Defiance ETFs launches first of three funds trading zero-day to expiry options

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Defiance ETFs, a boutique exchange-traded fund (ETF) firm managing nearly $900 million, introduced the Defiance Nasdaq 100 Enhanced Options Income ETF on Thursday. This fund is the first in a series of three that will actively trade zero-day to expiry (0DTE) options. The other two funds, Defiance S&P 500 Enhanced Options Income ETF and Defiance R2000 Enhanced Options Income ETF, are set to launch soon.

The new funds aim to outperform returns from three major equity indexes: the S&P 500, Russell 2000, and Nasdaq 100. They will employ a strategy of writing short-dated put options linked to these indexes while maintaining large holdings of cash and cash equivalents as a safeguard against losses.

Over the past year and a half, 0DTE options linked to major U.S. equity-market indexes have gained popularity. Data from options-exchange operator Cboe Global Markets (NYSE:CBOE) shows that in August, options with less than 24 hours to expiration accounted for half of all trading volume in all S&P 500 options. For the year 2023 so far, they've made up 43% of the average daily trading volume in S&P 500 options.

These options are known for their ability to shift from worthless to highly valuable within hours or even minutes due to their short expiration window. This results in a relatively low premium for investors while also offering the potential for significant gains or losses.

The three new Defiance funds will focus on selling at-the-money or in-the-money put options with less than 24 hours until expiration, although they may occasionally sell options with up to a week left until they expire. Each fund will charge an annual management fee of 0.99%, which is significantly higher than the annual fees on traditional index-tracking funds.

The investment strategy of Defiance mirrors that of JPMorgan Equity Premium Income, which has seen its assets under management skyrocket in 2023 due to its approach of enhancing returns by selling covered-call options.

However, option trading carries higher risks compared to owning shares in a single stock or index-tracking ETF. As a precaution against potentially significant losses, Defiance has pledged to hold at least 80% of each fund's assets in cash and Treasurys as a buffer.

Despite the increasing popularity of 0DTE options, critics argue they could potentially amplify volatility in the broader stock market and create the potential for less experienced traders to incur large losses. Cboe has refuted these claims, stating there is no evidence that 0DTEs are contributing to increased stock market volatility.

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