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 (Nasdaq: 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]