TSLY's 75% Yield Real, But It's Income Strategy I Am Staying Away From

seekingalpha2023-11-27

I am interested in investment products that utilize option strategies to generate income.I have decided not to invest in TSLY, a product that generates income through a synthetic covered call strategy...

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From\n</h2>\n\n<h4 class=\"meta\">\n\n\n2023-11-27 22:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4654129-tslys-75-percent-yield-real-but-its-income-strategy-i-am-staying-away-from><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>I am interested in investment products that utilize option strategies to generate income.I have decided not to invest in TSLY, a product that generates income through a synthetic covered call strategy...</p>\n\n<a href=\"https://seekingalpha.com/article/4654129-tslys-75-percent-yield-real-but-its-income-strategy-i-am-staying-away-from\">Source 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PM ImagesAs a practitioner of utilizing the options market to generate income, I keep my eyes open for new investment products that deploy option overlay strategies. I have utilized the options market to generate income through selling covered calls on individual positions, writing cash-secured puts to generate income on idle cash on positions I wanted to dollar cost average into, and running an option wheel strategy on positions I own to manufacture a continuous flow of income. I am always on the lookout for new investment products that deploy options strategies. I am intrigued with how others utilize the option markets to manufacture income, and when I find investment products that fit my needs, I will add them to my Dividend Harvesting Portfolio Series on Seeking Alpha (latest article can be read here) or in my main dividend portfolio. The YieldMax TSLA Option Income Strategy ETF (NYSEARCA:TSLY) has grown in popularity as it focuses on Tesla (TSLA) and manufacturers a gigantic yield. TSLY popped up on my radar, and after placing it on my watchlist as something I may add, I am taking it off my watchlist after going through the additional data. I have had a love-hate relationship with TSLA's valuation despite being a shareholder through my wife's purchases, but I would rather own TSLA directly than allocating capital toward TSLY to manufacture income from TSLA. The TSLY strategy certainly generates more income than most ETFs on a percentage basis, but after running the numbers, I am going to stay away from them for the time being. If the situation changes and the data looks better in 6-12 months, I will reevaluate starting a position, but for now, the numbers don't work for me.   Seeking AlphaFollowing up on my previous article about TSLY On 8/21/23, I wrote an article on TSLY (can be read here) where I discussed how TSLY generates overwhelming amounts of premium that gets distributed as monthly income through a unique option strategy around shares of TSLA. I showed the distribution track record and explained how the yield was real, but it's not the way I would look to play TSLA. After several months and collecting more data, I am following up on my previous article to discuss why TSLY is coming off my watchlist, why this will not make it into any of my accounts, and what would need to happen for me to consider allocating capital toward TSLY. For those who are interested in TSLY's option strategy but are not interested in my previous article, I will put that section below:  TSLY revolves around options contracts on TSLA and its synthetic covered call strategy. TSLY will purchase and sell a combination of call and put contracts on shares of TSLA. There is a big difference between a traditional covered call and a synthetic covered call strategy. When I implement a covered call overlay strategy, I buy shares of a company in blocks of 100 and write a covered call against my shares. I am selling someone the right to purchase my shares at an agreed-upon price on a specific date in the future. This allows me to collect immediate income or premium from holding shares of a company, but my upside is capped because someone is paying me to purchase the shares at the designated price. A synthetic covered call strategy is much different in my opinion, than a covered call overlay strategy. While the issuing party is selling a call option that is based on the value of the underlying security, in this case, TSLA, the investor who is writing the contract, does not own shares of TSLA. They are synthetically replacing owning the underlying shares through various investment instruments. TSLY creates its long exposure to TSLA, which is their equivalent of owning the shares by purchasing TSLA call options and, selling TSLA put options to try to replicate the price movements of TSLA. Both the call and puts that TSLY purchases will be on a 6-12 month option chain while the strike prices are approximately equal to the price of TSLA at the time of purchasing the contracts. Through this combination, TSLY can synthetically replicate owning shares of TSLA through the options market. TSLY generates its income for shareholders through its covered call strategy. Due to the fact that TSLY does not own shares of TSLA, the written call options will be sold short and generally have an expiration date of one month or less. TSLY will look for a strike price that is roughly 5-15% above the current price of TSLA when writing the contract. Writing covered calls will cap the upside potential if shares of TSLA appreciate, and there is a caveat to the strategy that investors should be aware of. If TSLA's stock price appreciates beyond the strike price of the contracts that are sold short, then shares of TSLY could depreciate as the fund would lose money on the short call positions and limit the upside return of the synthetic long strategy.  