Summary Yieldmax MSTR Option Income Strategy ETF offers income through covered calls on MicroStrategy stock, providing dividends and mitigating volatility risks in a potential higher-for-longer interest rate environment. MicroStrategy's leveraged Bitcoin strategy may face challenges in 2025 due to its rate sensitivity and the incoming U.S. administration taking time to ease regulations, making MSTY a safer income-focused alternative. MSTY's income strategy, through selling call options, delivers regular dividends and cushions against volatility, outperforming other income-focused investments like ProShares Bitcoin Strategy ETF. For those prioritizing regular income over capital gains, MSTY is a better option, though near-term volatility is expected as the new government settles in. On a cautionary tone, one of the trade-offs of the income strategy is having to forego the larger capital appreciation obtained by directly owning the stock itself. The Yieldmax MSTR Option Income Strategy ETF ( MSTY ) aims to generate income through covered calls made on MicroStrategy’s ( MSTR ) stock which has already gained more than 350% as shown below this year driven by several catalysts. However, market conditions in 2025 may be different in case the Federal Reserve keeps interest rates higher for longer. Data by YCharts Also, one cannot exclude volatility risks because of the high expectations built into Bitcoin's ( BTC-USD ) price after the election of a crypto-friendly President, especially if the incoming U.S. administration takes time to execute its promises about easing regulations and building a national Bitcoin reserve . Amid such a backdrop, this thesis aims to show that MSTY which has delivered significant total returns as per the above orange chart, is better for Bitcoin exposure going into 2025 because of the risks associated with MicroStrategy's leveraged approach to crypto investing. MicroStrategy's Appeal May Falter in 2025 In this connection, I was bullish on the stock back in June based mainly on the Fed cutting down rates, and it has already appreciate by more than 100% since then. Moreover, from an IT play, the company has transformed its business model to be among the top holders of Bitcoin with about 331,200 held according to an SEC filing dated November 18. Subsequently, it purchased additional coins with an estimated total of 444,262 BTC on December 23. Furthermore, its strategy to continually spend cash generated from its software operations, contract debt, and issue equity has enabled it to position itself as a key corporate holder of BTC, second only to BlackRock’s iShares Bitcoin Trust ( IBIT ). More importantly, it has outperformed Bitcoin by more than four times during the last 3 years as shown in the orange chart below, and, this, despite the approval of several spot ETFs in January this year. Thus, investors have continued to trust the stock confirming its role as a Bitcoin proxy. However, it remains highly rate sensitive. Thus, looking further at the price action, it started surging around November 19 after the Federal Reserve cut interest rates by 50 basis points as highlighted in green below. This is explained by its Bitcoin holdings being financed mostly by debt, meaning a lowering of the cost of capital improves finances. seekingalpha.com However, it suffered from a sharp downturn around December 19 after the Fed cut rates by 25 basis points , but Powell hinted that there may be fewer reductions in 2025. This increases the risks associated with its leveraged approach to crypto investing, and, as a rate-sensitive stock, it is likely to suffer from volatility if borrowing costs remain higher for longer, thereby increasing debt servicing costs. seekingalpha.com Thinking aloud, in addition to tighter monetary policy reducing the attractiveness of MicroStrategy’s Bitcoin strategy, it may also face volatility risks in case President-elect Trump's nominee for the SEC (Security and Exchange Commission) takes time to ease regulations around crypto. In these circumstances, it makes sense to consider the Yieldmax ETF because of the income rationale. MSTY's Income Means a Better Total Return Looking deeper into the strategy, it is tied to MicroStrategy's stock performance and involves selling call options, which allows the fund managers to collect premiums that are eventually paid as distributions to shareholders. Thus, the fund has paid dividends regularly almost every month since its inception in February this year. Also, the yields of 93.35% paid on a trailing twelve-month basis exceed the mean for all other ETFs by a whopping 3,300% as shown below. seekingalpha.com However, in contrast to other dividend-paying ETFs which hold the shares of publicly listed companies and whose yields increase gradually with time, MSTY which was incepted on February 21 this year, excludes dividend growth as the amount paid varies widely as shown below. seekingalpha.com This is because the income depends on how shares of MicroStrategy have fared. Thus, during favorable market conditions, when the stock evolves either sideways or is on a moderate uptrend as was the case from April to October, fund managers were able to well execute the call options strategy. As a result, while the price performance charts diverge widely, MSTY's total return since its inception has mostly evolved alongside MicroStrategy's from April to October as charted below. For investors, the total return shows performance when the income obtained is reinvested back into the ETF. www,seekingalpha.com However, subsequently, there was a sharp divergence between