MSOX: Maximum Leverage On Cannabis, How To Play It

seekingalpha04-11

Advisorshares Msos 2x Daily ETF provides leveraged exposure to the U.S. cannabis sector.The MSOS ETF currently holds major cannabis companies through total return swaps.We show you the best way to ...

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Legalization has been on the cards for a long time and yet has not happened. Bulls have latched on to every news story as if it is the \"the one.\" Like this one.  The Senate Judiciary Subcommittee on Crime and Terrorism, chaired by Sen. Cory Booker , is expected to meet on Tuesday for the discussion. The meeting titled \"Decriminalizing Cannabis at the Federal Level: Necessary Steps to Address Past Harms\" is expected to take up a long-anticipated measure that Senate Democrats planned to introduce this week to legalize marijuana at the federal level, Marijuana Moment reported.  Source: Seeking Alpha. Got excited?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4007":"制药","GTBIF":"Green Thumb Industries Inc.","BK4588":"碎股","FDN":"First Trust Dow Jones Internet I","CURLF":"Curaleaf Hldgs Inc.","TCNNF":"Trulieve Cannabis Corporation","BK4557":"大麻股","MSOS":"AdvisorShares Pure US Cannabis ETF","NUGT":"二倍做多黄金矿业指数ETF-Direxion","VRNOF":"Verano Holdings Corp.","BK4585":"ETF&股票定投概念","MSOX":"AdvisorShares MSOX 2X Daily ETF","BK4550":"红杉资本持仓"},"translate_title":"MSOX：大麻的最大杠杆，如何玩它","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"VRNOF":1,"CURLF":1,"GTBIF":1,"MSOS":1,"MSOX":1,"NUGT":1,"TCNNF":1,"FDN":0.9,"US30Y.BOND":0.65,"US7Y.BOND":0.65,"US6M.BOND":0.65,"US5Y.BOND":0.65,"US3Y.BOND":0.65,"US2Y.BOND":0.65,"US10Y.BOND":0.65,"US12M.BOND":0.65,"US912797FS14.BOND":0.6,"US912797HH31.BOND":0.6,"US912797HG57.BOND":0.6,"US912797HE00.BOND":0.6,"US912797GW17.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GB79.BOND":0.6,"US912797FH58.BOND":0.6,"US912796CX52.BOND":0.6},"content_text":"Advisorshares Msos 2x Daily ETF provides leveraged exposure to the U.S. cannabis sector.The MSOS ETF currently holds major cannabis companies through total return swaps.We show you the best way to play this.jhorrocks/E+ via Getty Images If there has been one area of the market that has failed to live up to the hype, it has been the Cannabis industry. Legalization has been on the cards for a long time and yet has not happened. Bulls have latched on to every news story as if it is the \"the one.\" Like this one.  The Senate Judiciary Subcommittee on Crime and Terrorism, chaired by Sen. Cory Booker (D-NJ), is expected to meet on Tuesday for the discussion. The meeting titled \"Decriminalizing Cannabis at the Federal Level: Necessary Steps to Address Past Harms\" is expected to take up a long-anticipated measure that Senate Democrats planned to introduce this week to legalize marijuana at the federal level, Marijuana Moment reported.  Source: Seeking Alpha. Got excited? You shouldn't. It is from June 2022. In the interim, most of the companies continue to bleed cash as they deal with extremely hostile conditions for using expenses on their tax returns. Of course, we expect this to get done, and so do the sponsors of our protagonist ETF for the day, Advisorshares Msos 2x Daily ETF (NYSEARCA:MSOX). The Fund According to the website, the fund is designed to give you 100% leverage on AdvisorShares Pure US Cannabis ETF. The AdvisorShares MSOS 2x Daily ETF is designed for sophisticated investors looking to gain magnified exposure to the U.S. cannabis sector. As an actively managed, leveraged ETF, MSOX seeks to generate amplified cannabis exposure by normally investing in swap agreements on the AdvisorShares Pure US Cannabis ETF (MSOS). MSOS is designed to give exposure to U.S. companies across multiple industries expected to benefit from the growing legalization of medical and recreational cannabis. Source: MSOX. For those unfamiliar with this one, the Cliff Notes edition is that AdvisorShares Pure US Cannabis ETF (MSOS) is the true U.S. Cannabis play. The lack of legalization at the Federal level means that traditional ETFs can only play this via companies that are actually on the periphery of this potential boom. MSOS, on the other hand, \"invests\" in these companies via the unique total return swap.  Currently, due to Federal and Custodial Bank restrictions, the ETF is unable to invest in some U.S. cannabis companies directly. Over time, we do expect this to change. Until then, the ETF gains exposure to these companies via a total return swap agreement with a broker (the broker is the \"counterparty\" to the swap agreement). A total return swap is a commonly used derivative contract between two parties who exchange cash for the return from a financial asset. In our case, we are trading cash for the performance of certain public U.S. cannabis companies.  Source: MSOS. MSOS holds the following companies via total return swaps. MSOS Anyone dabbling in this area knows that Green Thumb Industries Inc. (OTCQX:GTBIF), Curaleaf Holdings, Inc. (OTCPK:CURLF), Trulieve Cannabis Corporation (OTCQX:TCNNF) and Verano Holdings Corp. (OTCQX:VRNOF) are the \"go-to\" names for exposure. That's good because MSOS holds 76.2% in just these 4 names. Of course, you are not getting these 4. You are getting these 4 with the 100% leverage added. Risks You are probably here because you have seen the performance of MSOX year to date. Data by YCharts 73.48% versus 44.37% looks legit for a 2X fund. What's not to love? Well, let's go back a little. At a 6-month back timeframe, you are basically neck and neck. Data by YCharts Why is a 2X fund doing so poorly? We will get to that in a minute, but let us first make the question an even more interesting one by looking at one other timeframe. Here we start off on January 1, 2023. Data by YCharts MSOS is up about 42% during this time period, while MSOX is barely being able to keep its head above the breakeven line. This is in essence the feature (not the bug) of 2X funds. They tend to perform very differently than what their name suggests, over any timeframe other than one day. The constant rebalancing is what creates this drift. This drift is higher when the underlying is more volatile. So Treasury bond 2X funds would actually move in line with what you would expect. Direxion Daily Gold Miners Index Bull 2X Shares ETF (NUGT), which plays on the Gold miners, will mostly be nowhere near what you would expect over medium time frames. Data by YCharts MSOS is about the most volatile underlying you can find, so MSOX will be moving with crazy volatility. Outlook & How To Play It This close to the election, legalization odds are extremely narrow. Of course, that won't stop rumors and bounces and more rumors and crashes. For longer-term positions, MSOS makes more sense. There is no decay with things actually resolving by mid-2026 versus next week. Even there, we rate this an extremely risky product and would allocate 1% or less to it. For those wanting to play MSOX, there is a way that actually works. That way is to use the extremely high implied volatilities in your favor. Buying the shares and selling near-term at-the-money calls offers a very good return profile, even if the shares tread water. For example, as the ETF trades near $6.12, you can sell the $6.00 covered calls for August 2024 for about $2.50. Interactive Brokers April 10, 2024. Your annualized return on cash invested moves to 187.99%, assuming MSOX just stays over $6.00. If it does move below $6.00 by option expiration, your cost basis is now $3.62. Author's App So if you are buying a lottery ticket like MSOX, the best bet is to also sell your own version of the lottery ticket to someone else. We personally won't be trading this, but with all 2X and 3X funds, selling volatility is the best counterbalance to trading these from the long side. Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult a professional who knows their objectives and constraints.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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