A new ETF seeks to capitalize on the brisk market for zero-day options.

An exchange-traded fund (ETF) that began trading on Thursday provides investors with a new way to engage in the brisk market for short-dated equity options, a hazardous trading tactic that has captivated markets in recent months. On Thursday, Miami-based ETF sponsor Defiance ETFs LLC introduced the Defiance Nasdaq-100 Enhanced Option Income ETF, the first ETF to leverage daily options income creation, according to a news statement. The ETF intends to capitalize on the popularity of short-dated options contracts as well as the increased interest in ETFs that seek to create income by selling options and investing in large cap equities in the United States. Short-dated options contracts with a day or less to expiry, known as 0DTE (zero days to expiry) options, have grown in popularity with investors in recent years, accounting for up to half of daily trading volume in options on major ETFs and indexes such as the S&P 500 (.SPX) and the Invesco QQQ ETF. Their rising use has raised concerns about their hazards, as well as the possibility of a volatility shock that might spread to the broader stock market. Investors have also flocked to exchange-traded funds (ETFs) that seek to earn income while reducing portfolio volatility by selling options against stocks. One such ETF, the JPMorgan Equity Premium Income ETF (JEPI.P), has increased its assets to approximately $29.5 billion, up from approximately $12.4 billion a year ago. Another ETF, the Global X Nasdaq 100 Covered Call ETF (QYLD.O), has increased its assets to $8.1 billion from $6.9 billion a year ago. “If there is one thing that investors want, it is a consistent stream of income, and we hope to provide just that,” said Defiance ETFs CEO Sylvia Jablonski. QQQY, a new actively managed ETF, aims monthly yield for investors by mixing Treasuries and Nasdaq-100 index options with short maturities. According to the ETF sponsor, the fund will seek to create income by selling 0DTE put options in order to capture the premium in these extremely volatile derivatives contracts. “QQQY is attempting to scratch two itchs at the same time: potential income from an asset that typically does not generate income and exposure to the sudden popularity of trading ODTE options,” said Lois Gregson, senior ETF analyst at FactSet Research Systems. Gregson, on the other hand, warned that the ETF’s reliance on the extremely volatile 0DTE options could expose it to losses. “The fund is ‘betting’ that the market will rise more often than it will fall,” Gregson explained, noting that the portfolio manager would have to buy back the short put options at a loss. “It’s similar to picking up dimes in front of a bulldozer.” “The income potential is there, but you could also get run over,” Gregson explained. Defiance ETFs plans to launch two more ETFs: the Defiance S&P 500 Enhanced Options Income ETF and the Defiance R2000 Enhanced Options Income ETF, both of which will adopt a similar strategy with exposure to the S&P 500 (.SPX) and Russell 2000 Indexes (.RUT). According to Seth Golden, head of investment analysis firm Finom Group, the new ETF’s success may be dependent on sustained growth in interest in short-dated options. Golden stated that he will monitor liquidity and trade volume for the new product to determine its potential. At 12:45 p.m. (1645 GMT), the ETF’s shares were trading roughly flat at $20.13, with approximately 7,000 shares changing hands. Risk disclaimer: Please note that this article does not offer any instructions or suggestions regarding investment decisions. It is important for you to conduct your own research or seek professional advice from a qualified professional before conducting an investment decision.