Credit Suisse unveiled a new strategy ETN for generating income on gold. The Gold Shares Covered Call ETN (GLDI) attempts to generate cash flow on gold by selling covered call options.
GLDI maintains a notional long position in shares of the SPDR Gold Trust ETF (GLD) while notionally selling monthly out-of-the-money call options on that position. Holders of GLDI are entitled to receive variable monthly payments based on the notional option premiums received from the sale of the covered call options each month.
The note is the first exchange-traded product in the U.S. market to offer investors access to a covered call strategy on a gold investment and is designed to pay variable monthly coupons.
GLDI, which tracks the Credit Suisse NASDAQ Gold FLOWS (Formula-Linked OverWrite Strategy)103 Index, sells approximately 3% out-of-the-money notional calls each month while maintaining a notional long position in GLD shares.
The strategy is designed to generate monthly cash flow in exchange for giving up any gains beyond the strike price. The strategy provides no protection from losses resulting from a decline in the value the GLD shares beyond the notional call premium.
In a covered call strategy, an investor holds a long position in an asset and sells call options on that same asset. Call options provide the seller with an upfront premium payment, but require the seller to deliver to the buyer any upside an asset experiences beyond a set level.
“Gold is often criticized as a portfolio investment because of its lack of any yield,” said Greg King, head of exchange traded products in Credit Suisse’s Investment Bank. “Covered call strategies however, are designed to enhance yield in exchange for sacrificing part of the upside of an investment position. GLDI seeks to provide investors and their advisors an interesting new way to introduce monthly cash flows into their portfolios.”
The index was created by Credit Suisse and is published and calculated by NASDAQ OMX. The strategy behind the gold income note is the following: O Call options with approximately 40 days to expiry are sold over a 5-day period each month within the Index;
O Approximately 30 days later, those same call options are repurchased over a 5-day period;
O The premium received, net of notional transaction costs, is paid out the following the repurchase of the options on or about the 25th of the month.
ETNs do not guarantee any return of principal and are subject to credit risk. If Credit Suisse were to go bankrupt, the value of its credit backed ETNs would likely be worthless.
Robert Hughes, vice president, NASDAQ OMX Global Indexes said, “Based on uncertainty in the global marketplace, investors continue to look for access to gold and income. GLDI provides access to these two key investment themes in a transparent rules-based methodology. Credit Suisse is a valuable partner of ours and bringing the FLOWS index family and GLDI to market demonstrates our shared commitment to giving investors more flexibility in customizing their investment strategies.”
GLDI is listed on the NASDAQ and charges annual expenses of 0.65%.