Animal Spirits Podcast
Episode: Talk Your Book: The Psychology of Income
Date: December 1, 2025
Guests: Michael Batnick (A), Ben Carlson (C), Troy Cates (D) (Co-Founder, Neos Investments)
Overview
This episode explores the surge in popularity of option-based income ETFs—even during strong bull markets—through a deep-dive conversation with Troy Cates, co-founder of Neos Investments. Hosts Michael Batnick and Ben Carlson unpack the psychology behind investors' love for steady income, the mechanics and risks of various option strategies, and how Neos differentiates itself in a crowded field. The discussion also analyzes tax implications, market scenarios, and how these products fit into investor portfolios across age brackets.
Key Discussion Points & Insights
1. The Allure of Option-Based Income in Bull Markets
- Even in rising markets, investors are flocking to income-focused ETFs for the perceived safety and regular yield.
- This trend extends beyond retirees to younger investors seeking alternative sources of income and portfolio diversification.
“People love income. It’s that simple.” – Ben (01:18)
- The hosts predict that the popularity of these products would further accelerate in sideways or bear markets.
Timestamp: 00:47–01:51
2. Introduction to Neos Investments
- Troy Cates summarizes Neos as an ETF issuer specializing in “synthetic option space,” offering income strategies in a tax-efficient manner.
- Neos manages 13 ETFs across various asset classes (equities, fixed income, Bitcoin, gold, real estate), focusing on “core allocations” with options layered on top.
“We build option strategies on top of those reference indexes … and we really just want to be a solutions provider in the end and keep slicing up the asset allocation pie.” – Troy Cates (03:12)
Timestamp: 02:12–03:12
3. Differentiation & Transparency in a Crowded Market
- Troy emphasizes transparency, long-term support for distributions, and participation in underlying asset returns, rather than capping returns for yield only.
- The discussion raises concerns about “bad actors” overpromising high distribution yields unsupported by actual returns.
“We want to make sure that those distributions going out can be supported by the total return over time.” – Troy Cates (04:00)
Timestamp: 03:12–05:17
4. Mechanics: What Are Investors Trading Off?
- In rising markets, option-based income funds typically lag the index slightly (e.g., NASDAQ up 20%, fund might be up ~18%), converting a portion of return into regular income.
- The strategy outperforms in flat or modestly declining markets due to steady premium collection, but isn’t designed to protect against sharp drawdowns.
“You are transforming the return structure of an asset class with positive expected returns into an income stream without giving up so much that you’re getting destroyed … it’s not like the NASDAQ would be up 20 and you’re up 12.” – Ben (04:33)
Timestamp: 04:33–06:32
5. Shifts in Investor Demographics & Asset Flows
- Neos sees increased interest from younger investors using these ETFs for income compounding—sometimes reinvested, sometimes used to supplement spending—unlike the traditional retiree focus.
“Now we’re starting to see people younger and younger wanting to be invested in these types of products … how can they build an income-producing portfolio at a young age?” – Troy Cates (06:32)
Timestamp: 06:32–07:42
6. Downside & Upside Capture: Managing Expectations
- The only "protection" in a standard covered call fund is the option premium collected; these are not “hedged” or black swan funds.
- Example: If market drops 20% in a month, and you collect a 1.5% premium, your loss is ~18.5%. If market declines are gradual, the income offers a meaningful cushion.
“It is not a downside protection strategy. It's a defined outcome strategy.” – Troy Cates (10:36)
Timestamp: 08:54–11:03
7. Hedged Equity Income: QQQH Explained
- Neos’ QQQH ETF overlays NASDAQ 100 exposure with an “options collar”: sells calls, buys put spreads (buying a put ~4–5% out of the money and selling another further out).
- The collar offers partial downside protection at the cost of capping upside beyond the short call strike, but allows for market participation in rebounds.
“The idea behind this hedge product is … you can still capture a good portion of the upside, but it’ll give you that measure of downside protection and smoothing out your return stream.” – Troy Cates (13:30)
Timestamp: 11:03–15:46
8. The Appeal of Index Options
- Neos uses index options for maximum liquidity, transparency, and tax efficiency (1256 contracts: 60% long-term, 40% short-term capital gains regardless of holding period).
- Single name options do not provide the same tax and liquidity benefits.
“They’re the most liquid options out there ... the tax efficiency is huge.” – Troy Cates (13:36)
Timestamp: 13:36–14:19
9. Advice for Financial Advisors & Portfolio Construction
- Higher beta (risk) strategies suit younger, risk-tolerant investors; hedged products with lower beta are better for retirees seeking income and downside protection.
- Product popularity: QQQI (“high income”) over $6B AUM, QQQH (hedged) smaller but growing.
“If you have younger clients that want to be in this space, want to get income ... my view would be probably QQQI, you have a longer time horizon. Whereas if you have clients that are older … you really would want to keep it more conservative.” – Troy Cates (16:43)
Timestamp: 16:22–17:30
10. Investor Psychology: The “Easy Button”
- Many investors prefer the convenience of an all-in-one fund, even if it’s not mathematically optimal compared to buying the index and selling portions as needed.
- Tax-efficiency, transparency, and operational ease are key drivers.
“People love the easy button, even if it is not, quote, the most mathematically efficient way to do this. And I am … in that category too.” – Ben (18:31)
Timestamp: 18:31–19:10
11. How to Evaluate and Compare Option Income ETFs
- Don't judge by yield alone; focus on total return and tax implications.
- Look under the hood: check fund holdings and structure for red flags (e.g., unsustainably high distributions not covered by asset returns).
“The best way to equalize the returns is to look at the total return and say … are the total returns similar? One might have a huge distribution, one might be smaller.” – Troy Cates (20:40)
Timestamp: 20:19–21:55
12. Impact of Interest Rates on Option Income
- Rising rates attract flows to fixed income, but as rates fall, more investors look to equity option income for yield.
- Options strategies are based on volatility, so they remain viable even as traditional yield sources decline.
Timestamp: 21:55–22:57
13. Expansion into Crypto: The Bitcoin Income ETF
- Neos offers BTCI, a bitcoin-based income ETF. Bitcoin's volatility allows for higher distribution yields (in the 25–30% range), but with significantly higher risk.
- The bitcoin product gained traction with advisors whose clients became more interested as bitcoin's price rose.
“Being able to earn income off of the volatility around bitcoin, which is traditionally three to four times what you might see in the S&P 500 or the NASDAQ 100, is really enticing.” – Troy Cates (23:00)
Timestamp: 23:00–24:25
Memorable Quotes & Timestamps
- “People love income. It’s that simple.” – Ben (01:18)
- “You are transforming the return structure … into an income stream without giving up so much that you’re getting destroyed.” – Ben (04:33)
- “It is not a downside protection strategy. It's a defined outcome strategy.” – Troy Cates (10:36)
- “Don’t make your decision based purely on the distribution yield though.” – Michael (24:14)
- “People love the easy button, even if it is not, quote, the most mathematically efficient way to do this.” – Ben (18:31)
- "The best way to equalize the returns is to look at the total return..." – Troy Cates (20:40)
Resource Links
Summary prepared for listeners who wish to understand the core insights and investor psychology around options-based income ETFs, without needing to listen to the full episode. The tone remains conversational, candid, and educational—true to the spirit of the hosts and their guest.