When the Defiance S&P 500 Enhanced Options Income ETF (NYSEARCA:JEPY) launched, it aimed to generate high returns and significant dividend yield from selling daily options. The fund’s initial monthly dividend distributions resulted in an annualized yield of 59%, but its strategy appears to have shifted in recent weeks. Its approach to selling daily options has changed, which could impact its potential returns.

Initially, the fund planned to sell put options up to 5% in the money, allowing investors to generate income and participate in any upside of up to that amount. However, recent changes show that the fund is now only selling at-the-money put options, leaving out all potential upside. This shift in strategy became evident during a period of market rally, raising concerns about the fund’s performance.

Analysis of its performance relative to the S&P 500 during that period revealed that while the market experienced gains, JEPY only saw minimal increases, missing out on most of the upside and participating in all of the downside. This was a significant departure from the fund’s initial appeal, which included selling daily options and the ability to participate in market increases by 1-2%.

The deviation from its original strategy raises alarm because while the market experiences both green and red days, missing out on the potential gains from these green days can significantly impact the fund’s overall performance. Data from the last decade shows that the market’s total returns are heavily influenced by gains on days when the S&P 500 rose by 1% or more, highlighting the importance of participating in these potential increases.

Given these findings, selling at-the-money options could result in missed opportunities for significant gains from market rallies. It also exposes the fund to potential losses on red days, emphasizing the need to carefully consider its strategy and approach moving forward. The fund’s initial appeal rested on maximizing opportunities for income generation and participating in market gains, which may now be in question due to its recent shift in strategy.