ETN Spotlight: Income From Silver Covered Calls | ETF Trends

ETN spotlight on the Credit Suisse Silver Shares Covered Call ETN (Nasdaq: SLVO), part of an ongoing series.

Assets: $25.4 million

Objective: The ETN is designed to reflect the performance of the Credit Suisse NASDAQ SIlver FLOWS 106 Index, which measures the return of the covered call strategy on the shares of the iShares Silver Trust (NYSEArca: SLV).

Holdings: Covered call options on SLV.

What You Should Know:

  • Credit Suisse sponsors the ETN.
  • Exchange traded notes are unsubordinated, unsecured debt securities issued by an underwriting bank, so the notes are exposed to credit risk of the issuer.
  • SLVO 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, and if the price of the security is below the option upon the expiry date, the investor would pocket the difference.
  • 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.”
  • The call option gives the buyer the right to buy shares of SLV from the ETF over a set period at a set price, which currently sits at about 6% above the current price, reports Eric Balchunas for Bloomberg.
  • In exchange, the buyer pays the ETF a premium, which is passed on to investors as income.
  • If SLV does not rise above 6% over the life of the option, the ETF accrues the income and keeps the SLV shares.
  • The ETN pays a variable monthly coupon payment based on the notional option premiums received from the sale of the monthly call options on SLV shares.
  • According to a press release, SLVO has an indicative yield, or the expected coupon payment annualized and divided by the closing indicative value on June 16, 2014, of approximately 8.36% per annum.

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