Two Ways Options ETPs Might Generate Income

Options-based Exchange-Traded Products (ETPs) have grown in popularity as investors look for alternative ways to generate income beyond traditional stocks and bonds. By using options strategies, these ETPs can potentially offer consistent income while managing risk. In this guide, we’ll explore two common ways that options ETPs might generate income: covered call strategies and cash-secured put writing.

1. Covered call strategies

A covered call strategy involves holding a stock (or asset) and selling call options on it. This lets the ETP collect option premiums, creating a potential income stream.

Here’s how it works:

• Own the asset: The ETP holds shares of a stock (like Nvidia) or an index (like the S&P 500).
• Sell call options: The ETP sells call options on those assets with the aim of generating income.

If the stock price stays below the strike price by expiration, the option expires worthless. This means the ETP doesn’t have to sell any shares to the option buyer – and keeps the option premium as income.

If the stock price rises above the strike price, though, the ETP must sell the shares at the strike price. This can cap the upside – but the premium income could still boost total returns.

It’s a trade-off: some growth potential is limited, but consistent premiums can provide steady income.

Covered call ETP example: IncomeShares Tesla (TSLA) Options ETP

The IncomeShares Tesla (TSLA) Options ETP aims to generate monthly income by holding Tesla shares and selling out-of-the-money (OTM) call options on the stock.

By selling OTM calls (where the strike price is above Tesla’s current price), the ETP can collect income. But this strategy could sacrifice growth potential on the stock: if Tesla’s price rises above the strike price, the ETP must sell shares at that price.

2. Cash-secured put writing strategy

A cash-secured put strategy involves selling put options while holding enough cash to buy the underlying stock if needed. This allows the ETP to collect premiums and potentially buy stocks at a discount.

Here’s how it works:

• Set aside cash: The ETP holds enough cash to cover the purchase of the stock (or asset) if the option is exercised.
• Sell put options: The ETP sells put options on the stock to generate income.

If the stock price stays above the strike price by expiration, the option expires worthless, and the ETP keeps the premium as income.

If the stock price falls below the strike price, the ETP must buy the stock at the strike price. Here, the premium collected can reduce the effective purchase price to a potential “discount”.

Cash-secured put ETP example: IncomeShares S&P 500 Options (0DTE) ETP

The IncomeShares S&P 500 Options (0DTE) ETP uses a cash-secured put strategy on the S&P 500 ETF Trust. The ETP sells same-day (0DTE) put options with the aim of generating income.

If the S&P 500 stays above the strike price, the ETP keeps the premium as income. If the index drops below the strike price, the ETP may be obligated to buy the ETF. In that case, the premium collected could help offset the cost.

Key takeaways

• Covered call ETPs can generate income by selling call options but can limit growth potential if the stock price rises.
• Cash-secured put ETPs can collect premiums and might buy stocks at an effective discount if prices fall.
• Options ETPs tend to sacrifice growth potential for income.