Options strategies aren't used very often in the exchange-traded fund world. There are only nine ETFs that regularly use options, with total assets under management of a combined $800 million—small potatoes in the $3 trillion ETF industry.
But that could be changing. Strong inflows into one options-linked ETF this year suggests investors may be taking a closer look at these products as they consider new ways to generate income and hedge against downside risk in a market that is trading at rich valuations.
That ETF with the big inflows is the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW), which took in $162 million in new money this year. Total assets under management in the fund surged from around $30 million at the start of 2017 to nearly $200 million currently, a big leap for the 18-month-old fund.
Put-Write & Buy-Write
PUTW uses a "put-write" strategy, which is one of two flavors of options strategies commonly used by investors.
There's the possibility for a limitless variety of options strategies, but the most popular are the "put-write" strategy used by PUTW, and the "buy-write" strategy used by ETFs such as the $313 million PowerShares S&P 500 BuyWrite Portfolio (PBP).
Buy-write strategies entail buying a stock or index and then selling covered-call options on that position.
The investor using this strategy collects a "premium," which is the price of the option, but gives up upside in the security beyond the option's strike price.
PBP, the largest buy-write ETF on the market, describes its strategy as such:
"This strategy consists of holding a long position indexed to the S&P 500 Index and selling a succession of covered-call options, each with an exercise price at or above the prevailing price level of the S&P 500 Index. Dividends paid on the component stocks underlying the S&P 500 and the dollar value of option premiums received from written options are reinvested."