The reason to revisit GLDI is because of the recently launched Silver Shares Covered Call ETN ( SLVO). The strategy is essentially the same, but the silver ETN is tied to the iShares Silver Trust ( SLV). The big difference between the ETNs is that instead of writing calls every month that are 3% out of the money, SLVO will notionally sell calls every month that are 6% out of the money. The reason for this difference is that silver is more volatile than gold, so Credit Suisse believes note holders will benefit from being able to capture more of any potential monthly move higher.
The other nuts and bolts of SLVO are the same as GLDI's. That means it notionally sells calls over a five-day period beginning 40 days before the options expire, holds the cash received, then buys the call options back over a five-day period starting nine days before expiration. Then it pays out the net cash from the option sale seven days after the closed-out option position expires. SLVO will charge a 0.65% expense ratio. It's important to understand that this ETN won't participate in any monthly gain for SLV beyond 6%.
The role of SLVO in a portfolio would be as a holding in tandem with the more-standard SLV exchange-traded fund. (Investors can make similar combined purchases of GLDI and GLD.) To the extent that precious metals offer a form of insurance, putting a portfolio's entire precious-metals allocation into a fund that caps the upside (such as GLDI or SLVO) isn't ideal. Instead, investors could consider a 50/50 split between the traditional fund and the call-writing cousin. This would create some income and allow part of the position to run in the face of large, fast moves in the underlying metals. At the time of publication, Nusbaum's firm held shares of GLD on behalf of clients. Follow @randomroger This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.