How to Short MSTR? Using a Bear Call Spread Strategy

After Trump’s election, Bitcoin surged, making publicly traded companies heavily invested in Bitcoin—becoming "Bitcoin whales"—the most prominent "Bitcoin proxy stocks." Among them, MicroStrategy (MSTR) has drawn significant investor attention. How much do investors favor MSTR? Even leveraged ETFs tied to this stock have faced trading restrictions.

Background on MSTR-Linked Leveraged ETFs

For example, a 2x long ETF for MSTR recently hit trading limits. According to Bloomberg, last month, Tuttle Capital Management CEO Matt Tuttle received bad news: the swaps exposure limit set by its prime broker was reached for their MSTR 2x ETF, MSTU.
In simpler terms, barely a month after MSTU's launch, the prime brokers facilitating securities lending had to restrict its swaps trading.

Indicators show MSTU is among the most volatile ETFs in Wall Street history. It offers returns double that of MSTR. On a recent Friday, MSTU surged over 20%, with a one-month cumulative gain exceeding 220%. The fund attracted hundreds of millions of dollars in inflows over the past month. By the Thursday close of that week, MSTU managed $4 billion in assets—a 600% growth since its September inception.

Similarly, the Defiance Daily Target 2X Long MSTR ETF (MSTX) faced a comparable situation. Its issuer, Defiance ETFs CEO Sylvia Jablonski, stated that MSTX had to rely on options to maintain leverage shortly after its August launch. Initially offering 1.75x leverage, it increased to 2x after MSTU's debut.

Bitcoin-MSTR Feedback Loop

Prominent financial commentator and gold advocate Peter Schiff pointed out a positive feedback loop between MSTR's stock price and its Bitcoin investments. As MSTR’s stock price rises, the company can issue more shares to buy more Bitcoin, further driving up Bitcoin’s price.

For Bearish Investors: Bear Call Spread Strategy

Investors bearish on MSTR’s stock price may consider a Bear Call Spread strategy.

What is a Bear Call Spread Strategy?

A bear call spread is an options strategy for traders expecting a stock’s price to decline. It involves selling a call option at a lower strike price and simultaneously buying a call option at a higher strike price, both with the same expiration date. This limits potential risk while allowing for some profit.

Example: Shorting MSTR

Assume MSTR's current price is $440, and the investor expects it to drop to around $300 by December 20. Here’s how to implement the bear call spread:

Step 1: Sell a call option

• Expiration Date: December 20

• Strike Price: $300

• Premium Received: $16,147

Step 2: Buy a call option

• Expiration Date: December 20

• Strike Price: $425

• Premium Paid: $10,169

Strategy Details:

1. Net Cash Flow:

   • Premium received: $16,147

   • Premium paid: $10,169

   • Net Premium Collected: $5,978

2. Profit & Loss Analysis:

   • Maximum Profit:
     If MSTR's price is $300 or below at expiration:

     • Neither option is exercised.

     • Profit = $5,978 (net premium collected).

   • Maximum Loss:
     If MSTR's price exceeds $425:

     • The $300 strike call is exercised (loss: $125/share).

     • The $425 strike call is exercised to offset the loss.

     • Total loss = $125 \times 100 - $5,978 = $6,522.

     • Maximum Loss = $6,522.

   • Breakeven Point:

     • Breakeven occurs when the net premium offsets the difference between the stock price and the sold option’s strike price:
       $300 + $5,978 / 100 = $359.78.

     • Breakeven Price = $359.78.

Strategy Summary:

• Use Case: Suitable for scenarios where the stock is expected to decline or remain range-bound.

• Advantages: Risk is capped, and margin requirements are reduced.

• Risk Management: Both risk and reward are limited, with maximum risk occurring if the stock significantly surpasses $425.

For those confident in MSTR’s potential decline, this strategy offers a lower-risk way to profit from bearish market movements.