If you've been reading this site for any bit of time you probably know my intrigue with volatility as an asset class or strategy and the various types of funds that try to harness volatility. The space is being hit with a lot of new products and I am having a ton of fun looking at these new funds. We've got several more to look at today and I'll talk (again) about how I've incorporated volatility into client accounts.
A few weeks ago the ProShares S&P 500 High Income ETF (ISPY) launched. I am test driving a few shares in one of my accounts. ISPY is a covered call fund that sells calls that expire tomorrow. As explained to me, every day between 2pm and 2:30 it sells call options that expire the next day. Its first monthly dividend was $0.48 and the second one was $0.31. I manually reinvested the first dividend. Because of the lower second dividend I won't reinvest that until the third dividend pays.
The lag for ISPY isn't quite as big as the chart shows when you factor in the dividend but the upside is still being capped because of the call writing. I believe the strategy will allow for more upcapture of the index than something like Global X S&P 500 Covered Call ETF (XYLD) which sells monthly calls. ISPY will probably offer long term growth but at this point I doubt it will really look like a much higher yielding version of the S&P 500.
I mention ISPY because a new fund does something very similar. The Roundhill S&P 500 0DTE Covered Call Strategy ETF (XDTE) also sells one day options but does it a little differently. Instead of selling at 2pm the day before expiration is sells first thing in the morning options that expire that day. It has no covered calls overnight. If you believe in the night effect, XDTE will capture it while ISPY will not. The night effect came from a study that showed the vast majority of the gains in the S&P 500 come overnight, the market opening higher than it closed the day before. There was an ETF that targeted this effect and of course Murphy's Law, the night effect didn't work very well during the fund's life and the fund closed. I'd expect the "yield" of XDTE to be less than some of the others but I do believe in the night effect and maybe it will have better upcapture than the others.
The newly listed Defiance S&P 500 Income Target ETF (SPYT) offers yet a different take on 0dte options. It will sell not covered calls every day but call credit spreads targeting a 20% "yield." Specifically, it owns S&P 500 ETFs and every day will sell a call and buy a call with a higher strike, that is the credit. I tend to be curious about all funds but not this one. Buying calls reduces the "income" available to distribute and doesn't really protect against a whole lot for just one day. The underlying index isn't too likely to go up 10% in a day. The underlying index isn't too likely to go up 5% in a day. How frequently does the S&P 500 go up 3% in a day? The long call in the spread is trying to protect against price appreciation being capped by a big rally. That might make sense for a month or longer but I can't figure the value on a daily basis.
A few weeks ago we talked about Bitcoin covered call funds and Roundhill has one of those too with symbol YBTC. It is very new but we can get a little sense of it compared to iShares Bitcoin ETF (IBIT).
YBTC looks like it is synthetically long Bitcoin by going long a call and short a put and then it sells call options that are shorter dated. It has already paid out two monthly dividends totaling about 6% of the $50/share that the fund started at back in mid-January. So on a total return basis it is up close to 20%, far, far behind the 64% that IBIT is up. YBTC is certainly harnessing volatility but even adding the yield back in, it isn't a proxy for Bitcoin on the way up. On the way down, the calls wouldn't make it worse but if Bitcoin again goes down 70 or 80%, this fund shouldn't be expected to do much better.
Kind of related, there is a YieldMax covered call, single stock ETF for Microstrategy. The symbol for the common is MSTR and the YieldMax fund is MSTY.
Again the covered call fund doesn't really track the underlying. It hasn't paid out a distribution yet, MSTY's price has just been capped from keeping up with the common because of the covered calls. If you are unfamiliar with MSTR, the CEO has become one of the loudest Bitcoin touts, turning the company's stock into a Bitcoin hedge fund. It made news this week that it was again selling convertible securities to buy more Bitcoin. It has done this several times before. I don't know if they did this when Bitcoin was down a lot, Barron's said they did it before at $50,000.
I am not in any way suggesting doing anything with Microstrategy. I don't really understand how it is ok for a CEO of a publicly traded company to turn that company into a Bitcoin proxy. How is there not a governance issue? He has leveraged up the company to buy more and more Bitcoin. He could be a tout without leveraging the company in this way.
Hopefully, throughout this post anytime the word yield was used, I put it in quotes. As we've looked at quite a few times, many of these funds don't keep up with the yield and on a price basis they go down. Spending the entire yield, spending even most of the yield is probably a road to zero at some point, not for the funds, they will reverse split as the YieldMax Tesly ETF (TSLY) recently did but for an investor's position.
I've mentioned that I am also test driving the Defiance NASDAQ 100 Enhanced Options Income ETF (QQQY) which sells 0dte puts. I bought 100 shares on the first or second day in Mid September for a total of $2017.00. I've manually reinvested each dividend such that I now have 132 shares with a value of $2180.64. In the almost six months the price of the fund has gone from just over $20 to closing at $16.52 on Thursday. Based on price alone, the fund is down 18% in six months. If I was taking out the dividend and spending it, the position in my account would be down 18%. The total return though is 8% which annualizes out to 16% +/-. In that same six months, the underlying QQQ is up 20% so QQQY, is not up even half of what plain vanilla QQQ is.
These options funds are proxies for different things. With QQQY/QQQ, the options fund does have a much lower standard deviation per Portfoliovisualizer, at 9.85% versus 16.59%. Is that worth anything to you? Should it be worth anything to us? Maybe. Where I did not expect QQQY to be an equity proxy, I am happy with it so far but would like to see how it does in a downturn that is more meaningful than what we've had since the fund came out.
Back to Bitcoin volatility. I think there is a way to sell Bitcoin volatility in a manner that any such fund doesn't get destroyed. A Bitcoin volatility fund could spread off the risk, use very short term options that are far out of the money. I've disclosed using Princeton Premier Income Fund (PPFIX) for clients. It is a volatility fund, it sells weekly puts that are very far out of the money. I've used the analogy of picking up pennies a mile and half in front of a steamroller as opposed to picking up nickels and dimes right in front of a steamroller. For a while I used a long volatility fund has a hedge, it tracked medium term VIX futures and its negative correlation to the equity market was pretty reliable.
I will continue to study this. The work and willingness to experiment with very small dollars in my account helps me to work through the things I write about which is how I filter the few things that actually make it into the portfolio.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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