Summary NEOS Bitcoin High Income ETF (BTCI) remains a Buy, benefiting from bitcoin's upside and active option strategies that closely track the underlying asset. BTCI offers modest drawdown mitigation and strong upside capture, outperforming many passive option-writing ETFs, especially in bullish or stable markets. Lower bitcoin volatility may slightly reduce BTCI's drawdown protection, but its active management sustains income generation and capital growth. BTCI's ~25% yield is primarily funded by underlying bitcoin growth; long-term bullish outlook on bitcoin is essential for continued outperformance. The NEOS Bitcoin High Income ETF ( BTCI ) has benefited from a moderately bullish phase in bitcoin since I rated it a Buy in June 2025. BTCI has been able to capture all of the ~7.5% upside in bitcoin in the past 3 months. As bitcoin are entering a more regulated and transparent era with the GENIUS and CLARITY acts introducing frameworks to support investor confidence, let us review the thesis for BTCI to see its utility as an income generating vehicle and compare it to the alternative option of riding bitcoin directly (with income payouts). This thesis will take cues from past performance and walk through scenarios and outcomes for BTCI - to understand its utility and strength. It will look beyond comparisons with peers, as we have done in the June thesis. It will also review whether the Buy thesis is intact in a world of lower bitcoin volatility. Data by YCharts Crash and Burn Scene To check how BTCI did during a ~20% correction earlier in the year, up until April, I plotted total returns for the VanEck Bitcoin ETF (the underlying holding for BTCI) and BTCI. BTCI closely mirrors the path of the underlying and saves a couple of percentage points in a ~20% fall spanning almost a couple of months. This is not huge drawdown mitigation, but somewhat acceptable compared to what I have seen in the case of other option writing ETFs. A 3-4 percentage point drawdown mitigation in a fall of this magnitude and pace is what I will call great - BTCI falls just a little short of that upper end of the performance spectrum for an option income strategy. Data by YCharts Although there are several option strategies that are based on the same principle, performance differences are often seen between one income ETF to the other (without any material methodology differences to account for it). The magnitude of the drawdown is an obvious factor in performance differences. The pace and even shape of the drawdown is also a factor. Then, of course, the volatility profile of the underlying and execution specifics (like which strike exactly and how much option coverage, etc.). The pace of a drawdown is important because usually passive buywrite strategies work on fixed positions with a monthly time horizon. The strikes are at the money at the start of the month. In the case of BTCI, the underlying holding as well as the option layer appear to be dynamic and active. The bitcoin exposure is often partially through synthetic option setups. The extent of portfolio exposure to bitcoin could also be altered as per management's view of the bitcoin markets. Even the amount of coverage through options, choice of strikes and rolling to nearer strikes during a live month is a possibility. The prospectus clearly mentions even different strategies like bear call spreads that can be employed in neutral to bearish bitcoin view regimes. In short, the methodology is active (although systematic and rules based). That active angle implies BTCI's performance could be different across two scenarios that are similar/identical, depending on how the active elements are setup. Apart from the active element, expect an option strategy to mitigate drawdowns better if it unfolds over several months. Let us walk through the details of the option mechanics. Proxying IBIT for bitcoin, an at the money call option for expiry on 31 October 2025 is trading at a premium that equals ~4.5% of IBIT today. So, that is the extent of drawdown mitigation possibility in the best case for a month's tenure. Spread the possibility across 2 months and the possibility expands to ~9 percentage points and so on. What prevents a full capture of the premiums is how the strikes are chosen, when they are chosen, etc. - things that can be categorized as execution factors (more important for an active strategy like BTCI). The other thing is the exact path of the decline. Remember, if the strategy reduces drawdowns by a couple of percentage points, but captures only a small part of the upside move (known limitation of option writing strategies), it could do worse if a crash consists of small rebounds in between (as is usually the case in reality). The last factor that has an important role to play in option strategy performance is the underlying asset's volatility. This is where historical performance has to be taken with a pinch of salt. The current volatility levels of ~35% are not only at the lower end of the spectrum for bitcoin, but could be the start of a new era. Usually, the ~4.5% premium possibility we see today for the strategy can spike up significantly when volatility levels shoot up to beyond 60% as we have seen on occasions in the past. That is great for income generation, but also leads to volatile fluctuations of the underlying prices - a factor we have discussed as negative for capturing the higher premiums. Data by YCharts Why the volatility factor is more important to understand today than ever before is because with every step towards maturity, volatility should gradually decline in general. The regulatory transparency that has started coming in could be even more supportive of a stronger bitcoin era now. That strength should definitely translate to lower volatility levels, as we are already seeing, if not to a hike in bitcoin prices. Reviewing the earlier thesis in the light of reduced expected volatility levels, what does a crash scene translate to for BTCI? Lower volatility levels of ~30% is lower in the bitcoin world - it still remains healthy compared to several equity names like Google or Microsoft (although the gap is closing). I expect BTCI to be able to save less in drawdowns due to the reduced volatility, i.e. up to half a percentage point on any crash per month, marginally lower than what we saw in April earlier this year (2 percentage points saved over 2 months). I don't expect a more dramatic drop in drawdown mitigation though because any crash will spike volatility levels upwards that could lead to higher premiums to fall back on. Also the volatility levels are still healthy to generate enough income. Data by YCharts A Benign Market This is a market where bitcoin remains rangebound. In real life, such markets are a combination of ups and downs rather than a really flat line. Theoretically, you would expect the strategy to earn a majority of the ~4.5% premiums at play every month, but in reality most option strategies fail to consistently earn anything significant. The same is true for BTCI. It hardly delivers the expected alpha of the option layer in what should have theoretically been a home run - a flat territory spanning more than two months as shown below. Data by YCharts Going ahead, I expect a similar ability from BTCI to trace bitcoin in overall flat markets. The reduced volatility expectations do not materially alter performance in flat markets because the analysis above is in an era of already lower volatility. Boils Down to Upside Capture Given the odd percentage point advantages in correcting and consolidating markets, the upside capturing ability of BTCI becomes the deal clincher. Generally, a good income strategy reduces drawdowns significantly, which BTCI does not. So, BTCI's upside capturing capabilities should determine its Buy thesis positioning. And there BTCI does show excellent upside capturing data. In over 5 months, it has been able to trace a gain of ~45% in bitcoin, most of which transpired over the initial couple of months before stagnating. This is not possible from a passive option strategy that could have only captured around the ~4.5% of the premium in a month. Clearly, BTCI's active strategy does well to tweak the active elements (like options coverage, strategy, strike selection, etc.) in a much more meaningful way. The end result is that we get an option ETF that closely traces the underlying bitcoin. Data by YCharts Retain a Buy Rating The net effect of the option strategy in BTCI is to reduce downsides by a little bit and in return capture decent upsides. That, in my opinion, is an even better income plan profile than one that reduces downsides by 4-5 percentage points but sacrifices 20-30 percentage points on rallies. The option layer in BTCI smoothens the bitcoin holding experience by minor amounts, and allows the fund to grow and fund payouts. I have, in the past, written extensively about investing directly in the underlying and replicating payouts manually. My concerns on the lack of growth in the option strategies can be summarized in a single line as "there is no income without growth". BTCI uses the option layer actively and optimally to reduce volatility marginally and grow the invested capital in the long term. That growth funds a large part of the moderately aggressive ~25% yield. Even as volatility subsides, BTCI's ability to trace the underlying will not drop, making it a Buy for long term investors. The only thing that has changed in the Buy thesis is that with reduced volatility, BTCI investors will need a long term bullish thesis for bitcoin, as most of the payout funding will come from that than simply volatility harvesting as was possible earlier.
