Futures Options Swaps by Pavel Ignatov via Shutterstock

A new type of ETF has emerged, focusing on writing zero-day-to-expiration call and put options against popular stock indexes or single stocks. These 0DTE ETFs are gaining popularity, but come with risks. Investors must stress-test these options, understand performance, and consider whether they protect capital during market downturns.

XDTE, a 0DTE ETF, has delivered a total return of 10% year-to-date, compared to 17% for the S&P 500. While XDTE offers a high yield, investors need to carefully assess the risk taken for the returns received. The main advantage of XDTE is psychological, as it provides a nice yield but may not offer significant capital gains.

In case of a sudden market drop, a covered call strategy like XDTE may not protect capital. XDTE fell by 18% during a market downturn earlier this year, almost in line with the S&P 500’s decline. Investors flocking to these strategies should understand that the main benefit is income generation, while the downside is price sensitivity.

Investors considering 0DTE ETFs must understand the risks involved and the potential outcomes. While these ETFs offer a high yield, they may not provide significant capital protection during market downturns. It is essential for investors to assess their priorities and understand the products they invest in to make informed decisions.

Read more at Barchart: Want to Buy a 0DTE Option ETF? 3 Questions You Should Ask First.