On March 7, 2024, Roundhill Investments launched the first two ETFs utilizing zero-day-to-expiration (0DTE) options to generate income and pay dividends to investors. The team at Roundhill recently released a report detailing the returns and features of these two high-yield funds.

The two Roundhill ETFs are:

·       Roundhill Innovation-100 0DTE Covered Call Strategy ETF (QDTE), with a current distribution yield of 35.54%.

·       Roundhill S&P 500® 0DTE Covered Call Strategy ETF (XDTE) now yields 21.68%.

0DTE option trading involves selling call options in the morning that expire on the same day. Currently, only the SPDR S&P 500 ETF Trust (SPY), Invesco QQQ Trust ETF (QQQ), and iShares Russell 2000 ETF (IWM) have options that expire daily. The options are weekly options that, after a week, become 0DTE puts and calls.

Roundhill provided performance results from the launch date through the end of February. QDTE returned 17.82% compared to 16.78% from QQQ. XDTE posted an 18.81% return, compared to 18.16% from SPY. The return differences are not significant; however, in a strong bull market, such as the one that occurred in 2024, covered call ETFs typically underperform the underlying assets. The Roundhill ETFs produced comparable returns with lower volatility.

Here are some interesting facts from the Roundhill report:

“The ‘night effect’ is a phenomenon where stock returns have historically been higher during the overnight trading session compared to the daytime market hours. By holding an uncapped long position on the index overnight—XDTE and QDTE sell their 0DTE calls in the morning—both funds can benefit from this effect.” This effect has been a favorable tailwind for both ETFs.

Roundhill actively manages the strike prices of its call options. As the report notes: “If the call is written too close-to-the-money, it will expire in the money and generate a loss, and if the call is written too far-out-of-the-money, it will not generate an attractive premium.” Fund managers examine the “win ratio,” which measures the percentage of the time the calls expire out of the money.

The average win ratio for unmanaged 0DTE calls is 69%. The Roundhill fund managers with active management have posted a 76% win ratio. The extra wins add 1.44% to the XDTE return and 2.10% to QDTE.

As an additional bonus, QDTE and XDTE pay weekly dividends, with cash deposited into your account every Friday. You might have noticed that these funds have large distribution yields. That raises the potential for some erosion in share price. We’ll want to keep an eye on the total return results.