Strategy

RS Crypto Income Fund Objective

Actively manage a lower risk strategy by systematically
selling options to generate income

The trading and management of this fund differs from an automated passive strategy. While most of the income generation will be from selling downside puts, the Fund will opportunistically sell calls to increase the overall return.

As options approach expiration, fund managers will look to enhance yield by deciding whether to (1) allow the options to expire worthless, (2) roll them to a different strike and/or expiration, (3) cover them prior to expiration and wait for a better opportunity to re-establish the short option position, or (4) take delivery of the underlying ETF and overwrite them with selling upside calls.

The decision during each expiration between the 4 above scenarios will differ due to a variety of factors, including but not limited to: (1) number of days until expiration, (2) theta remaining in the options, and (3) whether fund managers believe a crypto market pullback is ahead.

During times when puts are out of the money, the Fund’s excess capital is invested in short-term treasuries, allowing RS Crypto Income Fund to benefit from higher interest rates. Higher interest rates increase the strategy’s return profile, as the profits generated from our option sales (in addition to our excess capital) gets invested in higher yielding short-term treasuries.

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Who Should Invest and Why

An investor seeking to benefit from the high volatility inherent in cryptocurrencies and seeking to minimize their risk through an income generation strategy in this asset class. The approval of Bitcoin ETFs has allowed a mass population of investors to now have exposure to Bitcoin, but this does not mean that volatility will not exist. The strategy focuses on consistently extracting income from the high implied volatility in this asset class.

While making money in a bull market seems relatively easy, most investors don’t think about the risk they are taking to generate this return. When markets turn volatile, profits can disappear quickly, and this is where the Fund’s strategy can help one’s overall investment portfolio. As Bitcoin stabilizes after extreme down moves, this strategy enhances the overall yield of an investor’s portfolio, while taking significantly less risk and earning income in both up, down, and sideways markets. Investors who want to consistently generate income under all market environments can gain extreme outperformance in sideways and down markets. 

  • In an upward trending market, income generation is steady. At the same time, the risk relative to the market is low, but potential returns are high due to selling extremely elevated implied volatility.
  • In a highly volatile environment, while the immediate outperformance of the strategy exists, the bulk of the income generation occurs in the coming months/quarters once the market stabilizes, and the strategy takes advantage of the sale of significantly higher option premiums.

Risk/Reward Across Market Scenarios

Generate consistent income with beta significantly lower than the market

  • Down Market: Significant outperformance due to lower beta, allowing options to be sold for a higher premium as the market declines and options are rolled.
  • Flat Market: Extremely profitable environment for the strategy due to majority of options expiring worthless but premiums still being elevated relative to an up market.
  • Moderate up Market: Very good performance, and while overall outperformance is likely accomplished with much less risk, it is ultimately dependent on speed or magnitude of the up move.
  • Rapid up Market: High absolute return, but potential to underperform because lower beta limits the performance to premium collected as markets continue to go higher.
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Beta of the Strategy

At initiation of RS Crypto Income Fund, the beta was approximately 0.35, and over the long term, the Fund aims to have an average risk exposure of 35% relative to the underlying ETFs that track Bitcoin. The beta will not be 0.35 every day. Following a big down year, we will enter the following year at a higher beta, and following a big up year, we may enter the following year at a slightly lower beta.

As the market goes sideways or up and the options approach expiration and a worthless value, the beta slowly reduces (typically toward 0.20-0.25). This is when we use our expertise on when/where to roll our options to make sure we never get too low of a beta.

As the market goes down and the likelihood of the options going in the money increases, the beta slowly increases (typically toward 0.50-0.80). Once the market stabilizes (this could take weeks, months or even quarters), the average beta slowly heads back to 0.30. NOTE: This is where tremendous opportunity arises because as volatility spikes, the premiums sold will be much higher, but it sometimes takes up to several quarters to play out.

We will opportunistically use the sale of call options, which can alter our beta at any given time, but the beta of the overall portfolio will always be positive.