Roundhill Investments Launches First-Ever 0DTE Options ETFs (XDTE, QDTE)
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The introduction of XDTE and QDTE by Roundhill Investments represents a novel approach in the ETF market, aiming to capitalize on the growing trend of 0DTE options trading. This strategy is particularly noteworthy given that 0DTE options now constitute a significant portion of SPX contract volume. By focusing on income generation through the sale of 0DTE options, these ETFs are positioned to offer a unique value proposition to income-seeking investors.
From a financial perspective, the weekly distribution model could attract investors looking for regular income streams, potentially increasing demand for the ETFs. However, the strategy's success hinges on the accurate identification and exploitation of mispricings in the short-dated options market. Given the high levels of retail participation in this market segment, there could be increased volatility and unpredictability, impacting the ETFs' performance.
Investors should be aware of the risks associated with 0DTE options, including the potential for rapid premium erosion and the challenge of accurately predicting short-term market movements. The covered call strategy employed may limit upside potential, as gains are capped at the strike price of the sold calls. This could result in underperformance in a rapidly rising market.
The launch of XDTE and QDTE taps into a burgeoning segment of the options market, with 0DTE options experiencing a surge in popularity. The ETFs' strategy is designed to leverage the structural overpricing of volatility in these options. The high participation of retail traders in this space suggests a trend towards more speculative and short-term investment strategies, which could influence market dynamics and the liquidity of these ETFs.
Analyzing the potential market impact, the introduction of these ETFs could lead to an increase in the volume of 0DTE options traded, further solidifying their place in the market. Additionally, the success of XDTE and QDTE might prompt other fund managers to consider similar products, potentially increasing competition and innovation within the ETF space.
It is important for stakeholders to monitor the adoption rate and performance of these ETFs, as they could serve as indicators for the viability of 0DTE strategies in mainstream investment portfolios. The weekly distribution feature may also set a precedent for payout frequency expectations among investors in similar products.
The mechanics of 0DTE options are critical to understanding the potential impact of XDTE and QDTE ETFs. These options, expiring on the same day they are traded, are characterized by their sensitivity to immediate market movements and implied volatility. The strategy of selling out-of-the-money calls could be profitable in a stable or moderately bullish market, as the options are likely to expire worthless, allowing the ETFs to retain the premium collected.
However, the inherent leverage and gamma risk associated with 0DTE options mean that sharp market movements can lead to significant losses or opportunity costs. Investors in these ETFs should have a clear understanding of the Greeks, particularly delta and gamma, as these measures indicate how the price of an option responds to changes in the underlying asset's price and the acceleration of that response, respectively.
The ETFs' focus on overnight performance also introduces a unique risk profile, as after-hours news and events could significantly affect the indices' opening levels. This could result in a gap between the ETFs' performance and the underlying indices, especially in volatile market conditions. Stakeholders should consider these factors when evaluating the potential impact on their investment strategies.
XDTE and QDTE sell zero-days-to-expiry ("0DTE") options each day to seek income generation. Both funds seek to pay weekly distributions to fund shareholders.
XDTE and QDTE each employ a covered call strategy, designed to provide current income while targeting
According to CBOE, 0DTE options now account for more than
"XDTE and QDTE offer investors the potential for high levels of income on a weekly basis" said Dave Mazza, Chief Strategy Officer at Roundhill Investments. "Both ETFs allow investors to potentially benefit from structural mispricings inherent to the short-dated options market, while maintaining exposure to major equity indexes."
QDTE and XDTE seek to pay distributions, if any, on a weekly basis.
1,2 Cboe Global Markets (June 30, 2023). The Rise of SPX® & 0DTE Options.
About Roundhill Investments:
Roundhill Investments is a registered investment adviser focused on offering innovative financial products designed to offer exposure to investment themes that appeal to the next generation of investors. To learn more about the company, please visit roundhillinvestments.com.
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus or summary prospectus, if available, with this and other information about the Fund, please call 1-646-661-5441 or visit our website at https://www.roundhillinvestments.com/etf/. Read the prospectus or summary prospectus carefully before investing.
All investing involves risk, including the risk of loss of principal. There is no guarantee the investment strategy will be successful. For a detailed list of fund risks see the prospectus.
