New ETN Pays You to Own Gold
The first point is that the ETN will not actually buy shares of GLD, or sell any covered calls. It will instead maintain "notional" positions and execute "notional" trades. This is normal under the hood of an ETN, but it is important to realize that this is the case here.
The "notional" option strategy is plainly spelled out in the fund's literature. Forty days before the expiration, the strategy will select call options to sell that are 3% out of the money and then notionally sell those calls over the next five days. Then 5-9 days before expiration, the strategy will buy the calls back, while looking to sell the next round of call options. The distribution will be paid seven days after the options expire and will be comprised of the option premium received less any notional trading costs. One cost embedded in all of this will be the 0.65% expense ratio.
Repurchasing the calls before expiration will be done by selling a small amount of GLD to pay for the repurchase. The positive is that this cost will not subtract from the payout, but the negative is that this will have a dilutive effect on the ETN. Credit Suisse believes the dilution will be negligible, but that might not be the case, it depends on how GLD and its options trade in the future. The fund was structured this way to protect the distribution.
Another important building block of understanding is that in selling call options that are 3% out of the money, the price of GLDI will not go up more than 3% in a month. If in a given month GLD goes up 6%, GLDI would be expected to only go up 3%. In the trailing 12 months, there were three different months where GLD went up more than 3%. Selling covered calls will offer some downside protection in case GLD drops, but only to the extent of the premium taken in.
The index that the note tracks was created in November and although it has been untradeable, Credit Suisse says that if it had been available, the monthly distributions would have annualized to a 9.45% distribution percentage. It is very important to understand that any actual payments made to note holders could vary.