To offset the downside risks of precious metals as prices come under increasing pressure, Credit Suisse has launched a silver exchanged traded note that aims to generate income through a covered call options strategy.
The Credit Suisse Silver Shares Covered Call ETN (SLVO) provides exposure to the iShares Silver ETF (SLV) and is the first exchange-traded product in the US to offer investors access to a covered call strategy on a silver investment. The ETN is designed to payout a variable monthly coupon and is the second precious metals covered-call strategy from Credit Suisse after GLDI, an ETN following a similar strategy on gold.
SLVO tracks the Credit Suisse Nasdaq Silver FLOWS 106 Index, where FLOWs stand for Formula Linked OverWrite Strategy. The index implements a rolling covered call investment strategy by retaining notional long position in the shares of iShares Silver ETF while selling monthly out-of-money call options on the same position. Investors of SLVO will be entitled to receive monthly variable payments based on the notional option premiums collected from the sale call options every month.
A covered call or buy-write strategy uses call options on an investment to generate regular income from option premiums. You would typically sell a call option above the current price of the security hoping prices to drop before expiry. If the price of the security is indeed below the exercise price on expiry date, you get to keep the option premium. In other words, covered call strategies enhance yield in a bearish market, but sacrifice potential upsides of an investment position.
You should, however, bear in mind that ETNs are essentially uncollateralized loans or debt obligations to an investment bank. Hence you are exposed to potential default risks of the issuing bank and may lose principal if the bank goes under, which is one of the reasons I don’t like these types of set ups given the tremendous leverage banks are using to speculate in derivatives.
SLVO has an annual expense ratio of 0.65 percent.
Disclosure: No holdings