I came across this today. Basically, this ETF invests in the S&P 500 stocks, and then sells near term S&P 500 calls to enhance dividend payments. It seems to be getting like 10% yield (?). I haven’t looked into this in depth, but might be something to explore if you think the market’s going sideways or down.
I think it’s a good strategy, but conditional on what environment you’re in. PBP only has a history back to 2007, but there are other indices that go back further.
Morningstar has a paper on it:
What made this interesting to me is that there are ETFs and indexes that replicate stock/option combination strategies. Presumably, their trading expenses are lower than what it would cost to do it ourselves. If you don’t like the covered call strategy, most likely, there are ETFs that replicate other combinations.
I think there’s also a Putwrite ETF also.
For a reasonably sized account, you could probably replicate the strategy more cheaply by yourself. They charge 0.75% expense fee. Interactive brokers commisions on options in the U.S. is 25-70 cent. I’d have to do the math, but you could probably hold a SPY ETF and write some options on futures for cheap that would replicate the PBP.
Don’t you need a substantial amount of capital before you can start writing options? Ive never used options before…but I thought each option = option on 100 shares?
yes, you need a lot more capital before you can writeoptions. plus the commission per contract is on top of a standard commission…
Yes. For SPX, you’d need about $130k to get going. Or you could trade something with a smaller share size, like SPY, DIA, etc.
I’m not sure if most people would be able to keep expenses under 0.75%, especially if you sell calls multiple times a year. Unless you’re really good at trading, you’ll lose money paying the bid-mid spread, in addition to commission.
You don’t need that much. It’s all relative, but if you have a $10k account you can write a couple puts. Not on Apple or Google, but plenty of others.
Edit: I’m not talking about replicating an ETF that enhances income by writing puts. I meant just being able to write puts in general. It doesn’t take that much money.
Ok. I guess I should also clarify that you only need the full notional in cash if you are planning to replicate the buywrite strategy. If you are just trading options without the underlying stocks, you only need the option premium plus collateral, not the full notional.
Ohai, the least costly strategy depends on how big your account size is. For small accounts, the ETF you mentioned is probably least costly. The bigger you are, the less attractive it becomes.
- If you wrote the calls on something you hold, I don’t even think you need to post margin at most places:
If you write the calls on something you don’t hold, then I agree you might have to hold more margin.
At interactive brokers (I don’t work for them, just think they have some of the best prices), if you have 100k in your account or more, they take a rather holistic approach to margin. Presumably this would allow you to post little margin if you write a call on SP futures and hold ETFs, or something to that effect.
If you’re trading less than 100 options on equities or ETFs, you probably wouldn’t get hit by any extra fees.
Fair enough. I probably would not put more than say… 10% of my money in a single ETF. So let’s say the indifference point might be somewhere between $1 million and $2 million in total portfolio value?
In addition, I would consider the time cost of getting good options execution. If it takes daily effort to watch option prices, then maybe it’s better to leave it to the ETF and use your time to do something else.
If you wanted to replicate the ETF, you’d be hard pressed to even achieve the same price they use (iirc it’s a weighted average over a given hour on some trading day) - so yes, execution is an issue if you want to compare apples/apples.
The p/l effect of the cost is minor in comparison to the p/l effect of the strategy’s risk.
In other words, there’s not much point in worrying about execution given that any advantage is dominated by the inherent strategy risk - you’d have to wait a long time to see any beneficial effect. It makes no difference either way imo.