Options Deep Dive: 3 Rounds in the Ring - XPAY vs XDTE

Overview

Roundhill currently offers two different income-focused ETFs targeting the S&P 500 Index. The first is XDTE, the Roundhill S&P 500® 0DTE Covered Call Strategy ETF, and the second is XPAY, the Roundhill S&P 500® Target 20 Managed Distribution ETF. So how do the two ETFs differ and which may suit you best? 

Round 1: Delta to the Benchmark

Delta is one of the main option greeks, and it measures an option’s sensitivity to the underlying asset price. For example, if an investor owns a call option on XYZ with a 50% delta, for every $1 increase in XYZ, they can expect a $0.50 increase in the price of their option. When comparing XDTE and XPAY, delta is a key differentiator. Both ETFs hold call options, but the net delta of their portfolios vary. 

XPAY is composed of a ladder of very deep in-the-money SPY call options. Due to how far in-the-money these call options are (you can think of them as 0 strike call options), they trade at a 100% delta, which means that they trade identically to the underlying asset. These options create a synthetic long position. 

XDTE is also composed of a ladder of very deep in-the-money SPX call options. While slightly less in-the-money, they still have near 100% deltas. However unlike XPAY, these longer-dated options are used to cover writing (or selling) near-to-the-money 0DTE call options. The written 0DTE options are short delta. This negative delta position, which is small in magnitude at the time of trading every morning, partially offsets the 100% delta of the long calls. This leaves the Fund with a less than 100% delta exposure to the S&P 500 intraday. 

It’s important to note that deltas are not stagnant – they will move as the underlying asset price (in this case, the S&P 500 Index) moves around the option strike. This is not relevant for the deep in-the-money calls held in XPAY or XDTE, as the S&P 500 is trading significantly above their strikes. However, it is relevant for the short 0DTE calls in XDTE, which are struck close to-the-money. Every morning, the short out-of-the-money call plus long in-the-money call combo creates a net positive delta, meaning investors profit from moves higher in the underlying asset. See below for an illustrative example.

9:35AM - Market has opened, new 0DTE position is written

However, if the S&P 500 were to move higher over the day, the negative delta of the short call would grow in magnitude, and the net delta would shrink. XDTE would profit less and less from moves higher in S&P 500.

11:45AM - S&P 500 rallies 2% and net delta shrinks

If the market fell, the opposite would occur. The 0DTE option delta would shrink and the portfolio net delta would rise. XDTE would move more in-line with the underlying S&P 500 exposure.

2:58PM - S&P 500 falls 3%, net delta rises

Regardless of how the 0DTE option trades during the day, after the market closes and the 0DTE option expires, XDTE will remain at 100% delta overnight until the market reopens and a new 0DTE option is written (sold).

4:00PM - S&P 500 closes -1% on the day, 0DTE expires worthless, overnight exposure remains at 100% delta

What does this all mean? In short, XPAY has a higher sensitivity to intraday S&P price changes than XDTE does, especially when intraday markets move meaningfully higher. While this may seem like a negative for XDTE, selling intraday upside exposure in XDTE can be a profitable strategy, as evidenced by XDTE outperformance versus the S&P 500 Index from inception through year-end 2024.

Round 2: Where Are My Distributions Coming From?

As mentioned earlier, both XDTE and XPAY are income-focused ETFs. The funds currently make distributions on a weekly and monthly basis, respectively. But how do the value of these distributions differ if they both track the S&P 500?

In the case of XPAY, investors are paid fixed, monthly distributions based on a 12-month calendar, with the intention of returning 20% of the total notional each year as return of capital payments. While the NAV of XPAY will fluctuate based on the performance of the S&P 500 (as we discussed, these are 100% delta options), the distributions will be paid regardless of S&P 500 performance. The key benefit to XPAY is that its distributions have the potential to be return of capital (not taxable) as other methods of monetizing positions (i.e. dividends, selling shares and taking capital gains, and options income) are all taxable events. With XPAY, investors potentially will not pay taxes on their position until they sell shares, and they will receive a targeted 20% of their position annually in cash, targeted towards being tax-free.

