PUT SELLING OVERLAYS IN LARGE-CAP EQUITY PORTFOLIOS
RETHINKING TRADITIONAL EQUITY EXPOSURE
Financial advisors seeking efficient, risk-adjusted growth for clients often turn to broad-based, low-cost U.S. large-cap index funds. While index funds provide broad market exposure, they do not take advantage of a persistent market inefficiency called the Volatility Risk Premium (VRP). This occurs because investors consistently overpay for downside protection, meaning that the cost of options (implied volatility) is often higher than the actual market movement (realized volatility). By systematically selling put options, investors can collect this potential excess premium and enhance returns.
A well-designed put spread writing overlay can generate a supplemental income source and enhance long-term risk-adjusted returns. This approach capitalizes on the fact that put options are chronically overpriced due to sustained demand for downside protection. While manually managing such a strategy presents complexities, the Overlay Shares Large Cap Equity ETF (OVL) provides a systematic, risk-managed solution that allows advisors to capture these potential benefits efficiently in a turnkey solution.
THE CASE FOR A PUT SPREAD WRITING OVERLAY
Investors often overpay for put options, just like people tend to pay more for car insurance than the actual cost of claims. A put writing strategy works like an insurance company: by selling put options, an investor collects premiums from buyers who seek downside protection. Over time, this provides a steady income stream because put options tend to be overpriced.
Over the past 20 years, investors have paid more for downside protection (put options) than for upside speculation (call options). This pricing imbalance means that, all else being equal, selling puts generates more premium than selling calls, making put writing a more attractive strategy.
Puts Relatively Rich vs Calls
S&P 500 Index 97.5/102.5 Moneyness Implied Volatility Spread
Positive Readings Favor Put Selling, Negative Favor Call Selling
1/31/2005 - 1/31/2025
Source: Bloomberg. Past performance is no guarantee of future results. Option volatility historical pricing and spread is not illustrative of fund performance.
Moreover, spread writing strategies—when structured effectively—can provide low volatility of returns and lower sensitivity to interest rates compared to outright equity ownership.
A covered call strategy limits potential upside gains because you sell calls at a fixed price. In contrast, a put spread writing strategy allows investors to keep full upside exposure in the stock market while collecting premiums from put options that sit below current prices. The risk is controlled by simultaneously buying another put option to cap potential losses.
When paired with an outright long position in an underlying exposure, such as an index-based large-cap US equity ETF, investors can expect to receive full upside participation in the underlying market. This approach allows investors to generate positive returns in a variety of market environments, including flat or moderately declining markets, while slightly increasing downside participation during fast large-cap equity market selloffs.
This combination of selling relatively expensive downside (put) option volatility while maintaining uncapped upside also benefits from the fact that stocks, on average, tend to have more positive months than negative months. Further, the percentage of months in which large-cap stocks have greater than 2% upside moves tends to exceed the percentage of months in which stocks have greater than 2% downside moves, thus making the uncapped upside potential even more critical for extracting the most benefit out of the asset class.
S&P 500 Index Monthly Returns
1/31/2005 - 1/31/2025
Source: YCharts. Past performance and is no guarantee of future results. Index performance is not illustrative of fund performance. One cannot invest directly in an index.
ADDRESSING THE CHALLENGES OF DIRECT IMPLEMENTATION
Despite its advantages, implementing a put writing strategy independently requires significant expertise in strike selection, contract duration, and risk mitigation. Managing a put writing strategy manually can be challenging. If the market drops sharply, investors can face large losses unless proper risk controls are in place. Additionally, managing cash to cover potential losses (collateral) and ensuring there’s enough liquidity to trade options efficiently can add complexity.
As a result, most investors and advisors have historically gravitated toward covered call writing due to its perceived simplicity, even though put writing offers higher Volatility Risk Premium capture, a lower reliance on equity appreciation, and a more attractive risk-adjusted return profile. This underscores the need for a rules-based, professionally managed put writing strategy that mitigates these operational challenges while delivering the full benefits of the approach.
HOW OVERLAY SHARES LARGE CAP EQUITY ETF (OVL) DELIVERS A TURNKEY SOLUTION
OVL provides a systematic put writing overlay on top of a low-cost U.S. large-cap equity allocation, allowing investors to efficiently access the potential advantages of options-based income generation.
Unlike indiscriminate put selling, OVL employs a risk-defined approach, incorporating constant hedging mechanisms to help protect against unexpected market volatility. The fund’s methodology is designed to maintain multiple layers of risk management, including:
- Clearly defined downside risk through systematic hedging of sold put
- A diversified approach across multiple positions, expirations, and strike prices
- Active risk management in times of market stress, adjusting exposures to mitigate adverse conditions
This structure allows OVL to deliver enhanced income potential while maintaining prudent risk constraints, making it a compelling alternative for financial advisors seeking to increase portfolio efficiency without requiring direct options trading expertise.
Since launching in 2019, OVL has outperformed its benchmark of the S&P 500 Total Return Index, demonstrating the power of its systematic put writing strategy.
Overlay Shares Large Cap Equity ETF (OVL) vs. S&P 500 Index, Total Return (NAV)
9/30/2019 - 2/28/2025
Source: YCharts Performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance, please call 1-866-704-OVLS. For standardized performance and expenses https://lsfunds.com/ovl
CONCLUSION
For advisors looking to enhance client portfolios with an innovative, income-generating overlay strategy, a risk-defined put spread writing approach presents a powerful solution. By capitalizing on the persistent Volatility Risk Premium to generate consistent income, put writing offers a differentiated return stream that complements traditional equity allocations.
With Overlay Shares Large Cap Equity ETF (OVL), advisors can access this strategy in a liquid, tax-efficient, and professionally managed ETF structure, allowing them to help improve client outcomes while maintaining disciplined risk management.
By incorporating OVL, advisors can position portfolios to take advantage of market inefficiencies in a transparent, efficient, and cost-effective manner, ensuring that clients may benefit from a smarter, more resilient investment approach.
For more information on option overlay strategies or OVL, please contact info@lsfunds.com or call 770-350-8700.
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.
RISK FACTORS: The Fund invests in options that derive their performance from the performance of the S&P 500 Index. 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.
Distributed by Foreside Fund Services, LLC, which is not affiliated with the Adviser.
