One product that has emerged in the exchange-traded fund landscape focuses on taking a popular stock index or single stock, writing zero-days-to-expiration (0DTE) call options against that underlying core position, and 0DTE put options too. Does that sound confusing?
The secret is, it should, even to a fairly tenured investor.
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0DTE ETFs can be very useful products, but they have the same “baggage” as many other covered-call ETFs. But don’t try to convince those who have poured into them. I’ll say this to leave no doubt: I like the concept here. However, based on the time and focus it took for me, no stranger to option investing and investing in general, to understand the full range of possible outcomes from using ETFs like this, I shudder to think what billions in AUM currently invested in these vehicles is capable of doing.
I’m not talking about a relatively calm market. And I’m not talking about self-directed investors, since they are their own boss when it comes to investment decisions.
I am thinking about these as a longtime investment advisor. In that world, it’s all fun and games until someone loses a million. Or two or three. Then, the questions start.
And they often end up with the end client realizing too late that they did not truly comprehend how much they could lose. That’s not just possible in the future, it is likely. I just do not know when. But as with every stock market bubble and subsequent bursting of the same, there’s a long list of things that went on during the frenzy and thrill of it all that no one cares about.
That is, until a digit or two comes off the old investing statement. If an advisor is involved, there’s a good chance that no matter what disclosure and discussion might have taken place when investing in exotic, new ETFs, the client will call foul.
I’m retired from the personal investment advice business, and I do not mean to be ghoulish or condescending here.
So to put it out there in plain language, here are three questions I came up with for investors to consider when trafficking in ETFs that combine an index or stock, and options that expire within a day or two. Thus grabbing a little bit of premium income daily, to pad the old wallet.
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