Summary Roundhill Bitcoin Covered Call Strategy ETF offers high weekly income by using a synthetic covered call approach on Bitcoin exposure. YBTC's structure involves options on the iShares Bitcoin ETF, generating yield but not directly owning Bitcoin or Bitcoin ETFs. The ETF's high yield masks principal erosion and exposes investors to Bitcoin's volatility, resulting in wide swings and lower total returns than IBIT. Risk management strategies, such as pairing YBTC with inverse ETFs, can help moderate volatility, but investors should weigh yield against potential capital loss. Look at them, folks. Covering the plate like a gift from the heavens. Until they make us wish we hadn't gone anywhere near them. Sure, I'm talking from personal experience about hot "Buffalo" chicken wings. But that's one of many analogies I find between that tasty yet dangerous (to some of us) bar food favorite and an ETF known as the Roundhill Bitcoin Covered Call Strategy ETF ( YBTC ). If you have studied up on covered call ETFs the last few years, you will likely read this article one way. And if you are still fairly new to them or to ETFs in general, you will probably get something different out of it. Either way, I hope this assessment of YBTC adds to your ongoing understanding of this very popular but very risky market segment. To me, buffalo wings are a consistent metaphor for investing in an ETF like YBTC, which takes the idea of owning Bitcoin but as a base to earn a very high rate of income. YBTC does that, as dozens of other YieldMax ETFs do, through a combination of options trades that create a structure that simulates owning a Bitcoin ETF and getting covered call income from it. A lot of covered call income! This ETF has a lot of spice to it. No grilled chicken with lemon happening with YBTC. It pays a weekly dividend, which to retirement income fans is like the scent wafting through the restaurant when you walk in, a few minutes before football kickoff time. However, that expense ratio, gently tucked just under an even 1%, means you are paying for the complexity here. Seeking Alpha I will always pay up for something I consider to be of value. For this, I'm more likely to pass. I have not owned it to this point, and it is frankly not high on my radar. But I do think this ETF is going to attract some buzz as it approaches its second full year. And that it has accumulated more than $300 million in assets that quickly, from an ETF producer that is not a top-tier firm, e.g., iShares, means that it is getting some attention. It also trades pretty actively on a daily basis. OK, so I'm nearly 400 words into this, and I have not yet mentioned the main reason investors buy ETFs like this one: just look at that yield! OK, the exclamation point was borrowed by me from many investors who insist on crowding into covered call ETFs with high yields. This is far from a new subject for me, as my regular readers know. And once again, I'm stating, as I have before, I don't dislike covered call ETFs. I just think they are overrated. And while it is neither my role nor my responsibility to tell others what to do with their income-objective assets (that was my old job for 27 years as an investment advisor, now retired), I see potential for a toxic combination here: covered call income that masks erosion of principal over time and the potential for Bitcoin to have more extended slumps. Bitcoin and AI have something in common: they are new, exciting business areas that people continue to pile into. And at this point, they are still quite a distance from sustained, proven ability to create monetization results. Yet for many, I still sense it is more about "number go up" than knowing what they own. Tell Me More About the Buffalo Wings/YBTC Similarities Yes, thanks for reminding me. Here we go: YBTC's holdings are like a wing sauce recipe. You have a pretty good idea of what's in them. But there's always a chance there's that extra ingredient that can turn a tangy flavor into a living nightmare. Though it won't be apparent right away. Here are this ETF's recent holdings. As is typically the case with these vehicles, they own US T-bills to back the purchase and short sale of options. Roundhill ETFs Specifically, above we see a combination of: A purchased call option on iShares Bitcoin Trust ETF ( IBIT ), the largest and most liquid Bitcoin ETF, which debuted in early 2024, a couple of weeks before YBTC launched. A put option sold at the same strike price and expiration date as the call purchase. A covered (sold short) call option on