Does it make sense as a long-term investment to sell Put Options of a Bonds ETF?


For this to work, there obviously must be a bias for the share price of the ETF to go up long-term.

It doesn't have to go up - as long as the price doesn't decline below your strike it could trade sideways or even go down some

Is this all there is to it? If so, do bond ETFs usually distribute 100% of the interest payments to investors?

The bond coupons are passed onto the ETF investors as dividends (monthly for $VCLT)

Interest rates go down, causing the price of the underlying bonds to go up.

That's correct but since you mentioned $VCLT (Vanguard Long-Term Corporate Bond ETF) you also need to consider credit spreads, which could widen even if rates don't move. Additionally, the slope of the rates curve could change, so it further depends on the durations of the bonds included in the ETF.


It's really not that different from selling puts on other ETFs that pay dividends.

It's important to consider implied volatility (IV) compared to historical volatility (HV). Since bond ETFs have relatively low volatility, option premiums are commensurately low. In order to generate meaningful income, you'd have to sell a lot of contracts or choose a strike that's close to the money, both of which are risky.

I'm not sure I understand your point about selling puts as a long-term investment. Theta increases as the options approach expiry. Ideally, you'd repeatedly sell relatively short-dated options, rather than few long-dated ones.

After looking at the option chain for VCLT, I also note that there are few expiries to choose from and there's almost no volume/open interest. As a result, bid-ask spreads are quite wide, which makes it hard to unwind the position to take profits/avoid losses before expiry.


The primary driver of share price for a bond ETF is interest rates. They are inversely related. Since interest rates are so low and can't drop much further, VCLT isn't going to rise a lot because of that.

The secondary driver is investor mentality. VCLT periodically has a 10% correction as investor/trader perceptions change (for example, see the inverted yield curve fears of late 2018 and the Covid correction last year).

VCLT issues:

  • Implied volatility is very low so the payoff for selling options isn't good.

  • Open interest is low, resulting in illiquid options with wider bid/ask spreads. That also makes it more costly to close the position if need be.

  • Put premium appears to be fatter than call premiums but this is a function of dividends being priced into the options (a dividend raises put premium and lowers call premium). VCLT has been going ex-dividend every month for about 27 cents so share price is going to drop that amount every month. Selling a long dated option anywhere near the money is likely to be assigned. So if it's a December expiration, outside of market forces that move share price, with a short put you're agreeing to but at the strike, knowing that share price $1.62 lower (6 dividends) by expiration. However, you're only receiving about 1/2 that amount in baked in put premium increase.

Selling puts on VCLT isn't a good income play.


Good answers here, but one thing to keep in mind is that when you sell single options, your profit is limited to the premium that you get upfront. Your best case scenario is that the option is not exercised, and you don't have to pay any more to close your position.

So even if VCLT triples in your investment horizon, your profit will be capped at the premium you received. If you want to bet on VCLT going up, just buy the ETF and don't mess with options.