Gold Silver Reports ~ Institutional investors have been selling or writing put options for many years to boost income when markets are placid and trend sideways.
Put options are financial derivative contracts that gives the buyer/owner the ‘right’ to sell an underlying asset (e.g. stocks) at a pre-agreed strike price on a stipulated date (e.g. one month/ three months from the date of purchase).
◊ The seller/writer of put option is obligated to buy the asset if the option buyer chooses to exercise the put option on the stipulated date. The buyer of the put option pays a small premium for buying the ‘right,’ and if the contract reaches expiration without being exercised, the put writer/seller gets to keep 100 percent of the premium.
◊ Perhaps that explains why WisdomTree recently launched the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW). The newly launched fund aims to follow the performance of the CBOE S&P 500 PutWrite Index, a gauge used to measure the performance of a hypothetical portfolio selling put options on the S&P 500 index against collateralized cash reserves held in short-dated money-market instruments.
◊ Collection premium by selling put options is akin to collection of insurance premiums by insurance firms. The strategy is popular among institutional investors and has long been used to boost returns for clients. It works best when markets are rising since the option expires without being exercised by the buyer.
◊ On the contrary, if markets fall below the strike price of the put, the buyer exercises the option and the seller is forced to pay the difference between the strike price and the level of the S&P 500 index, thus incurring a loss.
◊ PUTW sells a sequence of one month, at-the-money European-style S&P 500 puts, which means they can only be exercised on the option’s expiration date. The number of options sold is chosen carefully to avoid losses that could prove catastrophic for the fund.
◊ PUTW attempts to ensure full collateralization, meaning the premium collected should be equal to the maximum loss possible in case of adverse index movements at final settlement. However, if potential losses exceed estimated maximum loss, PUTW can lose money and decline in value.
◊ Selling put options is speculative in nature and may not be suitable for all investors.
◊ The fund rebalances every month and has a 0.44 percent gross expense ratio. ~ Neal Bhai Reports
