The Achilles’ Heel of ETFs Promising 100% Income Yields

Mar 1, 2024

Observations & Insight

Futures Discovery: Physical Delivery VS Cash Settlement

Today, we’re delving into the fundamental aspect of futures trading-the Settlement Showdown: Physical Delivery versus Cash Settlement. In the dynamic world of futures trading, how contracts are settled is a game-changer, influencing strategies and risks alike. Join me as we explore the two primary methods that define this landscape: Physical Delivery and Cash Settlement.

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Term of the Week – To Be Paid By the Buyer to the Seller

In addition to their potential intrinsic value, options also have another element of value: the option premium. The premium has to be paid by the buyer, which is then transferred to the option seller. To a certain extent, the purchase of an option contract can be compared to the acquisition of an insurance policy, where a premium is charged by the insurance seller. The insurance buyer pays the premium in advance of the period during which the insurance agreement is valid. The contract embeds a potential claim, which will only be lifted if certain conditions are met.

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Lead Stories

The Achilles’ Heel of ETFs Promising 100% Income Yields; Single-stock ETFs, which generate income by selling options, make sense for speculators, but they are money losers for long-term investors.
Aaron Brown – Bloomberg (opinion)
One of the hottest products for retail investors the last couple of years is the single-stock option-income exchange-traded fund. While the basic idea is similar to the old and respectable covered-call writing strategy, the modern versions grabbing attention and dollars are supercharged, promising income yields of 100% or more.
The largest such fund is the Yieldmax TSLA Option Income ETF, or TSLY, which takes long and short positions in call and put options on Tesla Inc., or TSLA, shares. The fund is actively managed to have a generally long exposure to Tesla stock, to generate substantial income from net selling of options, but in return to forego some of the upside if the stock rises, while suffering increased losses if the stock goes down. While this can be a useful tool for short-term speculators, it shares with leveraged and inverse ETFs an Achilles’ heel for long-term investors.

Bitcoin Resumes Rise With Options Traders Targeting Record High
David Pan – Bloomberg
Bitcoin climbed for a seventh consecutive day, with options traders increasing bets that the digital asset will soon surpass its late 2021 high. The largest cryptocurrency increased as much as 2.1% to $62,694. It has surged more that 20% since last Friday, the biggest weekly increase in an year. Bitcoin reached an all-time high of almost $69,000 in November 2021.

Short positions in China stocks shrink after regulatory crackdown
Short positions in China’s stock market shrank by a third in February to their lowest in more than three years, reflecting measures by regulators to curb speculation and boost investor confidence.

February Ends with Record Highs: Markets Surge on Strong Earnings and Economic Data
JJ Kinahan – tastylive
February concluded with record highs for the markets. The S&P 500 rose by 0.5% yesterday, marking a 6% gain for the month, while the Nasdaq Composite climbed 0.9%, also ending the month with a 6% increase. These gains reflect a consistent upward trend, with both indices closing higher in nine of the past twelve months.

Viewpoint – Brokers and exchanges ramping up resources for retail traders
Walt Lukken, President and CEO – FIA
Retail trading is one of the fastest growing dimensions of the exchange-traded derivatives markets. This trend picked up speed during the pandemic, and it shows no signs of slowing down.
According to the Commodity Futures Trading Commission, US retail trading volume in futures contracts now averages about 50% higher than the pre-pandemic era.
Last week, FIA and the National Futures Association (NFA) held a ‘retail roundtable’ in Chicago – our second of its kind – to learn more about this trend. Roundtable participants represented all segments of the industry, including clearing firms, brokers, exchanges, and technology vendors.


Crypto derivatives’ daily trading volumes reach record highs
Martin Young – Cointelegraph
Daily trading volumes for options and futures crypto derivatives have surged in the past week, hitting record highs on a number of exchanges.
Crypto derivatives exchange Deribit said in a Feb. 29 X post that its 24-hour trading volume hit an all-time high of $12.4 billion on the day.

