ULTY: That High Yield Has A High Cost

seekingalpha05-18

Arsenii Palivoda YieldMax Ultra Option Income Strategy ETF (NYSEARCA:ULTY) is another new product by YieldMax whose high-yielding ETFs have been very popular lately. Similar to other YieldMax funds, ...

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Similar to other YieldMax funds, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4694140-ulty-that-high-yield-has-a-high-cost\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"YMAG","symbol_name":"YieldMax Magnificent 7 Fund of Option Income ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4694140-ulty-that-high-yield-has-a-high-cost","article_id":"2436927943","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1449174792/image_1449174792.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2436927943","pubTimestamp":1715965931,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Arsenii Palivoda YieldMax Ultra Option Income Strategy ETF  is another new product by YieldMax whose high-yielding ETFs have been very popular lately. 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Similar to other YieldMax funds, this fund also writes simulated covered calls against individual stocks on a weekly basis. So far, the fund has been around for just a few months, and it already boasts an annualized distribution yield close to 100%, but of course, it comes at a cost of NAV decay as with many covered call ETFs. ULTY Distribution Yield (YieldMax) Since inception a few months ago, the fund's price and NAV is already down about 25%, but its total return is closer to flat (only down -3.33%) after reinvesting distributions. Data by YCharts So, what does this fund write covered calls on? This fund is a bit different from other YieldMax funds because its underlying stocks change from week to week. Many of you are familiar with single stock YieldMax funds such as TSLY (TSLY) which writes covered calls on Tesla (TSLA) or NVDY (NVDY) which writes covered calls on Nvidia (NVDA) and those funds never sell options on other stocks as they stick with the same stock every time. ULTY writes covered calls on about ~15 different stocks, and these stocks could change from week to week. For example, currently the list includes stocks such as Celsius (CELH), Affirm Holdings (AFRM) and Upstart (UPST). In the list there are plenty of small caps, crypto stocks or cannabis stocks. You might be wondering what these stocks have in common and how ULTY selects its holdings for a given week, and it is typically high IV (implied volatility). When a stock is highly volatility and its option premiums are juicy, it will be included in ULTY's list for the week so that it can generate the maximum number of premiums. I probably couldn't emphasize this enough. These stocks are very risky and many of them have a history of moving 20-30% overnight or more in either direction, in some instances. We are looking at many stocks such as small-cap crypto mining stocks, pharmaceuticals and start up companies that are super volatile. The fund even has a history of trading \"meme stocks\" such as GameStop and AMC. Some of these stocks could possibly lose 90% or more of their value, and some of them already lost most of their value in recent years.    ULTY Top 10 Holdings (Seeking Alpha) Well, when a stock has this high of implied volatility, it's usually for a good reason because either the stock is facing a binary event such as an earnings report, government approval for a drug or a major announcement or that the stock is just one of those inherently volatile stocks that have plenty of ups and downs. These types of stocks might drop or rise 10-20% on a regular day without any major news. When you sell covered calls on these types of stocks, you are taking on a huge risk because if the stock rises 20% overnight you won't see the benefits of it since you limited your upside by writing covered calls but if the same stock were to drop -20%, you'd see most of the damage so it's a skewed play that's more likely to cause damage than benefit for you. Below you can see 30-day rolling volatility for ULTY's current top holdings. Notice how the number ranges from 49% to 267% which is pretty massive. Considering that currently VIX sits at 12 as of me writing this article, these stocks have a volatility level anywhere from 4x to 20x times the overall market. Data by YCharts The fund doesn't do any fundamental or technical analysis and doesn't use any valuation to determine its holdings. Its goal is to maximize premium income, so the only metric that matters if whether a stock has high volatility or not that week, which is pretty close to gambling because the fund is taking the chance that a stock will move less than its implied volatility suggests during the week. If a stock has an implied volatility of 30, and it actually experiences a volatility of 20, the fund would make money on the trade, but if the same stock were to experience a volatility of 40, the fund would lose money on the bet. Each week, the fund places 15 bets