An Exchange Traded Fund (ETF) that has caught my eye lately is the BMO U.S. Put Write ETF (TSX:ZPW). This ETF has become more attractive to me recently, given the extreme volatility we’ve seen, and the trepidation which comes with jumping into a market that could drop 10% on a given day (as has been par for the course in recent weeks).
What this ETF does, and why it interests me, is it writes put options on companies in a “wait-and-see” fashion. This allows investors to get into the market at potentially lower prices while collecting premium in the meanwhile.
For investors who may not be terribly familiar with options: put options give the writer (seller) of the option the ability to buy a stock at a lower price. The buyer of this put option agrees to pay a premium to the writer, for the option to sell the writer shares of a given company at a specified price, lower than where the stock trades at a particular point in time.
The buyer of the put makes money if the underlying stock drops below the agreed-upon price (betting the price will drop), and the writer makes money if the stock stays above the strike price (keeps the premium paid by the buyer).
If the price of the stock goes below the strike price, the writer of the put has to own those shares at a specified price. This is fine for long-term investors who don’t care about timeline and want to get into the market, but believe there is more downside ahead.
Invest wisely, my friends.
