why own btcc vs this?i'm discovering this set of new etfs, so the question is why would you want to own btcc vs this one? potentially you get the capital gains of btcc + selling calls premiums atho btcc since canadian options a joke. Anyways i'm scratching my head here, if the delta of exposure is just 5% (so 95% bitcoin cs 100% bitcoin) and they can generate 10-20% yield, there may be no reason to hold the no yield version of the etfs
Check out the prospectus. here is the info for ether yield, they say they will mainly invest in the ETH fund, but leave the door wide open to lending securities for shorting, futures and swaps etc. the whole bag of tricks.
The fund seeks to achieve its investment objectives by investing indirectly in long-term holdings of Ether primarily through investment in units of the Purpose Ether ETF and implementing an option writing strategy (as described below). The fund may also invest in other investment funds which provide exposure to Ether. Purpose Ether Yield ETF - 70 - In order to seek to generate additional returns and enhance the portfolio’s income, the manager may write covered call options and cash covered put options in respect of the securities held by the fund. Such options may be either exchange-traded options or over-the-counter options in accordance with Canadian securities laws. The manager may write covered call options and cash covered put options in respect of some or all of the securities held by the fund. Initially, the manager expects that covered options will be written on up to 50% of the fund’s portfolio. The decision as to which of the portfolio securities options will be written on, the number of options to be written on such securities, and the terms of such options will be based upon the manager’s assessment of the market and of the best value offered by the option premiums available on the securities held by the fund at the time such options are written. Covered call options and cash covered put options will be written at a strike price that is at-the-money or out-of-the-money as determined by the manager at its discretion. While writing options on portfolio securities may have the effect of lowering the overall volatility of returns associated with the fund’s portfolio, the manager will not execute its option writing strategy with a primary view to minimizing volatility. The manager may, in its discretion, close out outstanding options that are inthe-money prior to their expiry date or permit securities subject to a call option to be called away. In circumstances where securities are called away, the manager will use the proceeds realized by the fund on the exercise of the call options to acquire securities of the issuers whose securities were called away in the market as soon as practicable following the exercise of such options. This may result in securities being acquired at prices exceeding the price received for them pursuant to exercised options even after taking into account the premium realized by the fund on the writing of the option. The amount of option premium depends upon, among other factors, the volatility of the price of the underlying security: generally, the higher the volatility, the higher the option premium. In addition, the amount of the option premium will depend upon the difference between the strike price of the option and the market price of the underlying security at the time the option is written. The smaller the positive difference (or the larger the negative difference), the more likely it is that the option will become “in-themoney” during the term and, accordingly, the greater the option premium. The fund may choose to (a) use warrants, ETFs and derivatives such as options, forward contracts, futures contracts and swaps for both hedging and non-hedging strategies to generate income, hedge against losses from changes in the prices of the fund’s investments and from exposure to foreign currencies and/or gain exposure to individual securities and markets instead of buying the securities directly and/or (b) hold cash or fixed income securities for strategic reasons or provide cover for the writing of cash covered put options in respect of securities in which the fund is permitted to invest. The fund may also enter into securities lending transactions to generate additional income. The fund may also hold cash and cash equivalents or other money market instruments in order to meet its current obligations. The fund may invest up to 100% of its assets in foreign securities. The portfolio holdings are reconstituted and rebalanced at the discretion of the manager. With respect to the ETF currency hedged units and mutual fund currency hedged units generally, a substantial portion of the U.S. dollar currency exposure will be hedged back to the Canadian dollar by using derivatives including currency forward contracts in the manager’s discretion. The approval of unitholders is required prior to any change to the currency hedging strategy in respect of the units.
Connecting Covered Calls and Crypto
Now that we have all of that in the bag, let’s talk about how this translates into the cryptocurrency world. As we previously mentioned, volatility means a higher likelihood of hitting the strike price—as a result, call writers require higher premiums to offset that risk.
Furthermore, when we think of cryptocurrencies, what is the first thing that comes to mind? Sure, “to the moon,” but what comes after that? Once we go beyond all the memes, it is the volatility that stands out.
The price movements that make the biggest stock market crashes look like small bumps are becoming synonymous with cryptocurrencies. Below is the daily volatility of Bitcoin, Ether, and the S&P 500 over the past five years. As illustrated below, there’s a significant difference between the crypto world and traditional assets in terms of volatility.
Since the price of Bitcoin and Ether are often volatile, crypto premiums should be more expensive than traditional assets. One way to look at this is to compare the 10% out-of-the-money call option for Bitcoin or Ether with that of the S&P 500.
While SPY has a $0.09 premium for a ~10% out-of-the-money call option, ETHH has a $1.25 premium, which is more than 10 times that of the S&P500.4 It is clear that the volatility of cryptocurrencies can translate into option premiums, creating a significant source of income.
Bottom Line
Covered call options enable investors to generate additional short-term income on an asset they believe in for the long term. This strategy can limit the downside during bear markets and provide a source of income when prices are flat. Furthermore, it can elevate returns in markets with slight price appreciation, but will underperform once prices reach high enough to limit price participation.
Given the connection between the volatility of the underlying asset and premiums, covered call strategies on cryptocurrencies offer unique exposure to a unique asset class, providing investors a high yield without sacrificing significant price participation.