where most of their actual volatility will be less than their implied volatility from the week before. It's also a plus if the stock goes up a little bit, which would bring some more profits for the fund. Since the fund uses a different set of stocks each week, it may or may not get lucky that week and once a stock crashes, and it loses money on it, the fund may never recover that money again, unlike a fund that trades the same stock time and time again. Let's take another YieldMax fund AMDY (AMDY) for example. This fund only trades AMD options and nothing else. If AMD were to crash today, the fund would lose money, but it could always recover that money again when AMD eventually rises back up and recovers because it trades the same stock every time. ULTY trades a different set of stocks every week, so once a stock crashes and money is lost, it may be lost for good even if that said stock were to recover its losses next week, since the fund might have moved on from that stock already. ULTY actually reminds me of another YieldMax fund, which is OARK (OARK). This fund writes covered calls on the highly popular ARK Innovation ETF (ARKK) which attracted a lot of attention in 2020 during the rally that happened in the second half of the year. Managed by famous Cathie Wood, ARKK holds a lot of highly volatile growth stocks that also happen to have high valuations, such as Tesla, Roku (ROKU), Coinbase (COIN) and Block (SQ). You can see some of ARKK's holdings below. OARK writes covered calls against ARKK itself but not its individual holdings, whereas ULTY writes covered calls against individual stocks, many of which are similar to ARKK's holdings.   ARKK Top 10 Holdings (Seeking Alpha) How did OARK perform since inception? It saw its share price drop by -43% and its total return (after reinvesting distributions) barely up 1% since inception. Interestingly enough, ARKK has been up about 25% during the same period, so the fund virtually missed out on all this upside while writing covered calls on ARKK. I wouldn't be surprised to see a similar scenario play out in the long run for ULTY either. Data by YCharts When we look at ULTY's worst performing days excluding ex-dividend days, we see that it already had 10 days when it was down by 2% or more, with the average drop being -3.5% for these 10 days. Mind you, the fund has only been around for a few months and most of this was spent during a period of rising market and low volatility.         Date Price Open High Low Vol. Change %   5/10/2024 15.36 16.23 16.23 15.36 681.32K -4.48%   4/12/2024 17.14 17.79 17.81 17 369.15K -4.35%   3/11/2024 19.16 20.06 20.06 19.13 178.71K -3.91%   4/15/2024 16.5 17.32 17.32 16.44 404.92K -3.73%   3/5/2024 19.34 19.99 19.99 19.1 72.75K -3.64%   3/19/2024 17.38 17.79 17.79 17.08 218.69K -3.55%   4/19/2024 14.25 14.62 14.74 14.11 429.72K -3.13%   4/30/2024 14.71 15 15.05 14.71 191.28K -2.84%   4/2/2024 17.76 18.34 18.34 17.59 150.79K -2.84%   5/14/2024 15.96 16 16.1 15.72 1.60M -2.15%   Click to enlarge When we look at the fund's best days, we find one day when it was up 6% just a few days ago because its holding of GameStop (GME) performed exceptionally well. Besides that, the average rise on greenest days was usually between 2% and 3%.         Date Price Open High Low Vol. Change %   5/13/2024 16.31 15.9 16.8 15.9 681.38K 6.18%   3/1/2024 20 19.6 20 19.39 108.82K 3.36%   5/2/2024 15.04 14.97 15.09 14.55 111.18K 3.08%   5/9/2024 16.08 15.75 16.1 15.5 718.10K 2.88%   3/20/2024 17.88 17.47 17.88 17.35 147.12K 2.88%   4/3/2024 18.21 17.84 18.34 17.8 129.32K 2.53%   4/22/2024 14.6 14.43 14.7 14.08 339.00K 2.46%   3/6/2024 19.81 19.81 20.08 19.56 68.85K 2.43%   4/23/2024 14.95 14.73 15.04 14.69 174.72K 2.40%   5/3/2024 15.39 15.31 15.5 15.3 211.46K 2.33%   Click to enlarge The other two funds run by YieldMax both seem to be outperforming this one. In fact, YMAG (YMAG) is even outperforming the overall index during this period. YMAG is up 5% in total returns and YMAX is up 2.25% whereas ULTY was down -3% during the same period and yes, this includes total returns including reinvesting of distributions. Data by YCharts  At the end of the day, ULTY seems more of a trading fund than an investing fund, and its holdings aren't based on any fundamental or technical analysis. The fund basically writes covered calls on whichever stocks tend to have the highest volatility in a given week, which is as risky as it gets. If your risk appetite is exceptionally high, you might want to take a bite in this fund, but if you do it, make sure that your bite size is not very large. If the fund is performing this poorly when the overall market is doing well and volatility is low, I can't imagine how it would perform in a more volatile environment like what we saw in 2020 or 2022 though, so I would be very careful with this one.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"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":"4.29.2","shortVersion":"4.29.2","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/2436927943"}