hand, a Covered Call ETF can perform well if the market doesn’t rise very much, or declines a bit. Other options-based strategies include buying “tail risk” options that will pay out if the market experiences a sharp decline. These funds can produce sharp gains if volatility massively picks up, but a prolonged bull market in equities can see them bleed assets as they pay for option premiums that never result in any gains. Accordingly, options-based funds and ETFs are only appropriate for sophisticated investors and traders willing to take on a fair bit of risk. View more View less

Options-based funds and ETFs invest a substantial portion of their assets in either put or call options. A put option gives an investor or fund the right to sell a security at a... Options-based funds and ETFs invest a substantial portion of their assets in either put or call options. A put option gives an investor or fund the right to sell a security at a specified price at a specified date. Puts offer downside protection in the event that the market falls. A call option, on the other hand, gives an investor the right to buy a security at a specified price at a specified date. Options-based funds and ETFs can employ various strategies. Some attempt to generate income by selling options. For example, a Covered Call ETF will own a basket of stocks, and sell (write) call options against them, collecting the premium in the process. The risk here is that the stock rises substantially and gets “Called”, meaning that the fund won’t benefit from a large rise in its basket of stocks. On the other hand, a Covered Call ETF can perform well if the market doesn’t rise very much, or declines a bit. Other options-based strategies include buying “tail risk” options that will pay out if the market experiences a sharp decline. These funds can produce sharp gains if volatility massively picks up, but a prolonged bull market in equities can see them bleed assets as they pay for option premiums that never result in any gains. Accordingly, options-based funds and ETFs are only appropriate for sophisticated investors and traders willing to take on a fair bit of risk. View more View less