MSTY Generates Revenue for Investors Through MicroStrategy

YieldMax MSTR Option Income Strategy ETF (NYSERCA: REVENGE) is an income-based ETF that actively manages an options strategy in order to generate income for the investor. MSTY's strategy focuses on a single-name stock, MicroStrategy (MSTR)) as its principal position by selling options on the underlying asset to generate income. This passive, actively managed ETF offers a unique opportunity for investors looking to maintain exposure to MicroStrategy, whether in short-short, short-long, long-long, or long-short positions. Given the equivalent risk involved and the substantial income-generating component, I recommend MSTY with a BUY rating.

For clarification, I am bearish on the underlying stock, MicroStrategy.

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Since this portfolio strategy does not commit to either going long or short on MSTR stock, I believe it offers a great opportunity for investors looking to invest passively. Invest in MSTR through an actively managed options strategy.

How it works

YieldMax's portfolio strategy involves actively managing a portfolio of options on the underlying asset. The company generates revenue through two components. The first is through the sale of covered synthetic put or call options to generate revenue. The strategy typically involves long positions in options to manage risk; however, the primary goal is to short options based on the direction of the underlying stock.

The second income component is the fund's holdings of short-term U.S. Treasury bonds as collateral. If we compare MSTY to another strategy that YieldMax manages, AMDY (AMDY), MSTY holds substantially less Treasury bonds than AMDY. This may be a result of the level of volatility that MSTR has compared to AMDY's underlying, Advanced Micro Devices (AMD). In contrast, MSTY has a substantial amount of “cash and other” in the portfolio, which is likely held in money market funds that may provide a lower income yield. Despite this factor, MSTY's returns to investors are substantially higher than AMDY's as the forward distribution rate is 100.54%. The portfolio currently remains net-bullish on the underlying given the short straddle position of 10% short-long and 13% short-short, each maturing on October 18, 2024.

The cost of owning MSTY is 99 basis points, substantially below the distribution rate offered by the strategy, suggesting that MSTY may be a strong candidate for earning passive income while maintaining equity option exposure. In the event of a rate cut by the Federal Reserve, MSTY may offer investors passive income that may be more attractive compared to fixed-income strategies. MSTY currently has $446 million in net assets and an average daily trading volume of 809,000.

During normal trading periods, MSTY stock closely tracks the underlying asset, MSTR.

This is likely a result of investor sentiment towards the underlying asset, given the active trading volume seen in the ETF. On the other hand, the MSTY deviates from the MSTR during periods of increased volatility, as seen in the period from August 23 to 24.

Given this factor, MSTY may offer investors more “stability” when investing in MicroStrategy, as the ETF remains cautious in maintaining the investment initiative of investing in MSTR stock.

Conclusion

MSTY offers passive equity investors the ability to invest in an actively managed options strategy with respect to MSTR stock. This portfolio offers investors an income component as a result of short selling options on the underlying asset, providing an attractive income component for those who wish to maintain equity exposure. Given the portfolio's ability to generate a substantial amount of income on the underlying security, I rate MSTY with a BUY rating.

Again, I remain bearish on the underlying stock. This is not a recommendation to buy MSTR stock. The sole purpose of this report is to understand the mechanics of the derivatives strategy offered by MSTY. The rating associated with MSTY applies only to MSTY.