New Trade for December 16th, 2022

Stocks ticked lower this morning, adding to yesterday’s steep losses as investors assessed the Fed’s “higher for longer” sentiment regarding interest rates and the possibility of a recession in the new year. The major indices were on track for a second straight negative week and a losing month.  

Many on Wall Street believe markets will likely remain volatile in the coming months as investor sentiment fluctuates between hopes of economic growth and recession fears. Today we’ll highlight an investment that provides large-cap exposure with a twist. It also allows investors to benefit from extreme shifts in market sentiment.  

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One of the first ETFs to launch from Simplify, The Simplify US Equity PLUS Downside Convexity ETF (SPD) seeks to provide capital appreciation by offering US large-cap exposure while aiming to boost performance during extreme market moves down via a systematic options overlay. The actively managed fund’s core holding gives investors low-cost, index-based exposure to US large caps. A modest option overlay budget is then deployed into a series of options positions that help create downside convexity in the fund.

Under normal circumstances, it invests at least 80% of its net assets (plus any borrowings for investment purposes) in equity securities of U.S. companies, primarily by purchasing ETFs. The downside convexity option overlay consists of purchasing exchange-traded and over-the-counter put options on the S&P 500 Index or an S&P 500 Index ETF.

The option strategy is designed to provide downside protection without capping any upside participation, or in other words, it creates downside convexity in the fund. The specific put option contracts are selected strategically based on the adviser’s evaluation of relative value, strike price, and maturity. Investors should anticipate a non-linear relationship between the fund and market returns.