Writing naked puts on high-vol stocks sounds risky, but it’s delivered a smooth ride to fat yields lately.
Unlike any other ETF I know of, the ALPS U.S. Equity High Volatility Put Write Index Fund (HVPW) aims to deliver specific cash flow—1.5 percent—every 60 days. That’s 9 percent in annual yield, a juicy number in today’s low-rate climate.
HVPW has been trading for about a year now, and it’s delivered the goods: Its 12-month yield per Bloomberg is 9.05 percent, delivered without the unwanted help of a dropping price.
Yield-focused ETFs include everything from high-dividend equity, junk bonds, bank loans, REITs, MLPs, preferreds stocks and multi-asset funds that dabble in all of these areas.
In contrast, HVPW does it with options. It sells puts options on about 20 stocks and collects the premiums, and it’s those premiums that get distributed to HVPW’s shareholders.
Using derivatives—especially naked puts on high-volatility stocks—sounds risky, but I’d argue that the return profile is less risky than the S&P 500.
Perhaps the biggest risk—relative to the S&P 500—is on the upside.
HVPW’s growth from a total return perspective is essentially limited to its yield. So if 2014 turns out to be anything like 2013, it will miss out on huge growth compared with what you’d get owning the S&P 500.
HVPW’s downside risk—at a maximum—equals that of an equity fund, tempered by its premiums.
In practice, its risks are more subtle. HVPW’s puts are out of the money, meaning if the stock is priced at $100, HVPW is on the hook for losses only after the price drops more than $15 within the 60-day window. And, unlike a high dividend yield equity fund, HVPW is less like to lose money if interest rates rise.
Charted out, HVPW’s performance since inception shows extremely low volatility. I’m showing it next to the SPDR S&P 500 (SPY | A-98) and to the SPDR S&P Dividend ETF (SDY | A- 71) as a high-dividend-yield reference.
HVPW gave up some gains to be sure, but also avoided the market’s dips in June 2013 and at other times.