If you work with income-focused investors, you’ve probably heard some version of this question: “Is there any way to generate more income without taking on risks I don’t understand?”
It’s not an easy problem. Bond markets have gone through large interest rate shifts, equities can be volatile, and many investors still remember how “hidden risks” surfaced in past drawdowns. This has led some advisors and institutions to explore options-based strategies, including putwrite ETFs, as one possible component of an income-oriented portfolio. While this blog discusses put-writing concepts broadly, Overlay Shares implements the strategy through put spreads, pairing each short put with a lower-strike long put to establish a defined-risk options overlay.
At a high level, a putwrite ETF is an exchange-traded fund that:
Sells (“writes”) put options on a market index (often the S&P 500 Index), and
Holds collateral—such as cash, short-term fixed income, or an underlying ETF—to support the obligations of those options.
When the ETF sells a put option, it:
Receives an upfront option premium, and
Takes on the obligation to absorb some downside if the index falls below the strike price of the option.
If the index finishes above the strike price at expiration, the put option may expire worthless, and the strategy keeps the premium. If the index falls below the strike price, the put seller may incur losses that can partially or fully offset, or exceed, that premium.
In simple terms, the strategy is agreeing to take on some downside risk in exchange for option premium income, within a rules-based framework.
One factor that has influenced option pricing over time is the historical tendency for implied volatility to exceed the volatility the market ultimately realizes. This relationship—often referred to as the volatility risk premium—has been observed across multiple market periods, although it can vary meaningfully and may not persist in the future.
It does not eliminate risk, and it should not be viewed as a guarantee of income or positive returns. However, understanding this market dynamic can help explain why option sellers may at times receive premiums for taking on equity market risk.
When advisors hear “options-based income,” many immediately think of covered-call strategies. If the goal is to harvest option premium, though, there are important differences between selling calls and selling puts. The historical data behind the chart below helps illustrate this. We start by comparing two option selling indexes: the Cboe S&P 500 BuyWrite Index (BXM, black) and the Cboe S&P 500 PutWrite T-W Index (PWT, blue). BXM consists of a portfolio of S&P 500 Index securities with a monthly at-the-money (ATM) call option sold against the portfolio. PWT owns U.S. Treasury Bills and sells a monthly ATM put option on the S&P 500 Index. To reiterate: PWT does not include S&P 500 portfolio exposure. Over this period, investors in a systematic treasury bill + putwrite strategy (PWT) have outperformed the covered-call overlay strategy (BXM) without having any direct equity beta exposure. The sample below shows data from 7/7/2014 – 12/31/2025.
Source: Ycharts | Results vary across market cycles and index performance is not indicative of any investable strategy. You cannot invest directly in the index
The pattern is intuitive. A covered-call strategy accepts call premium but gives up a portion of the market’s strongest upside moves, while still participating in most drawdowns. In long or powerful equity rallies, that forgone upside can more than offset the income. By contrast, a putwrite strategy is not limited in its upside potential. Selling puts can allow investors to keep the full premium in flat or rising markets and use that premium to help absorb part of the damage in more moderate pullbacks. Only when markets move meaningfully below the strike does the options sleeve begin to look and feel more like equity risk. Additionally, option premiums may not be sufficient to offset losses in declining markets.
For income-focused investors, the practical takeaway is that not all option-selling frameworks are created equal. For some investors, selling puts may offer a differentiated way to seek option-premium income across a full market cycle. This is one of the reasons the Overlay Shares lineup is built around a disciplined, out-of-the-money put-writing framework, while still acknowledging that each approach will have periods where it is more or less favorable.
But not all putwrite strategies look alike. Two design choices can significantly affect how they behave:
What collateral backs the options?
Two broad approaches are common:
Cash-secured putwriting
The fund sells put options and holds enough cash and/or short-term instruments to cover its obligations if the market declines sharply. This can help manage counterparty obligations, but it does not eliminate the risk of loss. If the market falls, the value of the options position can decline substantially.
Overlay on an existing portfolio
Some strategies, including Overlay Shares, hold a core ETF exposure—such as a large-cap equity ETF or a core bond ETF—and then apply a put option overlay on top. In that case, investors are exposed both to:
The underlying asset class (equities or bonds), and
The performance of the options overlay.
The choice of collateral affects the strategy’s return pattern, risk exposures, and potential role in a portfolio.
Single puts vs. put spreads
A second key choice is whether the strategy uses:
Single (“naked”) short puts
The strategy sells a put option, collects premium, and remains exposed to additional losses as the index declines, potentially down to zero in an extreme scenario.
Put spreads
A put spread is created by:
Selling a put at one strike price, and
Buying another put at a lower strike price.
The purchased (long) put is designed to create a floor on losses from the options position over each option cycle. While this does not protect the overall portfolio from losses in the underlying assets, it helps define the maximum loss attributable to the options sleeve.
Overlay Shares uses put spreads, rather than single short puts, within its overlay design.
Liquid Strategies manages the Overlay Shares family of ETFs, which focuses on combining core equity and fixed income ETF exposures with a put spread overlay using options on the S&P 500 Index.
