It was rolled again in mid-April to the 110P strike for a gain of +$72. In mid-February, the short 95P put was rolled up to the 105P strike for a gain of +$146.
In early January 2023, the 165C call was rolled down to the 160C strike for a net premium gain of +$114. This was the result of rolling the options down and up, respectively, in response to price movement and, to a lesser extent, volatility changes in the underlying. The red line represents the short put side of the bear spread with the difference between it and the red line being the amount of hedge protection.Įxamining the chart reveals that both the covered call and short put strike prices have changed over time. The yellow line represents the primary protective component of the position, which is the long put. The green line represents the strike price of the covered call and also serves as the upside cap for capital appreciation. Downside protection provided by the bear spread clocks in at 23%.Īn actual ongoing position I opened on XLK back on 9/15/22 helps visualize what the LEAPS options are doing. The overall position caps gains at 16.7%, or a 9.5% annualized return + dividends + potential credit premium from rolling the short put option up. This should produce a small credit as shown in the example order below. Owning 100 shares of the underlying ETF sets up selling a 175C covered call, which in turn pays for a 150P/115P put spread. The primary hedge is provided by selling a covered call and using the proceeds to purchase a bear put spread using the furthest-dated LEAPS options available.įor example, the Technology Select Sector SPDR ETF ( XLK) is currently trading around $150. Do It YourselfĪbout 8 months ago, I started migrating my portfolio into my own structured buffered ETF positions where I was able. The additional degree of control afforded by constructing buffered ETFs yourself may be a worthwhile endeavor. This is due to the added tax complexity introduced by using options but ultimately a matter of personal preference and level of comfort dealing with the tax aspect and efficiency. It is important to note that outside of a tax-advantaged account, it may be more beneficial to use an issuer-provided buffered ETF product. While these buffer ETFs can play an important role in risk-averse investor portfolios, a buffered ETF position can also be constructed by the do-it-your-self investor.
In reducing risk, PNOV shines over its relatively short existence when compared to SPY. It is to use a suitable underlying to construct a targeted risk-reward scenario. Now, going into this it's not exactly the goal to beat the returns of any particular underlying. Of course, the period - reveals the opportunity cost. Another striking feature is the reduction in volatility. Max drawdowns are roughly half of the S$P 500 index during each period. It's pretty clear the buffer is doing its job hedging to the downside. You can't glean a whole lot from the graph, but looking at the available historical outcome periods definitely shows trends. The following shows how PNOV is performing relative to SPY in the current outcome period while also highlighting the gain cap and buffer zone. Its goal is to buffer the first 15% of losses while capping gains at 20%. Equity Power Buffer ETF ( PNOV ) at $774 million AUM. Innovator ETFs has the largest standalone with the U.S. First Trust's BUFR ( BUFR) has more AUM over $1 billion but is an aggregate of several ETFs. They also come with a costly average expense ratio of around ~0.80%. New products have spilled out from more niche issuers, like Innovator ETFs, and into mainstream players like BlackRock as seen in the following headline.Īccording to data from etf.com, there are now over 100 buffer ETFs, with varying levels of gains cap and buffer protection. They are designed to give up profit potential past a certain point in return for immediate downside protection through the use of options. These defined outcome products raked in about $10 billion in 2022, roughly doubling assets in the space. Buffer ETFs have been gaining in popularity in recent years, primarily fueled by higher market volatility and uncertainty.
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