the returns of MicroStrategy and the ETF as when its underlying asset undergoes a sharp uptrend, part of the upside is capped leading to underperformance relative to MicroStrategy's stock. Yieldmax's Gain is Capped but Provides Protection Against Volatility Thus, in a bull market, the price of the underlying asset (MicroStrategy) can exceed the strike price of the option calls being sold. This compels the fund managers to sell the shares at the strike price itself, thereby limiting further gains. Consequently, obtaining good returns depends on whether the strike price remains below the underlying stock, and this is more likely to occur in relatively stable or slightly bullish market conditions. Only during these conditions, which, I believe, should occur in 2025, can the income generated enhance overall returns enough to match or slightly trail the stock. Next, I look for MSTY's performance where the stock is on a downtrend. In this case, the income generated from selling call options can lower capital losses suffered as a result of owning the stock. This was the case after December 19 as pictured below when the Fed made a hawkish cut as mentioned earlier and MSTY's total return suffered less than MicroStrategy's. This means the income strategy succeeded at providing some cushion against volatility. seekingalpha.com Tellingly, Chair Powell's comments about monetary policy unlikely to be eased further not only impacted Bitcoin's value but also caused the broader market to slump by around 3% . Now, in case the market slumps further, MicroStrategy's ability to sell equities at a premium to take advantage of favorable investor sentiment to grow its Bitcoin pile may be put into question. For this matter, at the time of writing, it was trading at around $330 which is over a hundred dollars lower than its mid-December peak of $436. Thus, looking ahead, the Fed signaling fewer rate cuts may dampen risk appetite for growth stocks that tend to have higher valuation multiples, as exemplified by MicroStrategy's sky-high P/S of 131x. The problem is in a higher-for-longer rate environment, it may not be able to borrow enough money at attractive rates to grow fast enough to justify its valuation. Moreover, higher-for-longer rates may prompt investors to rotate toward more value, dividend, or other income-generating strategies in case the recent uptrend seen in inflation is sustained. MSTY Appears better Positioned than a Direct Investment in MicroStrategy Therefore, in a macroeconomic environment where rates are maintained at their present level or even raised as the Fed monitors the inflationary effects of the tariffs potentially imposed on imports from the rest of the world, and migration control measures, MicroStrategy's share price may not benefit from the same momentum created by the earlier 50 basis point rate cuts. On the contrary, as a leveraged stock, the disproportionately high gains it has enjoyed from Bitcoin's price moves may work against it. Moreover, as an alternative, the Yieldmax ETF has been closely shadowing MicroStrategy and has a 0.96 correlation with the stock, except, during periods of extreme Bitcoin fluctuations. Thus, for those wishing to remain invested in BTC, MSTY is a better option as it can mitigate the effects of volatility potentially engulfing MicroStrategy in case market conditions become unfavorable. www.yieldmaxetfs.com/ However, on a cautious note, one of the trade-offs of benefiting from the income strategy is having to forego part of the capital appreciation obtained by directly owning the stock. Also, MSTY’s 0.99% fee grinds into the capital appreciation, especially during bull or bear markets. Still, the impact of such a trade-off appears negligible in comparison to the rate-sensitivity risks facing MicroStrategy in case it takes on more debt. In this connection, as of November 18, there were only $15.3 billion remaining in authorized shares available for issuance under its sales agreement. Now, in addition to diluting shares, the problem here is the limited quantity left for issuance could restrict its ability to expand its Bitcoin holdings at the same pace as before unless it issues additional debt. MSTY is Better as an alternative income-focused investment than BITO Therefore, for those looking to profit from MicroStrategy in 2025 and ready to accept less capital gains in favor of regular income, investing through MSTY may be the better option. To further support my argument, Yieldmax has performed better than an alternative income-focused investment based on bitcoin futures, or the ProShares Bitcoin Strategy ETF ( BITO ) since its inception as charted below. Data by YCharts The reason is despite its upside being capped during MicroStrategy's sharp upsides, MSTY has been more consistent at generating income from selling call options than BITO which depends on Bitcoin’s price movement for this purpose. Thus, despite also being exposed to leverage (through MicroStrategy), MSTY has better profited from Bitcoin's price action. Finally, as investors look towards income and prioritize risk-adjusted returns in a potentially higher-for-longer rate environment, MSTY's is likely to perform better. While its exact price will depend on both Bitcoin and MicroStrategy's trading range, I have a hold position as its current share price of $29.5 remains below its 10-day and 50-day but above its 100-day moving average, hinting at near-term volatility. As for MicroStrategy, I remain cautious because of its rate sensitivity, despite my prediction for BTC to rise to around $105K in the latter part of 2025.