Meanwhile, XDTE distributions are variable week to week. Weekly distributions are generally paid based on gross premiums collected from daily call writing throughout the week. That means, it is not S&P 500’s performance that determines the magnitude of distributions, but its level of implied volatility and strike selection. In the case of volatility, higher implied volatility equals higher premiums and vice versa (all else equal). While the price performance of the S&P 500 will not impact the magnitude of premium, the moneyness of the options will impact profitability, as with any option selling strategy. A positive profit from 0DTE call writing is generated when intraday SPX performance is relatively muted and the short calls expire out-of-the-money. This is a stark contrast to XPAY, which has a 100% delta to the S&P 500 and, therefore, uncapped upside. 

Round 3: Winner? Loser? Draw?

As with any investment, XDTE and XPAY’s relative performance will be entirely dependent on market conditions. XDTE is likely to outperform the benchmark in down and neutral-to-slightly-up markets but underperform when markets move meaningfully higher. XPAY trades at a 100% delta and should approximately track the benchmark on a 1-for-1 basis (including return of capital payments).

When comparing the two funds, investors should keep in mind the variability of distributions. If you are looking for a fund that systematically provides consistent distributions in a tax-free manner, XPAY may be the investment vehicle for you. If you are looking to generate income while reducing your portfolio’s intraday volatility, XDTE might be a fit in your portfolio. 

See below for a table summarizing a comparison of the two ETFs. 

Considerations

All investment strategies come with considerations, especially those involving options and leverage. While solely composed of call options, XDTE and XPAY are both exposed to downside risk, since each Fund’s long call options are deeply in-the-money. Additionally, when evaluating income-generating ETFs investors should consider the lens of total return, not only price return, as cash distributions are a major contributor to shareholder profitability over time. 

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The performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than their original cost. Returns less than one year are not annualized. For the most recent standardized and month-end performance, please click here: XDTE, XPAY.  

The Funds currently expect, but do not guarantee, to make distributions on a weekly or monthly basis. Distributions may exceed the Funds’ income and gains for the Funds’ taxable year. Distributions in excess of the Funds’ current and accumulated earnings and profits will be treated as a return of capital. Distribution rates caused by unusually favorable market conditions may not be sustainable. Such conditions might not continue to exist and there should be no expectation that this performance will be repeated in the future. Please see the Supplemental Tax Information section of the webpage for more information on the distribution composition including the estimated return of capital. Current distributions may include return of capital. 

Per the Funds most recent 19a-1 notice, the estimated per share composition of the distribution includes return of capital (ROC) of 100% for XDTE and XPAY.

A final determination of the tax character of distributions paid by the Funds will not be known until the completion of the Funds’ fiscal year and there can be no assurance as to the portions of each Fund’s distributions that will constitute return of capital and/or dividend income. The final determination of the tax character of distributions paid by the Funds will be reported to shareholders on their Form 1099-DIV.

Please consult your tax advisor for proper treatment on your tax return. 

This material must be preceded or accompanied by a prospectus.

Click here for the XDTE prospectus. 

Click here for the XPAY prospectus. 

All investing involves risk, including the risk of loss of principal. There is no guarantee the investment strategy will be successful. The funds faces numerous risks, including options risk, liquidity risk, market risk, cost of futures investment risk, clearing broker risk, commodity regulatory risk, futures contract risk, active management risk, active market risk, clearing broker risk, credit risk, derivatives risk, legislation and litigation risk, operational risk, trading issues risk, valuation risk and non-diversification risk. For a detailed list of fund risks see the prospectus. 

XPAY Risks

Distribution Tax Risk. The Fund currently expects to make distributions on a monthly basis. These distributions are expected and designed to exceed the Fund’s income and gains for the Fund’s taxable year. Distributions in excess of the Fund’s current and accumulated earnings and profits will be treated as a return of capital. The Fund seeks to be managed such that the entirety of the Fund’s distributions will be treated as a return of capital. A return of capital distribution generally will not be taxable but currently will reduce the shareholder's cost basis and will result in a higher capital gain or lower capital loss when those Fund Shares on which the distribution was received are sold. Once a Fund shareholder’s cost basis is reduced to zero, further distributions will be treated as capital gain if the Fund shareholder holds Fund Shares as capital assets. Additionally, any capital returned through distributions will be distributed after payment of Fund fees and expenses. Because a significant portion of the Fund’s distributions will consist of return of capital, the Fund may not be an appropriate investment for investors who do not want their principal investment in the Fund to decrease over time or who do not wish to receive return of capital in a given period.

