Atlanta-based Nicholas Wealth Management has made its ETF debut by launching a fund that aims to deliver a high level of income primarily through actively managed options-based investing.

David Nicholas, Founder and President of Nicholas Wealth Management.

The Nicholas Fixed Income Alternative ETF (FIAX US), which has listed on NYSE Arca, may appeal to yield-seeking investors who wish to diversify their sources of income while avoiding the duration risk posed by traditional fixed income asset classes.

The fund is led by David Nicholas, Founder and President of Nicholas Wealth Management, alongside Jay Pestrichelli, co-Founder and CEO of ZEGA Financial, and Michael Venuto, CIO of Toroso Investments.

The ETF invests 60% to 90% of its assets in short-term US Treasuries which serve to generate income and act as collateral for the fund’s options-based sleeve which accounts for the remaining 10% to 40%.

The options sleeve consists of option spreads on ETFs and indices linked to the performance of equities, fixed income, and commodities. Bull call spreads, bear call spreads, bull put spreads, and bear put spreads may all be employed within the options sleeve.

Bull spreads involve buying an option closer to the money and selling another option of the same type further out of the money. The strategy typically involves paying a net option premium. Bull call (put) spreads tend to profit when the asset price increases (decreases) above (below) the strike price of the long call (put) option; however, gains are capped when the asset price reaches the strike price of the short call (put) option.

Bear spreads, in contrast, involve buying an option further from the money while selling another option of the same type closer to the money. The strategy typically involves receiving a net option premium. Bear call (put) spreads tend to profit if the asset price falls (rises) or remains the same but may suffer if the asset price increases (decreases) above (below) the strike price of the short call (put) option; however, losses are capped when the asset price reaches the strike price of the long call (put) option.

Option spreads are ‘vertical’ in nature, meaning that the options purchased and written are in the same expiration cycle (typically with weekly, monthly, or quarterly expirations).

The risk level of the option spreads used by the ETF will generally vary from 1% to 3% depending on the time to expiration of the options.