A raw data comparison between investing in TSLY and TSLA I am going to look at the data since my last article and since TSLY's inception to provide 2 different time periods. All of the data will assume that the distributions from TSLY are taken as income. When my previous article on TSLY was published, its share price was $13.65. Since then, shares of TSLY have generated a $0.59 distribution on 9/18/23, a $0.58 distribution on 10/16/23, and a $0.59 distribution on 11/16/23 for a total of $1.75 in distributed income. For every share of TSLY purchased on 8/21/23, TSLY's share value would have declined by -$2.26 or -16.56% while generating $1.75 in distributed income. Overall, the net loss per share would be -$0.51 or -3.76% per share after deducting the generated income from the capital depreciation. Shares of TSLA closed at $231.28 on 8/21/23. Since then, they have climbed 1.8% or $4.17 per share to $235.45. TSLY's complicated options strategy did generate a staggering amount of income, but the loss in capital appreciation due to the methodology has placed its overall return at a lower point than just buying shares of TSLA and holding them.   Seeking Alpha  TSLY vs TSLATSLY went public on 11/22/22, so I am expanding my data set to their inception date. The chart above indicates that since TSLY's inception, shares have declined by -44.27% compared to shares of TSLA, appreciating by 28.67%. Now, I will factor in the distributions to see how TSLY would have fared when they are accounted for. TSLY went public at $20, and there is just over a year of data to look at. Since its inception, shares have declined by -$8.61 or -43.05% as they have gone from $20 to $11.39. Over this period, TSLY has produced 11 distributions that totaled $8.52, which is a 42.59% yield on the initial price or a 74.79% yield based on the current price. When the $8.52 in distributions are netted against the capital depreciation, an investment in TSLY would be down -$0.09 or -0.46%. Shares of TSLA, on the other hand, went from $183.20 to $235.45, appreciating by $52.25 or 28.52% over this period. In both scenarios, whether I am looking at the performance of TSLY compared to owning TSLA directly, owning TSLA stock has been a more lucrative strategy than utilizing TSLY. There are many investment products out there focused on generating yield, and while TSLY has some of the largest yields I have seen on a percentage basis, it hasn't been more appealing than just owning TSLA directly. If you wanted to manufacture income from Tesla you could just write covered calls TSLA has generated lucrative returns for many of its investors, and the combination of its popularity and volatility has created a robust options market. Investors who own at least 100 shares of TSLA could theoretically manufacture income by writing covered calls against their shares. In full disclosure, as I stated earlier, I write covered calls on some of my positions to manufacture income, but I do not have any covered calls written on TSLA. Anyone who is interested in options should do a lot of research and understand the risks before executing an options strategy. I built an options calculator that shows a possible scenario to manufacture income from TSLA. This is a hypothetical scenario with real-time data. Hypothetically, if you owned 100 shares of TSLA, you would be able to write 1 covered call against your shares. Each options contract is the equivalent of 100 shares. When you write a covered call, you're entering in a contract with another party where you are selling the right for the other party to purchase your shares at a specific price on a specific date. These are identified as the strike price and expiration date. I will be using the December 15th 2023, option chain for TSLA in this example. If someone wanted to manufacture income from the shares they owned of TSLA, they could write a covered call. Hypothetically, if someone wanted to generate around 1%, they could write 1 option contract on the December 15th 2023 option chain at a $260 strike price. This means that the owner of the shares is selling the right for another party to purchase their 100 shares of TSLA on December 15th for $260 per share, no matter what the share price was. The contract could expire worthless if shares of TSLA remained under $260, or the shares could get sold to the other party at $260 per share no matter where TSLA traded above $260. Based on the current share price of TSLA being $235.45, the investment capital for the option contract would be $23,545 because 1 contract is the equivalent of 100 shares. Since the premium for this contract is $2.52 per share, the buyer of the contract would pay $252 for this option contract. The owner of the shares would collect $252 for selling the covered call, which would be a 1.07% yield on the current value of the shares. Shares of TSLA would need to appreciate by 10.43% over the next 21 days for their shares to get called away. Ultimately, if TSLA finished above $260 on December 15th, the person who wrote the covered call would generate $2,455 or 10.43% in share appreciation and another $252 or 1.07% in option premium collected for a total profit of $2,707 or 11.5% if the shares got called away. If TSLA finished under $260, the contract would expire worthless, and they would keep the $252 or 1.07% they were paid on the option contract and retain their shares as the contract expired worthless. Please do your own research, as this is simply an example of how you can manufacture income from writing covered calls. Anyone who is interested should research the implications and make sure they understand the risks before entering into any investment.   Steven Fiorillo, Seeking AlphaConclusion  The large yield generated by TSLY was tempting, and I had placed TSLY on my watchlist. After reevaluating TSLY with the additional data, I am taking it off my watchlist and will reevaluate it again in the future. The numbers don't work for me, and while the income and yield are real, investors have done better by just owning TSLA over the past year. This can certainly change with more data, but for now, I would prefer running a covered call strategy to generate income from TSLA if I wanted to manufacture a dividend. TSLY is an interesting product that has potential, but for now, the results compared to just owning TSLA don't make a compelling case for me to start a position.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2386133870"}