Getting paid for holding Gold ETF long - can this Method be used for other ETFs?

[4jasmin]

Today I cam across a very interesting Article how to get paid for holding long a Gold ETF

http://www.zacks.com/stock/news/91673/gold-etfs-meet-covered-calls-in-brand-new-gldi

...The process is done by holding a notional position in GLD and then selecting the strike price roughly

40 days from expiration, usually focusing in on calls that are 3% out of the money. These are then sold

over the next five days while the cash received for selling the calls is held in the portfolio.

After that, GLD is sold notionally to buy back the calls over a period of about five days. Then, roughly a week

before expiration, investors are paid out net cash as a monthly distribution before the process starts all over again....

here is the Factsheed

https://notes.credit-suisse.com/csfbnoteslogin/etn/product_gldi.asp?tab=3

how could this Method be used to generate Income on other ETFs?

I am not familiar with Options, therfore I ask here someone of Knowledge of this Matter

[Gsxrnz]

I particularly like the way they haven't included the principal gain/loss on the notional commodity. Of course, the coupon will vary with the changing value of gold and the number/value of out of money option holders on the other side of the bet. Remember that the option holders are taking both buy and sell positions.

They're assuming there will always be losers, and in that regard they're probably correct. But the coupon will never replace any losses incurred on the initial investment, assuming the market goes against you.

I see they have a yield of 9.7% in the last three years, and the value of the initial investment is down 50%. Getting a yield of 9.7% on an ETN that has halved in value in three years is um.....not particularly good.

In essence it's the same as a dividend from a share, they are just using a commodity (gold) and a process (option sells and buybacks) to generate "profit".

True, if gold is your baby then this method gives you a method of getting cashflow from the actual metal, plus a way of investing in the metal itself, albeit by investing notionally via the Nasdaq.

I'd rather go for investing in shares of a real business if you want dividend yield. Or if you want more risk just play the options market.

But from your post I'm assuming you're looking for cashflow from gold - just don't forget you're taking the risk of the value of gold on board as well.

The irony is, it's a "covered call" investment, which means they minimise risk by not taking advantage of huge changes in value of gold. So if gold doubled in price for a week, then went back to were it was, they are still only going to unload the worst 3% of their portfolio. It works equally if the price halves. The actual price of the ETN will move in this scenario, but only by the anticipated positive/negative casflows from that week, and certainly nowhere near 100%.

I'd much rather invest myself and make my own decisions. This is no more than a managed fund with a strategy that is designed to generate positive cashflow, while leaving you at risk in the value of your principal investment.

And they take 0.65% off the top for their trouble.

[Suradit69]

Many closed end funds, a better choice than ETNs in my opinion, hold a portfolio of stocks and sell covered calls and/or calls or puts on some index proxy. That, coupled with dividends and cap gains generate a fairly decent regular distribution. Check out http://www.cefconnect.com/ and look up funds like ETY, QQQX or ETJ (get info from the CEF website or Morningstar, don't depend on the accuracy from places like Yahoo Finance).

The article you quote was written several years ago when exchange traded notes (ETN) like GLDI were relatively new. They haven't been very popular. Check out the two year chart below to see how GLDI has fared. Its daily trading volume is around 20,000 shares, which means getting out of the shares you own can be difficult. If you want to use options on gold, buy the GLD yourself and sell covered calls on your shares ... not that I'm recommending any "investment" in paper gold.

Keep in mind that any way you can make money in stocks or their derivatives is also a way you could lose money.

Most stocks and ETFs (not the same as ETNs or CEFs) also allow you to sell call options. Depending on the terms of your brokerage account, you'd probably only be allowed to sell covered calls, which means you need to buy shares in the stock or ETF and then can sell calls against the shares you own. One call option contract represents a call on 100 shares.

For more volatile stocks the option premium is likely to be higher, as is the risk. For stocks that don't move much, especially if they pay a decent dividend, the premium will be quite small.

If you buy 100 shares of XYZ corp or ABC etf at, say, $45, you check what calls are selling for, for example, out one month with a strike price of $50. Maybe they're listed at $0.40 bid/ $0.50 ask. Be aware that the bid/ask can be misleading, so you have to start out asking for something higher and see what happens. If you ask something on the low end it may be grabbed immediately and you could have got a better price.

So if you sell one contact at $0.50, you'll be paid 100 x $0.50 = $50 less commission. Until you buy back the call or it expires, you will not be allowed to sell the stock. If the stock price stays under $50, you keep the premium and can sell the stock or sell another call after this one expires.

If the stock price goes over $50 and you do nothing, the stock will be sold by your broker when the call expires. The stock could be sold by the broker for $50 at any time before the call expires if someone exercises the call and you are assigned. That's still $5 more per share than you paid for it plus you can keep the money you got when you sold the calls.

Selling covered calls is a great way to get extra "income" from stocks you hold, but it limits how much you can profit if the stock price shoots up.

If you have no experience with options, I suggest you try some trades on paper only and see how you do. Better still, consider buying one of the closed end funds that do all the work for you., but read this or something else on CEFs that use option strategies first https://www.blackrock.com/investing/literature/investor-education/guide-to-investing-cefs.pdf

See below how well the gold ETN has done over the past couple of years.It's been pretty much a disaster so far.

Edited January 31, 2016 by Suradit69