BTC-USD can be used as a reference for an instrument that generates weekly cash flows when approached with the Roundhill Bitcoin Covered Call Strategy ETF (YBTC). This ETF has elements that appeal to the average income investor but also raise a certain concern, especially when the distribution rate today is at 36.41%. How does it, and can it, sustain this distribution rate? In this article I'll explore how YBTC is structured, its purpose, how it behaves in various environments, as well as its specific risks.

Intro

It is an ETF based on a covered call strategy on Bitcoin launched in January 2024 and already today has an AUM above $130 million as of the time of writing. Being a complex instrument, it has a higher expense ratio compared to classic spot Bitcoin ETFs, here equal to 0.96%, to which is added a bid-ask spread that tends to be positive and a turnover of 0%, which does not take into account the rolling of weekly options.

The distinctive trait of this fund is precisely the weekly distribution of the fruits of the strategy. Distributions that today reach 36.41% and were 100% Return of Capital ("RoC"), at least as of today. A high percentage of RoC is typically a sign of NAV erosion.

What Does YBTC Do?

It defines itself as "the first American covered call ETF on Bitcoin". The fund does not hold bitcoin and does not hold IBIT shares directly in any meaningful way but builds synthetic exposure through options. And so, the strategy is therefore more accurately defined as a "synthetic covered call ETF," a distinction that the prospectus itself underlines and that has relevant operational implications.

It is therefore not a fund for those who want direct exposure to the price of bitcoin through its ownership. And indeed this is stated by the objectives defined in the prospectus itself: the primary one is to generate current income on a weekly basis, and the secondary one is to provide exposure to the price return of one or more Bitcoin ETFs.

The covered call strategy has fairly evident impacts: it creates a trade-off in returns; the options sold generate yield (which depends on implied volatility, or "IV") but also a fairly pronounced cap on the upside of the underlying.

So the fund becomes more convenient when the underlying is sideways to bullish, and IV is high (a combination not as frequent as it might seem).

Who Is YBTC For?

YBTC makes sense as a tool for investors who want exposure to bitcoin with a weekly cash flow profile, accepting to sacrifice NAV upside in bitcoin's big rallies.

This is most appropriate for income-oriented investors who are willing to accept a cap on the upside in exchange for weekly distributions and probably with a neutral or moderately bullish view on bitcoin in the short term, not those expecting explosive rallies.

It follows that it will become less appropriate to use YBTC in phases where bitcoin is in a strong upward trend or when IV is low; in that case, the premiums will be insufficient to compensate for the risk deriving from holding YBTC. In extremely bearish phases, like those of recent months, with no cap on the upside, YBTC should instead manage to follow the total return of BTC-USD quite well. But be careful: it will probably widen the gap at the moment (if it were to happen) of BTC-USD's recovery. In that case, the cap on the upside would make itself felt, and the price of YBTC would remain well behind BTC-USD (also dragging down the distributive function).

How Is YBTC Built?

The fund buys short-term T-Bills as collateral. Then purchase IBIT calls (long call) and sell IBIT puts at the same strike (short put) alongside the sale of out-of-the-money IBIT calls (short call).

Specifically, today it holds US T-Bill 07/14/2026 (912797UP0) with a weight of 116.87% and then First American Government Obligations Fund FGXXX at 3.90%. On the options side, at the time of the analysis, they are all on IBIT with an expiration of 06/18/2026. The short put has the most relevant negative value (-$25.93M, weight -19.35%). Here the options typically have weekly or shorter expiration and are held until or close to expiration.

A structure that today has a breakeven at just -0.13% of IBIT per week with an upside cap at 3.02%. An element not to be underestimated, considering that Bitcoin can easily move 3% (or much more) in either direction in a few days.

Risks

The gap between the distribution rate (36.41%) and SEC yield (2.83%) is over 33 percentage points. This means that the premium deriving from the covered call strategy is being distributed, and potentially capital appreciations when the opportunity arises. But this indirectly makes it difficult not to reinvest the distributions: it is needed to cope with the structural upside/downside asymmetry. If the fund participates fully in IBIT/bitcoin losses but only partially in gains, it means that to keep the average cost basis at levels consistent with one's distribution objectives, during downtrends it will be necessary to average down (reinvestment of distributions). The SEC yield also reflects the income from the bond holdings and not options income.

Because the most dangerous thing is precisely the fact that YBTC and BTC-USD share the same annualized volatility, but with significantly different price upsides. And the annualized volatility is by no means low; it has a D- rating and is almost 40%.

Peer Comparison

I'll compare YBTC with the Amplify Bitcoin Max Income Covered Call ETF (BAGY), the Tuttle Capital Bitcoin 0DTE Covered Call ETF (BITK), the YieldMax Bitcoin Option Income Strategy ETF (YBIT), and the NEOS Bitcoin High Income ETF (BTCI), which are other cryptocurrency covered call strategies.

Excluding for now BAGY and BITK because they have an AUM below $15 million, let's focus on the two main peers: BTCI and YBIT.

BTCI directly holds Bitcoin ETFs—the iShares Bitcoin Trust ETF (IBIT) and the VanEck Bitcoin ETF (HODL)—in addition to the synthetic structure; it's not just options—and builds the distribution structure on a monthly vs. weekly frequency like YBTC.

Compared to YBIT, it closely resembles the management of YBTC, but it seems the distribution frequency here is also monthly.

If on one hand this incentivizes the investor seeking frequent distributions for their own portfolio, in my view it makes the expected long-term return more unpredictable compared to simply BTC-USD.

Pros And Cons

At this point we can make some considerations; in my view, there are some positive elements to take into account:

1. It has a fairly efficient synthetic structure that generates a weekly distribution at a high nominal rate: the distribution rate (over 30% currently) is the main driver of interest for the fund.
2. There is a partial mitigation of drawdown compared to spot.
3. And, there is a potential tax advantage of the Return of Capital tax character on its distributions.

However, there are also negative elements to keep better in mind:

1. Structural asymmetry that cannot be remedied for bullish investors: The fund is structurally incapable of capturing bitcoin's explosive rallies.
2. Minuscule weekly profit window: breakeven at just -0.13% of IBIT per week with an upside cap at 3.02%.
3. Relatively high costs in context: 0.96% + potential positive spread between bid and ask not to be underestimated.

This article answers three main questions about YBTC:

1. What is YBTC's objective, and how does it relate to Bitcoin?
2. What risks accompany YBTC?
3. Which investors is YBTC suitable for?

Editor's note: This article is intended to provide a general overview of the ETF for educational purposes only and, unlike other articles on Seeking Alpha, does not offer an investment opinion about the ETF.