X-Links: A Covered Call Play on Gold

Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI) is an exchange-traded note (ETN) backed by Credit Suisse, the second-largest bank in Switzerland, notes Bryan Perry, a leading growth and income expert and editor of Cash Machine.

This ETN adds a new wrinkle to the gold segment, tracking an index that uses a covered-call strategy to add income to an asset devoid of yield. As an exotic instrument, GLDI is recommended in our high-risk "Extreme Income" portfolio.

The note’s index mimics a hypothetical position in the SPDR Gold Trust (GLD) — a physical gold ETF — coupled with a short position in GLD calls expiring in the next month with strike prices 3% higher than the price of GLD at the time of sale.

In other words, it offers the returns of a covered call strategy comprised of shares of the GLD and one-month call options with a strike price of 103% of GLD’s price. The premiums from the short-call position are replicated with coupon payments.

This is an instrument using a covered-call strategy to produce income, intended to generate a high yield, currently 13.99%, paid on a monthly basis. Due to the covered-call strategy, investors will not participate in the full potential of capital appreciation in the price of the SPDR Gold Shares ETF that it tracks.

Selling covered calls against an underlying position caps the upside at a defined level where the calls have been sold. My intention in recommending GLDI is to collect a double-digit-percentage yield for income and hopefully see the ETN continue to appreciate.

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