Shorting MSTR Leveraged ETF: How to Use Options?

November 26: Market Sentiment Retreats as Bitcoin Pulls Back

The cryptocurrency market experienced a notable pullback on November 26, with Bitcoin retreating after reaching its recent high of $99,588. In intraday trading, Bitcoin briefly fell below $93,000, marking a nearly 4% decline within 24 hours.

MicroStrategy's Aggressive Bitcoin Acquisition

Between November 18 and 24, $MicroStrategy(MSTR)$ purchased 55,500 bitcoins for approximately $5.4 billion, at an average price of $97,862 per bitcoin. For the entire month of November so far, the company has acquired 134,480 bitcoins, worth $12 billion.

Bernstein analysts predict that MicroStrategy’s share of Bitcoin's circulating supply could rise from 1.7% to 4% within the next decade. Consequently, they have updated their year-end 2025 price target for MicroStrategy's stock to $600.

Canaccord analyst Joseph Vafi suggests that MicroStrategy's valuation should be assessed using a "sum-of-the-parts" approach rather than traditional profit metrics. He highlights "Bitcoin per share" as a critical metric, which grew 41.8% year-over-year as of November 17, 2024. Vafi notes:"The near doubling of Bitcoin per share alone is attractive. When combined with Bitcoin's spot price growth, the resulting dollarized per-share gains are substantial, even though they aren't reflected on the income statement."

Diverging Valuation Perspectives

Benchmark analyst Mark Palmer emphasized that MicroStrategy’s equity value should account for its debt management capability, equating it to the value generated by companies through traditional goods and services.

Blake, a managing partner at Future Fund, questioned MicroStrategy's stock valuation. He noted that the company’s Bitcoin holdings were worth $31.2 billion at the time, with net debt of $4.2 billion, implying $27 billion in equity value. However, MicroStrategy’s market capitalization stood at a staggering $106 billion. Blake estimated the stock's fair value at approximately $105 per share, far below its current trading price, which he believes is overvalued by 75%. Blake also pointed out that the company’s core software business has not contributed to growth, with revenue from that segment declining by 10.3% year-over-year.
"It’s like a company issuing cash or debt just to buy tradable securities. Nobody would pay for that because anyone can buy Bitcoin," Blake argued.

The Volatile MSTU Leveraged ETF

$T-Rex 2X Long MSTR Daily Target ETF(MSTU)$ , a 2x leveraged ETF tracking MicroStrategy stock, has become one of Wall Street’s most volatile ETFs. Its intraday returns often double those of MSTR stock. On Friday, MSTU surged over 20%, with a monthly gain exceeding 220%. The ETF has attracted hundreds of millions of dollars in inflows over the past month, reaching $4 billion in assets as of Thursday. Since its September debut, the ETF's assets have grown over 600%.

To achieve these leveraged returns, MSTU’s manager, Tuttle, relies on swap contracts arranged through brokers. However, given MSTR’s volatility, only three counterparties are willing to work with him, and all three are nearing their exposure limits. For instance, Tuttle once required $100 million in exposure, but the three brokers combined could only provide $20 million. To meet ETF obligations, Tuttle has increasingly turned to buying call options.
"If this were a Procter & Gamble fund, I could get as much swap exposure as I wanted. But MicroStrategy is a different beast," Tuttle said, adding that $1 billion in exposure has now become routine for his fund.

Shorting MSTU with Options

Investors looking to bet against the red-hot MSTU leveraged ETF can consider selling call options as a strategy.

When to Use the Strategy
Selling call options is suitable when investors hold a bearish or neutral view of the underlying asset. In this case, if the ETF’s price remains flat or declines, the investor profits from the premium collected.

Advantages:

1. Collecting Premiums: Investors earn income from the option premium, which is realized if the option expires worthless.

2. High Strike Price: Selling calls with a strike price well above the current price (e.g., $300) reduces the likelihood of assignment.

Risks:

1. Unlimited Loss Potential: If the ETF price soars beyond the strike price, losses can theoretically be infinite.

2. High Volatility: MSTU’s extreme price swings can make this strategy risky, especially without hedging.

Case Study: Selling Call Options on MSTU

• Current Price: $181

• Strike Price: $300

• Premium Collected: $35.29 per share ($3,529 per contract)

Profit and Loss Analysis

1. Maximum Profit: $3,529 (the premium collected if the ETF price stays below $300).

2. Maximum Risk: Unlimited, as losses grow if the ETF price rises significantly above $300.

3. Break-even Point: Strike price + premium collected = $335.29.

This strategy is suitable for experienced investors confident in their bearish outlook for MSTU and who are prepared for the risks associated with selling uncovered calls.