IBIT, about 8% above the strike price of the call, and to an expiration date a week prior to the expiration date of the purchased call option. This is THE main income driver, so this snapshot indicates to me that the purchased calls are typically set up to expire about a month out, while the covered calls are sold weekly. Thus, the income can be distributed to shareholders weekly. Note that the call is technically "covered" because if the fund was forced to sell IBIT via being called, it could convert the "long" call options it owns into IBIT shares to meet that call event. That could be the case if IBIT rises in price. Likewise, the put sale allows the fund to be in a position to come up with the IBIT shares if that ETF falls in price. Taken together, this is known as a "synthetic" approach to "owning" IBIT. And once you own IBIT, you can write calls and earn income. Every week. But the ETF doesn't actually own any Bitcoin or Bitcoin ETFs directly. And while there's always a risk that IBIT option liquidity can dry up, it is less likely with a fund like IBIT. Not impossible, but less likely than, say, a small-cap stock's option market experiencing a spread that "blows out" and messes everyone up who is involved. And that all leads me to another buffalo wings/YBTC similarity. They both look a lot neater from a distance, before you really dig into them. But once you do, it's what I like to call an "organized mess." Let's finish this with a side of cool ranch and celery sticks. Oh, sorry, I mean by looking at how YBTC has done so far. Because it has been stress-tested during its short tenure. YBTC's 3-month total return range has been in excess of 50% and, on multiple occasions, below -20%. It is prone to wild swings. Not to be confused with "wild wings." Data by YCharts So far, YBTC investors have settled for 1/2 the total return of what IBIT, and essentially Bitcoin, have delivered since YBTC's inception in January of 2024. Data by YCharts That gaudy income rate has offset the fact that YBTC's non-income component has declined 9% thus far. So as long as IBIT doesn't suffer a sustained, steep slump, and as long as Bitcoin volatility stays as high as it has been historically, there's a lot of income to be gained here. Without enough price slippage to matter to many holders, I suspect. Data by YCharts The yield has remained quite stable this year, a good sign. The question is whether Bitcoin will correlate with other risk assets, which would make YBTC prone to stock market declines in the future. That's forward-looking, since so far this has not been an issue. What Can YBTC Investors Do to Soften the Volatility? As I've mentioned in past articles, many target underlying securities that have covered call ETFs associated with them also have inverse ETFs. That's the case with Bitcoin as well. To provide a visual, see how YBTC and this 2x short Bitcoin ETF move in polar opposite directions. That makes sense, given that they have roughly opposite objectives, apart from YBTC trading off a lot of price potential for income. Data by YCharts Finally, to provide just a glimpse of what is possible by combining either inverse ETFs or perhaps put options with the option-infused YBTC, here's the past 12 months total return path of YBTC, the S&P 500 ETF (SPY), and an 80%/20% mix of YBTC and the ProShares UltraShort Bitcoin ETF ( SBIT ) shown in the chart above. YCharts (Sungarden Investment Publishing) This shows potential to cushion the blow and deliver a return that is more focused on shrinking the range of possible outcomes with a "wildcard" situation that is combining options on a new ETF with Bitcoin to create another new ETF ((YBTC)). The tradeoffs are clear, but that purple line showing the mix did deliver an S&P 500-like return over this snapshot time frame. And both components of that mix still produce yield, albeit much less cash flow than YBTC on its own. Concluding Thoughts on Risk Management, YBTC, and Buffalo Chicken Wings I'm a risk manager, through and through. That doesn't mean you have to be. This article was intended to explore the "hot topic" that is the intriguing yet complex and rapidly expanding world of covered call ETFs. And as a risk manager, my own natural inclination is to say, "How can I try to get a chunk of that enormous yield from YBTC but not risk as much as I'd need to?" You know, sort of like deciding to have 1 or 2 wings at the sports bar while watching the game. Instead of downing 2 dozen of them (as young Rob Isbitts used to). Fewer napkins sounds pretty good to me. OK, let's eat!
