Income investors and those looking to diversify their alternatives portfolio should consider the Neuberger Berman Option Strategy ETF (NBOS ). The option-writing fund generates income from options premium and its short duration collateral portfolio and boasts a 7.78% distribution rate as of November 30, 2024.
Options strategies may prove advantageous for advisors and investors looking to position for potential volatility in 2025. In an environment of elevated volatility, options writers earn higher premiums, generating higher income potential for investors. The fund generated a nearly 8% distribution rate last month. Distribution rate annualizes the most recent distribution and then divides by the fund’s NAV.
NBOS is actively managed and seeks to generate income and long-term capital growth. Through the fund’s use of equity index options, it may provide a diversified income stream and yield for portfolios.
The fund writes put options on the S&P 500 and other indexes within the family of S&P 500 indexes, and on ETFs. Put options protect the buyer from loss should the underlying asset’s price fall below the strike price of the put. As a put writer, the fund benefits when the put option expires with the underlying price above or at the strike price. When it expires below and the put is exercised, the fund still benefits from the premiums earned.
Option-Writing Strategies Harness Volatility for Income
The strategy seeks to underwrite equity risk in markets, generating yield from option premiums and underlying collateral holdings. It’s expected to outperform in flat or declining markets, while lagging but still capturing some upside in rising markets. The strategy seeks to increase income potential through options premiums while also benefiting from market volatility. The fund also invests in short-term Treasuries as a source of income.
The ETF managers consider overall market volatility, underlying valuations, and risks when writing put options. The aggregative investment exposure of the options written will typically equal 100% of NBOS’ assets, though sometimes may be greater, without exceeding 125%.
NBOS collateralizes its options using a portfolio of laddered, investment-grade bonds, most short-term. The fund invests primarily in Treasuries. However, it can invest in government agency bonds, corporate bonds, mortgage- and asset-backed securities, structured notes, and cash or cash equivalents.
In addition to purchasing put options, the fund may invest in or write call options. NBOS carries a net expense ratio of 0.56%.
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