MSTY: Payouts Continue To Decline As Bitcoin Cycle Shifts

YieldMax MSTR Option Income Strategy ETF (NYSEARCA:MSTY) is arguably one of the most successful high yielding option funds that has been launched in the last year.

YieldMax MSTR Option Income Strategy ETF (NYSEARCA:MSTY) is arguably one of the most successful high yielding option funds that has been launched in the last year. MSTY currently offers investors a massive distribution yield of 12.6% per annum, and it paid out $1.3775 in distributions for the 12-month period that ended in December 2022. This is despite the fact that the ETF’s net investment income for the year was just $0.44.

Payouts Continue To Decline As Bitcoin Cycle Shifts

As impressive as MSTY’s income generation capabilities were in 2022, it is important to highlight that its payout potential is rapidly diminishing today as the Bitcoin cycle shifts. At the start of 2022, when MSTY launched, Bitcoin was trading at an all-time high of $69,000. But by the end of 2022, Bitcoin had dropped to $16,000. This price downturn has had a significant impact on MSTY’s ability to generate high levels of income.

This is because MSTY derives its income from selling covered call options on shares of MicroStrategy (NASDAQ:MSTR). MicroStrategy is a company that holds a large treasury investment in Bitcoin. MSTY’s strategy is to identify suitable strike prices and maturity dates for the call options that it sells, taking into account the prevailing market conditions and its risk tolerance.

When an investor buys a call option, they gain the right, but not the obligation, to purchase a specific security, in this case, MicroStrategy shares, at a predetermined price, known as the strike price, on or before a set date, which is the option’s maturity. In exchange for granting this right to the investor, the investor pays a premium to the seller of the option.

In today's market, selling covered call options on shares of MicroStrategy is relatively less risky than it would be in a rapidly rising market like the one we saw in 2021. This is because the potential for large price fluctuations is smaller in a slowly moving market.

However, it is crucial to understand that selling covered call options still carries inherent risks. If the price of the underlying shares rises significantly, the seller of the option may be forced to sell the shares at a lower price than they would have liked, and they may also forfeit the opportunity to realize further gains. Conversely, if the price of the underlying shares drops, the seller of the option will be able to keep the premium that they collected upfront.

In 2022, when Bitcoin’s price was in a strong uptrend throughout the first half of the year, and even more so in the first quarter, it presented an excellent opportunity for selling covered call options on shares of MicroStrategy at higher strikes and collect substantial premiums.

However, as Bitcoin’s price cycle turned in the second half of 2022, and especially in the fourth quarter, it placed MSTY in a less advantageous position. With Bitcoin’s price declining and the threat of steeper losses looming, MSTY had no choice but to reduce the strikes on its covered call options and sell them at lower premiums in order to mitigate the potential for even larger losses.

This shift in strategy is evident in the decreasing trends observed in the total premiums paid by investors in MSTY and the net investment income recognized by the ETF in 2022.

Despite starting the year with a strong potential for income generation, MSTY's payout potential is rapidly diminishing today as the Bitcoin cycle continues to shift.