What Is a Covered Call Bitcoin ETF? Why Did Grayscale Apply for One?

Grayscale Investments has applied for a covered call Bitcoin exchange-traded fund (ETF), amid the approval for its spot Bitcoin ETF among the bunch of 11 applications that were greenlit by the United States Securities and Exchange Commission (SEC) on Jan 10.

What precisely do covered call Bitcoin ETFs entail, and do they represent a safer or riskier investment for investors?

Grayscale Applies for a Covered Call Bitcoin ETF

On January 10, the SEC granted approval to 11 spot Bitcoin ETF applications from prominent US asset firms, delivering positive news to the crypto community. This expands access for investors who may be new to crypto but prefer traditional investment avenues like stock portfolios.

However, following this, news broke on Jan 11, that one of the successful applicants, Grayscale Investments, will be filing for a covered call Bitcoin ETF, which will allow investors to generate income from options on its Grayscale Bitcoin Trust (GBTC).

Common in the traditional stock market, a covered call ETF can potentially enhance an investors’ yield by buying a variety of stocks and writing call options on them.

The Street explains that a covered call strategy for ETFs often includes selling out-of-the-money calls under a certain amount of time, usually under two months. This means the security price is below the call option’s exercise price.

Therefore, investors can take advantage of quicker time decay with these shorter-term options.

Read more: How To Prepare for a Bitcoin ETF: A Step-by-Step Approach

Covered Call ETF Suits Investors who Forecast Minimal Price Movement

According to Investopedia, this strategy suits investors who anticipate minimal movement in the underlying price over the long term.

However, usually the investor choosing this option plans to retain the asset for the long term. Furthermore, opts for this strategy to generate income.

Covered Call Investment Strategy. Source: Investopedia

Although Grayscale had its spot Bitcoin ETF approved by the SEC on Jan 10, it was not a smooth sailing process. The asset management firm had to navigate a complex process.

This included seeking a re-review of its application from the US District Court of Appeals last year.

In August 2023, BeInCrypto reported that the Court of Appeals for the D.C. Circuit granted Grayscale Investments’ petition to review a SEC order. This ruling vacated the SEC order that had blocked the Grayscale Bitcoin Trust from listing on the NYSE Arca exchange.

Read more: Who Owns the Most Bitcoin in 2024?

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