Know Your Options: The Potential Advantages of Uncapped Structures

Guest Author
March 24, 2023

Cboe Guest Author: Michael Loukas, Chief Executive Officer, TrueShares ETFs

For retirees and risk-averse investors, structured outcome strategies may serve as an effective risk management tool as part of a conservative investment strategy. The theory behind a structured outcome strategy is to provide access to a broad-based index, such as the S&P 500® Index, while limiting both downside losses and upside gains in the market, with particular benefit lying in the mitigation of losses. 

A structured outcome strategy uses a well-defined option-based strategy to target a specific return, allowing for a specific or defined risk, at a set point in the future. Investors are protected from risk beyond their comfort zone, but their payoff is also limited to a preset maximum.

A buffered protection option strategy seeks to provide a “buffer” of protection against losses, while still providing the opportunity for a pre-determined level of growth or return.

Using a buffered protection strategy can seek to buffer against the first 10% of losses when the market has a downturn, over a defined outcome period. Some are designed to seek to achieve the investment strategy for investments made on the Initial Investment Day and held until the last day of the Investment Period. Others can differ in their exposure during market upturns, which are only reduced to about 70-80% of the gains observed by the S&P 500, while others are capped.

Capped Vs. Uncapped

A capped buffer protection strategy has specific limitations in place to cap its expenses or investing structure. While a cap may limit expense levels, the annual return will also be impacted.

An uncapped buffer protection strategy can offer a better return profile over the long run and make investing easier by removing difficult decisions for investors when compared to capped products. Overall, the potential advantage of the uncapped structure becomes apparent when you consider how these funds can trade in up and down markets.

Capped Products Trail in Up Markets

It is important to remember that investors can buy or sell at any time, not just at the end of a period. So how they are performing relative to expectations matters intra-period. This means that how they reach their expected outcome matters as much as the actual outcome.

In a capped structure, the cap is created by selling a call at the level that is defined as the cap. It is far out of the money when that cap is established. When the market goes up, it gets closer and closer to being in the money. In other words, it may become more valuable as a short position that weighs down performance. For investors, this means that a capped product may trail far behind an up market waiting for the period to end to realize gains up to the cap. 

In contrast, the uncapped structure does not have any additional options on the upside. As the market moves up, it trades closer to the expected outcome in terms of participation rate. For investors, that means they are poised to achieve almost all their expected gains in an up market as they occur.

When the market moves way up, a capped structure could get left behind waiting to realize the expected outcome. You may have to wait the whole year while the market is gaining. 

Resetting in a Down Market

The dilemma is even worse for a capped structure when the market is down. The capped and uncapped structures are very similar in their downside performance and face the same issue with realizing the buffer over time. Investors must wait to realize the full buffer at the end of the period. Both structures can have option positions down about 10%, and as the market moves down, each will have to wait until the end of the period for the full benefit of the buffer to be realized. The difference with a capped product means if you reset the buffer, you lower your cap and impact the return. 

If the market bounces, investors in a capped structure run into their cap sooner, limiting their chance to participate in the recovery. Some of the biggest upside moves happen in off market sell offs, so participation in those bounces is crucial for long term returns in investor portfolios. Resetting with a cap caps your recovery in the worst way. 

In an uncapped structure, investors can trade to reset their buffer, but since your upside is uncapped, there’s more opportunity to ride with a slightly different participation rate. That means you can reset your buffer and get additional downside mitigation without severely impacting your upside participation on any market bounce or recovery.

In a capped structure, when you are down and you reset your buffer, you lower the cap below its initial level. You are lowering how much you can participate in the recovery.

With an uncapped structure, you have more potential to ride a recovery, even after a reset.

Learn more about TrueShares Structured Outcome ETFs at

This article is part of Cboe’s Guest Author Series, where firms and individuals share their insights, strategies and ideas with the broader Cboe community. Interested in contributing? Email [email protected] or contact your Cboe representative to learn more.

Investing involves risk including possible loss of principal.

An investor who purchases Fund Shares after the Outcome Period has begun or sells Fund Shares prior to the end of the Outcome Period may experience results that are very different from the investment objective sought by the Fund for that Outcome Period. There is no guarantee that the Cap will remain the same after the end of the Outcome Period.

The Buffered Outcome ETFs' investment strategies are different from more typical investment products, and the Funds may be unsuitable for some investors. It is important that investors understand the investment strategy before making an investment. For more information regarding whether an investment in the Funds is right for you, please see the prospectus including "Investor Considerations."

Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus with this and other information about the Fund go to Read the prospectus carefully before investing.

Distributed by Foreside Fund Services, LLC.