Conceptually, the process looks like this:
Each fund starts with a core allocation—such as:
An S&P 500 ETF (U.S. large-cap equities)
A small-cap equity ETF
A foreign equity ETF
A core bond ETF
A short-term bond ETF
A municipal bond ETF
Put spread overlay on each ETF’s respective underlying index
On top of that core, the strategy systematically:
Sells laddered, out-of-the-money (OTM) index put options, and
Purchases lower-strike index put options, forming put spreads
Defined options risk framework
Because each short put is paired with a lower-strike long put, the options sleeve has a defined maximum loss over each option cycle. However, the underlying holding still carries downside market risk. This does not eliminate equity or bond market risk, but it provides a structural framework for managing tail risk within the overlay itself.
The Overlay Shares ETF lineup applies this same overlay concept across:
For some investors, the appeal is the combination of familiar core exposures with a systematic options overlay that is designed with risk controls on the derivatives sleeve.
Any decision to use a putwrite or overlay approach should be grounded in an investor’s objectives, risk tolerance, constraints, and time horizon. Conceptually, some investors and advisors evaluate strategies like Overlay Shares in a few broad contexts:
Adjusting core equity allocations
An investor who already holds a broad equity ETF might, together with their adviser:
Maintain a core allocation to a traditional equity ETF, and
Allocate a portion to an ETF that combines equity or bond exposure with a put spread overlay.
The idea is to stay connected to major markets while introducing a rules-based options component that may change the pattern of returns and distributions.
Building a diversified “income sleeve”
Some income-focused portfolios blend multiple sources of potential cash flow, such as:
Traditional fixed income
Dividend-oriented equities
Options-based strategies, including putwrite and overlay approaches
Because Overlay Shares applies a consistent overlay concept across multiple underlying asset classes (equities and fixed income), some investors view the family as one potential tool to diversify how income is generated—across coupons, dividends, and option premiums—recognizing that this does not eliminate risk but offers a potentially diversifying risk premium.
Incorporating a defined options risk framework
Investors who are comfortable with derivatives but prefer clearly defined parameters may gravitate toward structures, like put spreads, that establish a maximum loss for the options sleeve over each option cycle. This does not cap losses in the overall fund, but it offers a more transparent framework for understanding the risk contribution of the overlay itself.
In all of these cases, position sizing, monitoring, and rebalancing are critical and typically require ongoing review.
Ready to explore how a put spread overlay may complement your income or multi-asset allocations?
Explore the Overlay Shares ETFs lineup at lsfunds.com and contact us to discuss how a tailored put-spread overlay might enhance your income-focused portfolio design.
Risk Factors
Options strategies involve risk, including the potential for significant losses. Putwrite and put spread strategies may lose more than the premiums received, particularly in sharply declining markets. Premium income is not guaranteed and may vary with market conditions. Past performance of indices or strategies is not indicative of future results.
Selling (writing) and buying options are speculative activities and entail greater than ordinary investment risks. The Fund’s use of put options can lead to losses because of adverse movements in the price or value of the underlying asset, which may be magnified by certain features of the options. When selling a put option, the Fund will receive a premium; however, this premium may not be enough to offset a loss incurred by the Fund if the price of the underlying asset is below the strike price by an amount equal to or greater than the premium. Purchased put options may expire worthless and the Fund would lose the premium it paid for the option. The Fund may lose significantly more than the premiums it receives in highly volatile market conditions.
The Fund will invest in short term put options which are financial derivatives that give buyers the right, but not the obligation, to sell (put) an underlying asset at an agreed-upon price and date. The Fund’s use of options may reduce the Fund’s ability to profit from increases in the value of the underlying asset. The Fund could experience a loss or increased volatility if its derivatives do not perform as anticipated or are not correlated with the performance of their underlying asset or if the Fund is unable to purchase or liquidate a position.
Disclosures
Overlay Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Total Returns are calculated using the daily 4:00pm EST net asset value (NAV). Market price returns reflect the midpoint of the bid/ask spread as of the close of trading on the exchange where Fund shares are listed. Market price returns do not represent the returns you would receive if you traded shares at other times.
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other important information about the Fund, please visit the Documents section of this website or call (866) 704-OVLS. Read the prospectus carefully before investing.
Data from third-party sources are believed to be reliable but have not been independently verified
Liquid Strategies, LLC (“Liquid”) is an independent investment adviser registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended. Registration as an investment adviser does not imply any specific level of skill or training. Additional information about Liquid, including our investment strategies, fees, and objectives, is available in our Form ADV Part 2A and our Form CRS.
The information provided on this website is for informational purposes only and should not be construed as investment, tax, or legal advice, nor as an offer to sell or a solicitation of an offer to buy any security or investment strategy. All content is provided on an “as is” basis without warranties of any kind. While the information has been obtained from sources believed to be reliable, Liquid Strategies, LLC does not guarantee its accuracy or completeness, and it may be superseded by subsequent market events or other circumstances. We undertake no obligation to update or revise any information contained herein.
Options trading involves significant risk and is not suitable for all investors. Options can be highly volatile, may lower total returns, and even well-structured strategies may result in losses due to market conditions or unforeseen events. Before engaging in options trading, investors should carefully review and understand the disclosure document Characteristics and Risks of Standardized Options, available at www.theocc.com.
Investing involves risk, including the potential loss of principal. Past performance is not indicative of, and does not guarantee, future results. Investors should consult with a qualified financial and/or tax professional before implementing any investment strategy.
Distributed by Foreside Fund Services, LLC, which is not affiliated with the Adviser.