Market Risk. Market risk is the risk that a particular security, or shares of the Fund ("Fund Shares") in general, may fall in value. Securities are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in securities prices.

Managed Payout Risk. The Fund intends to pay monthly distributions to shareholders based upon based on the NAV of the Fund on the final business day of December each calendar year. Distributions will be paid from Fund assets regardless of the Fund’s performance or the level of dividends, income and capital gains earned by the Fund, and will reduce the amount of assets available for investment by the Fund. If distributions paid by the Fund exceed the Fund’s earnings and profits, distributions of that excess will be treated as a return of capital to the extent of your tax basis in your Fund Shares.

The targeted annual distribution rate to be paid by the Fund each year is based on the NAV of the Fund on the final business day of December of the prior year. The targeted annual distribution rate is not guaranteed and may be decreased or increased in the future. The actual annual distribution rate paid by the Fund each month or year may be higher or lower than the targeted rate.

SPY ETF Risks. The Fund will have significant exposure to the S&P 500 Index and the SPY ETF through its investments in the SPY FLEX Options. Accordingly, the Fund will be subject to the risks of the SPY ETF.

XDTE Risks

Covered Call Strategy Risk. A covered call strategy involves writing (selling) covered call options in return for the receipt of premiums. The seller of the option gives up the opportunity to benefit from price increases in the underlying instrument above the exercise price of the options, but continues to bear the risk of underlying instrument price declines. The premiums received from the options may not be sufficient to offset any losses sustained from underlying instrument price declines, over time. As a result, the risks associated with writing covered call options may be similar to the risks associated with writing put options. Exchanges may suspend the trading of options during periods of abnormal market volatility. Suspension of trading may mean that an option seller is unable to sell options at a time that may be desirable or advantageous to do. 

Flex Options Risk. The Fund will utilize FLEX Options issued and guaranteed for settlement by the Options Clearing Corporation (OCC). In the unlikely event that the OCC becomes insolvent or is otherwise unable to meet its settlement obligations, the Fund could suffer significant losses. Additionally, FLEX Options may be less liquid than standard options. In a less liquid market for the FLEX Options, the Fund may have difficulty closing out certain FLEX Options positions at desired times and prices. The values of FLEX Options do not increase or decrease at the same rate as the reference asset and may vary due to factors other than the price of reference asset. 

0DTE Options Risk.*** The Fund’s use of zero days to expiration, known as “0DTE” options, presents additional risks. Due to the short time until their expiration, 0DTE options are more sensitive to sudden price movements and market volatility than options with more time until expiration. Because of this, the timing of trades utilizing 0DTE options becomes more critical. Although the Fund intends to enter into 0DTE options trades on market open, or shortly thereafter, even a slight delay in the execution of these trades can significantly impact the outcome of the trade. Such options may also suffer from low liquidity, making it more difficult for the Fund to enter into its positions each morning at desired prices. The bid-ask spreads on 0DTE options can be wider than with traditional options, increasing the Fund’s transaction costs and negatively affecting its returns. Additionally, the proliferation of 0DTE options is relatively new and may therefore be subject to rule changes and operational frictions. To the extent that the OCC enacts new rules relating to 0DTE options that make it impractical or impossible for the Fund to utilize 0DTE options to effectuate its investment strategy, it may instead utilize options with the shortest remaining maturity available or it may utilize swap agreements to provide the desired exposure.

Roundhill Financial Inc. serves as the investment advisor. The Funds are distributed by Foreside Fund Services, LLC which is not affiliated with Roundhill Financial Inc., U.S. Bank, or any of their affiliates. 

Glossary

S&P 500 Index (S&P 500®): The S&P 500 Index is a measure of large-cap U.S. stock market performance. It is a float-adjusted, market capitalization-weighted index of 500 U.S. operating companies and real estate investment trusts selected through a process that factors in criteria such as liquidity, price, market capitalization, financial viability and public float. It is rebalanced quarterly in March, June, September and December.