Trading Overview in February 2024
Japan Exchange Group
Japan Exchange Group released Trading Overview in February 2024. Cash Equity Market In February 2024, the daily average trading value for the Prime Market (domestic common stocks) was JPY 5.8126 trillion.The daily average trading value for the ETF market was JPY 310 billion. Derivatives Market.In February 2024, total derivatives trading volume was 34,708,506 contracts.


Trading Technologies closes on ATEO acquisition
Trading Technologies International, Inc.
Trading Technologies International, Inc. (TT), a global capital markets technology platform provider, today announced that it has closed on the acquisition of ATEO SAS, a leading provider of post-trade solutions for listed derivatives, expanding TT’s reach into clearing and other middle-office technologies and services. Terms of the transaction were not disclosed. ATEO will operate as a global managed service hosted in TT’s data centers. ATEO’s post-trade allocation engine is already fully integrated into the TT order management system (OMS), providing TT OMS clients with seamless access to the functionality.


Options Trading Q&A Session
tastylive (Video)
The market is experiencing a strong rally with tech stocks reaching new highs, while Apple faces a decline. The transcript highlights the performance of various stocks, such as Dell, NVIDIA, AMD, and Apple. Dell saw a significant move to the upside after reporting positive earnings, while Apple faced a decline of $3. Other tech stocks like NVIDIA and AMD reached all-time highs. The transcript also discusses the behavior of the market and the impact of changing market dynamics on different stocks. The hosts share their thoughts on potential trade ideas and strategies. They provide insights on options trading, including call diagonals and iron flies, and discuss the importance of considering factors like intrinsic value and extrinsic value when making trade decisions. The hosts also mention upcoming events, such as earnings releases and economic reports, that could impact the market. They conclude by encouraging viewers to join their live sessions and ask questions. Overall, the video provides a snapshot of the current market conditions and offers insights into potential trading opportunities.

Options Income and the Volatility Risk Premium; A well-known concept at the core of this new trend.
Lan Anh Tran – Morningstar
The derivative income Morningstar Category netted over $25 billion in inflows in 2023, growing its asset base by half. Much of this investment went to JPMorgan Equity Premium Income ETF JEPI, which pulled in nearly $13 billion throughout the year. Still, money diligently poured into other options-income products launched by a wide range of asset managers.
Options income isn’t a novel concept, but it isn’t for everyone. The asymmetrical risk/reward profiles of these strategies make them susceptible to large market movements, and over the long run, many of these funds have underperformed the broader market. Investors have shown a newfound appetite for elevated yields over the past few years, but yield shouldn’t be the yardstick by which one measures these strategies. This article will break down the source of returns for these funds to give a clearer picture of their benefits and drawbacks for investors.

Cboe (Video)
You may know that the $VIX Index signals expected volatility in the S&P 500 over the next 30 days. But were you aware that it has a 68% confidence level? In #Vol411, Scott Bauer gives a helpful overview including how its calculated, its relationship with $SPX and more.


CME Group Executives to Present at 2024 Raymond James Annual Institutional Investors Conference
CME Group
CME Group, the world’s leading derivatives marketplace, today announced that Global Head of Financial & OTC Products Tim McCourt, Chief Accounting Officer Jack Tobin and Executive Director of Investor Relations Adam Minick will present at the 45th Annual Raymond James Institutional Investors Conference on Tuesday, March 5, at 8:40 a.m. (Eastern Time).
The presentation will be available for livestreaming via CME Group’s investor website at Please allow extra time prior to the presentation to visit the site and download the streaming media software required to listen to the online broadcast. An audio webcast will be available for replay at the same address approximately 24 hours following the conclusion of the conference.


Humanity loves a cup of tea. So where’s the futures market? Modern day mugging
Aiden Reiter – Financial Times
To quote the avuncular, ‘roided out Iroh, former Fire Nation General and tea aficionado from Avatar: The Last Airbender, “the key to wisdom and tea is proper ageing.” So he would be disappointed to learn that, in our world, tea has no futures market. Commodity traders champ at the bit for the latest data on sugar harvests in Brazil, or the precipitation figures for rice-paddy laden regions of Vietnam – but can largely ignore similar signs for tea, the second most popular drink on the planet after water.

****** Just what we need, a futures market on hot brown water.~JJL

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