Covered Call Strategy Risk. A covered call strategy involves writing (selling) covered call options in return for the receipt of premiums. The seller of the option gives up the opportunity to benefit from price increases in the underlying instrument above the exercise price of the options, but continues to bear the risk of underlying instrument price declines. The premiums received from the options may not be sufficient to offset any losses sustained from underlying instrument price declines, over time. Additionally, the Fund is a "synthetic" covered call strategy, meaning that it derives its long exposure to the S&P 500® Index from options that utilize the S&P 500® Index as the reference asset. This synthetic exposure increases the likelihood that the Fund's returns may not always precisely align with the returns of the S&P 500® Index.
Options Risk. The use of options involves investment strategies and risks different from those associated with ordinary portfolio securities transactions and depends on the ability of the Fund's portfolio managers to forecast market movements correctly. The prices of options are volatile and are influenced by, among other things, actual and anticipated changes in the value of the underlying instrument, or in interest or currency exchange rates, including the anticipated volatility, which in turn are affected by fiscal and monetary policies and by national and international political and economic events. The effective use of options also depends on the Fund's ability to terminate option positions at times deemed desirable to do so. There is no assurance that the Fund will be able to effect closing transactions at any particular time or at an acceptable price. In addition, there may at times be an imperfect correlation between the movement in values of options and their underlying securities and there may at times not be a liquid secondary market for certain options.
FLEX Options Risk. Trading FLEX Options involves risks different from, or possibly greater than, the risks associated with investing directly in securities. The Fund may experience losses from specific FLEX Option positions and certain FLEX Option positions may expire worthless. The FLEX Options are listed on an exchange; however, no one can guarantee that a liquid secondary trading market will exist for the FLEX Options.
0DTE Options Risk. The Fund's use of zero days to expiration, known as "0DTE" options, presents additional risks. Due to the short time until their expiration, 0DTE options are more sensitive to sudden price movements and market volatility than options with more time until expiration. Because of this, the timing of trades utilizing 0DTE options becomes more critical. Although the Fund intends to enter into 0DTE options trades on market open, or shortly thereafter, even a slight delay in the execution of these trades can significantly impact the outcome of the trade. Such options may also suffer from low liquidity, making it more difficult for the Fund to enter into its positions each morning at desired prices. The bid-ask spreads on 0DTE options can be wider than with traditional options, increasing the Fund's transaction costs and negatively affecting its returns. Additionally, the proliferation of 0DTE options is relatively new and may therefore be subject to rule changes and operational frictions. To the extent that the OCC enacts new rules relating to 0DTE options that make it impractical or impossible for the Fund to utilize 0DTE options to effectuate its investment strategy, it may instead utilize options with the shortest remaining maturity available or it may utilize swap agreements to provide the desired exposure.
New Fund Risk. The fund is new and has a limited operating history.
Derivatives Risk. The use of derivative instruments (i.e. options contracts) involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments.
Distribution Tax Risk. The Fund currently expects to make distributions on a weekly basis. These distributions may exceed the Fund's income and gains for the Fund's taxable year. Distributions in excess of the Fund's current and accumulated earnings and profits will be treated as a return of capital.
Roundhill Financial Inc. serves as the investment advisor. The Funds are distributed by Foreside Fund Services, LLC which is not affiliated with Roundhill Financial Inc.,
Glossary
Options
An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date.
Strike Price
The strike price is the price at which the holder of the option can exercise the option to buy or sell an underlying security, depending on whether they hold a call option or put option.
Covered Call Strategy
A covered call strategy involves writing (selling) covered call options in return for the receipt of premiums. The seller of the option gives up the opportunity to benefit from price increases in the underlying instrument above the exercise price of the options, but continues to bear the risk of underlying instrument price declines.
Out-of-the-Money Options
Out-of-the-money options are options whose strike price is above the market price of the underlying asset.
0DTE Options
0DTE (zero days to expiration) are options that are set to expire at the end of the trading day on which they are written.
Nasdaq-100 Index (N-100)
The NASDAQ-100 Index® is a modified capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ. No security can have more than a
S&P 500 Index (S&P 500®)
The S&P 500® is widely regarded as the best single gauge of large-cap
SOURCE Roundhill Investments
FAQ
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