Andrew Bary
MicroStrategy stock pays no dividend, but an exchange-traded fund that holds MicroStrategy and uses stock options to generate income has a "yield" of more than 100%.
The YieldMax MSTR Option Income Strategy ETF has capitalized on the extraordinary volatility of MicroStrategy stock to sell, or write, call options against its MicroStrategy holding to generate significant income.
The $1.2 billion ETF, which closed up 6.1% at $35.81 on Friday, paid out $4.42 a share in income in its November payment. The fund pays out distributions roughly once a month. The latest payment works out to an annual distribution rate of about 160%.
That is enormous and compares with about 8% distribution yield on the $60 billion JPMorgan Equity Premium Income ETF, the largest option-writing equity ETF.
MicroStrategy stock has surged since the November election as Bitcoin's price approaches $100,000. The stock climbed 6% on Friday to $421.88 and has roughly doubled since Donald Trump's election win. Shortly after the stock market closed Friday, Bitcoin was trading at around $99,400. The cryptocurrency has risen more than 40% since the election.
The ETF seeks to offer exposure to MicroStrategy, the largest corporate Bitcoin holder with about $33 billion of the cryptocurrency, and enhance returns by selling, or writing, call options against its MicroStrategy investment.
The ETF offers less upside than MicroStrategy stock because the call sales limit appreciation. Income, however, has been ample since the ETF launched in February due to MicroStrategy stock's high volatility.
"The first goal is yield and second is upside capture," says Jay Pestrichelli, the chief executive of Zega Financial, which manages the MicroStrategy ETF and nearly 30 other single stock YieldMax ETFs that use a similar strategy, including ones on Tesla (ETF ticker: TSLY) and Nvidia ( NVDY).
MicroStrategy might be the most volatile big stock in the market among companies valued at about $100 billion or more. The stock-price volatility implied in its seven-day options is around 200% against about 35% for Nvidia options and about 10% for the SPDR S&P 500 Trust, the largest ETF on the S&P 500.
High volatility translates into lofty options prices. The YieldMax MSTR Option Income Strategy ETF is capitalizing on that by selling short-dated calls maturing within the next two weeks or so.
Option writing ETFs often have to sell options with strikes that are only slightly out of the money -- meaning they are close to current stock prices -- to generate meaningful income. This caps the upside in the ETF.
But MicroStrategy is so volatile that the YieldMax ETF can sell out-of-the-money calls and still generate sizable income. For instance, the ETF has sold a $610-$760 call spread maturing in early December, selling the lower strike and buying the higher strike, or exercise price. And it has sold call options with strikes of $750. This translates into greater upside potential for the ETF if MicroStrategy stock rallies.
The ETF's monthly payouts were lower earlier this year when MicroStrategy's stock price was lower and less volatile. The options volatility was closer to 100%, half the current level. Current volatility levels in the options are unlikely to be maintained.
Since the YieldMax MSTR Option Income Strategy ETF was launched in late February at $20 a share, it has returned close to 300% including option income. MicroStrategy stock, meanwhile, has gained about 500%. This month, the ETF is up around 50% against 90% for the underlying stock.
"It's important to understand that you're taking MicroStrategy risk when you own MSTY. If you're not comfortable with MicroStrategy stock, you shouldn't own MSTY," Pestrichelli says. The call-writing approach doesn't provide downside protection and isn't the same as buying a put, which does offer downside protection.
The goal of the ETF is to return the volatility level of the options to holders of the ETF in income. Pestrichelli says the key metric for the ETF is the total return including option income, not just the change in the ETF price. If volatility averages 100% over the next year, the ETF could pay out something close to the current stock price in income. The income will depend on the level of the shares.
If MicroStrategy stock takes a tumble, the ETF will fall but investors should get cushioned by what's likely to be a sizable amount of income.
Write to Andrew Bary at andrew.bary@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 22, 2024 17:10 ET (22:10 GMT)
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