With an uncertain outlook on the precious metals market, Credit Suisse has launched a silver exchange traded note that could provide some downside protection by generating income through a covered call options strategy.
On Wednesday, April 17, the Credit Suisse Silver Shares Covered Call ETN (SLVO) began trading. SLVO is linked to the Credit Suisse NASDAQ Silver FLOWS 106 Index, which tracks the return of a “covered call” strategy, and it produces a monthly variable coupon based on the premiums received. The fund has a 0.65% expense ratio.
The covered call, or “buy-write,” strategy utilizes call options on a position to generate high income from option premiums. An investor would sell a call option above the current price of a security. If the price of the security is below the option upon the expiry date, the investor would pocket the difference. [Buy-Write Strategies]
Buy-write strategies “provide option premium income that can help cushion downside moves in an equity portfolio, but buy-writes often underperform stocks in rising markets,” according to the CBOE. “Buy-write strategies have an added attraction to some investors in that buy-writes can help lessen the overall volatility in many portfolios.”
SLVO matures on April 21, 2033. Unlike exchange traded funds, an ETN is essentially an uncollateralized loan, or debt obligation, to an investment bank and leaves investors open to potential credit risks of the issuing bank – if the bank goes under, there is no guarantee that the ETN investor will receive all of his or her principle back. [Exchange Traded Notes]
Credit Suisse also recently launched the Credit Suisse Gold Shares Covered Call ETN (GLDI) , which utilizes a similar options strategy.
“Precious metals investments do not typically provide any current income. For the GLDI and SLVO ETNs however, this is not the case,” Greg King, head of exchange traded products in Credit Suisse’s Investment Bank, said in a press release. “Covered call strategies are designed to enhance yield in exchange for sacrificing part of the upside of an investment position. Both SLVO and GLDI seek to provide investors and their advisors with interesting new ways to introduce monthly cash flows into their portfolios while maintaining some exposure to precious metals.”
For more information on new product launches, visit our new ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.