The first exchange-traded fund promising to actively trade so-called “zero-day to expiry” or “0DTE” options made its market debut on Thursday, and two more are expected to launch in the not-too-distant future.
Defiance ETFs, an boutique ETF firm with just under $900 million in assets under management, launched what it’s calling the Defiance Nasdaq 100 Enhanced Options Income ETF on Thursday.
It’s the first part of a trio of funds being introduced by the firm that will focus on trading 0DTEs to try and beat returns offered by three popular equity indexes: the S&P 500, Russell 2000 and Nasdaq 100. The firm officially unveiled the three funds in a prospectus dated Sept. 6.
The other two funds will be called the Defiance S&P 500 Enhanced Options Income ETF (which will use the ticker JEPY) and the Defiance R2000 Enhanced Options Income ETF (which will use the ticker IWMY). A representative for Defiance said JEPY is expected to start trading next week, while IWMY is expected to launch in the near future, although exact dates have not yet been set.
All three funds will employ a similar strategy: writing short-dated put options tied to the S&P 500
SPX,
Nasdaq-100
NDX
and Russell 2000
RUT,
while using large holdings of cash and cash equivalents as a buffer against losses.
Defiance heralded the launch of QQQY in a brief press release.
“We’re thrilled to introduce QQQY to the market. The daily notional trading value of 0DTE options has skyrocketed to about $1 trillion,” said Sylvia Jablonski, chief executive officer at Defiance ETFs. “QQQY exemplifies our commitment to innovation and to meeting the evolving needs of investors. With daily options at the core of these products, we’re seeking to unlock a new dimension of income generation within the ETF space.”
According to the prospectus, each fund will charge an annual management fee of 0.99%, far higher than the annual fees on vanilla index-tracking funds. They will focus on selling at-the-money or in-the-money put options with less than 24 hours until expiration, although the prospectus says they may sometimes sell options with up to a week left until they expire.
The option-selling strategy is similar to the JPMorgan Equity Premium Income
JEPI,
which has seen its assets under management soar in 2023 thanks to its strategy of boosting returns by selling covered-call options.
Trading in all options is a risky endeavor compared to owning shares in a single stock or index-tracking ETF. In a lengthy section of its prospectus, Defiance outlines the myriad risks associated with investing in its new funds, including the possibility that its derivatives investments could lead to losses “in excess of those amounts initially invested.”
To guard against potentially catastrophic losses, Defiance is promising to hold at least 80% of each funds assets in cash and Treasurys to act as a buffer.
Zero-day or 0DTE options tied to major U.S. equity-market indexes like the S&P 500 have seen their popularity explode over the past 18 months. According to data from options-exchange operator Cboe Global Markets, 0DTE trading reached a new milestone in August when options with less than 24 hours to expiration accounted for half of all trading volume in all S&P 500 options. So far in 2023, they’ve accounted for 43% over average daily trading volume in S&P 500 options.
The options are notable because they can go from being worthless to hugely valuable in the span of hours or even minutes, largely due to the fact that they have such a short window before expiration. This makes the premium investors pay to own them relatively cheap, while offering the potential for a huge payoff (or huge losses for those who bet against them).
Critics of these options say they could potentially exacerbate volatility in the broader stock market, while creating the potential for less-sophisticated traders to rack up large losses. Cboe has denied these claims, saying there’s no evidence that 0DTEs are making the stock market more volatile.
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