A New ETF That Uses Zero-Day Options to Boost Income

ProShares, a leading provider of exchange-traded funds (ETFs), announced the launch of a new ETF that uses the short-dated options commonly referred to as “zero days to expiry” on the S&P 500 index. The fund’s goal is to offer investors both the additional income that traditional options contracts may sacrifice and the potential for capital appreciation.


What are zero-day options?

Zero-day options are options contracts that expire on the same day they are traded. They are typically used by traders who want to take advantage of short-term movements in the underlying asset, such as the S&P 500 index. Zero-day options have become increasingly popular in recent years, accounting for 43% of overall S&P 500 options volume, up from 21% in 2021, according to Cboe Global Markets.

Zero-day options have some advantages over longer-dated options, such as lower premiums, higher liquidity, and lower exposure to time decay and implied volatility. However, they also have some drawbacks, such as higher transaction costs, higher risk of early assignment, and lower probability of profit.

How does the new ETF work?

The new ETF, called the ProShares S&P 500 Enhanced Option Income ETF (ticker: JEPY), will write and sell zero-day put options on the S&P 500 index every trading day, and invest the proceeds in a portfolio of S&P 500 stocks. The fund will aim to generate income from the premiums collected from selling the options, as well as from the dividends and capital gains from the stocks.

The fund will use a proprietary algorithm to select the strike prices and quantities of the options to sell, based on the market conditions and the risk-return profile of the fund. The fund will also use dynamic hedging strategies to manage the exposure and risk of the options portfolio.

The fund will charge an expense ratio of 0.09%, which is lower than the average expense ratio of 0.13% for U.S. equity ETFs, according to Morningstar.

What are the benefits and risks of the new ETF?

The new ETF offers investors a way to enhance their income and diversify their portfolio, while maintaining exposure to the S&P 500 index. The fund may appeal to investors who are looking for higher yields in a low-interest-rate environment, or who want to take advantage of the increased volatility and liquidity of zero-day options.

However, the new ETF also involves some risks and challenges, such as:

  • The fund may not be able to sell enough options to generate sufficient income, or may have to sell options at unfavorable prices, depending on the market conditions and the demand and supply of zero-day options.
  • The fund may incur losses if the S&P 500 index declines below the strike prices of the options sold, or if the options are exercised early by the buyers.
  • The fund may face higher operational and regulatory costs and complexities, due to the frequent trading and settlement of zero-day options, and the need to comply with the rules and regulations of the options exchanges and clearinghouses.
  • The fund may not be suitable for all investors, especially those who are not familiar with the mechanics and risks of options trading, or who have a low risk tolerance or a long-term investment horizon.

How to invest in the new ETF?

The new ETF is expected to start trading on the NYSE Arca on Wednesday, December 20, 2023. Investors who are interested in the fund can buy and sell the ETF shares through their brokerage accounts, just like any other ETF. However, investors should carefully read the fund’s prospectus and understand the fund’s objectives, strategies, risks, fees, and performance before investing.

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