Summary MSTY and IMST both suffer from using highly volatile MSTR as the underlying, making option income strategies structurally weak for long-term investors. IMST does not offer meaningful improvements over MSTY in methodology, yield management, or risk mitigation based on current disclosures and early performance. Aggressive yields in both funds are misleading, as total returns are mostly driven by MSTR's price action rather than sustainable option income. I maintain a Sell on MSTY and keep IMST on the watchlist, awaiting more data, but see little reason for optimism given persistent structural flaws. I had written about the pitfalls of MSTY as an income plan not too long ago. Very recently, Bitwise has been coming up with YieldMax like option strategy products. One of them being a MSTY like strategy on MSTR - the Bitwise MSTR Option Income Strategy ETF ( IMST ). Why MSTY Was Rejected MSTY as a concept had several red flags. The underlying MSTR is not only heavily leveraged, the underlying asset for MSTR, i.e. Bitcoins are not the most low volatile assets either. For option writing plans to work out and provide alpha over holding the underlying directly, the underlying's volatility is key. We do want a bit of volatility, as that enables good premiums that can be earned on wins. These cumulative wins may offset the loss in the underlying. Otherwise, months of option premium gains become insignificant in the face of a 15% crash in the underlying (for example), where the option writing cushion only provides limited drawdown protection. So, we need volatility. But too high volatility like in MSTR's case is destructive for option writing. MSTR may crash very easily by 15% whereas MSTY total returns will do better with a say ~10% correction. But MSTR bounces back by 20% next month, and MSTY captures only 5% of that gain. At the end of the entire volatile round trip, the MSTR investor is net positive and is rewarded for riding the risk, whereas the MSTY income seeker is short-changed - riding a lot of the downside but not compensated on sharp rebounds. Data by YCharts For better visualization, I have plotted a bull rebound and a sharp downside scenario separately. The differences in total returns should show how MSTY riders take a lot of the risk for little return. But for the minimal but existent drawdown protection, I would have attributed most of the yield (or total return) as attributable to MSTR's appreciation rather than the option income contributing significantly. Data by YCharts Data by YCharts Can IMST Do Better IMST is a newer offering on MSTR and should be of interest to existing MSTY investors. What are the pitfalls of MSTY that can be improved? One, the underlying - there is a systematic disadvantage in using MSTR for call writing income. IMST cannot improve on that. Two, methodology differences. There could have been several improvements that could have been made in IMST such as partial call writing allowing more upside capture. Or more aggressive closer to the money, call writing cushioning drawdowns better. Or even lower MSTR holdings (which are already leveraged) and use cash to fund Treasury Bills or other uncorrelated assets within the portfolio. As per the IMST prospectus , I do not see any evidence of any methodology differences. The underlying is still a synthetic holding simulated as a combination of options. The portfolio aims to provide at least 80% exposure to MSTR. There is no declared strategy around option writing principles to expect any difference in performance from a methodology perspective. Two, yields. In the past one year, an investor in MSTY would have received $28.8 in dividends. MSTY was trading at $30.7 a year back. This translates to a yield of 93% in the past year. This also is what looks exciting but misleading. In the same period, MSTY prices have eroded to $21. Still decent, but that has little to do with the option writing strategy and more to do with MSTR's 151% rise in the past year. In another era, either MSTY would have paid out far lesser, or the NAV would have collapsed by significant multiples. Coming back to how the yield can be better handled in IMST, MSTY's aggressive yield is actually good for de-risking MSTR agnostic investors from the underlying fast while the sun is shining. A lower yield should help if you believe in the underlying and want to keep more stakes open on the table on the asset you are backing. However, MSTR is not that kind of reliable asset (just speaking volatility wise, if not fundamentally). Plus, if you are an MSTR believer, you can go long MSTR and payout yourself and still experience higher total returns long term (without losing much advantage vs MSTY on a collapse). IMST does not declare any dividend philosophy officially, but its two payouts thus far look not very conservative. In two months, a total of $8.8 dividends have been paid out. Extrapolating that, it turns out an annual dividend rate of over 100%. As per IMST, the dividend yield is ~44% extrapolating the last payout. The yield for IMST is not yet stable, fluctuating wildly between the two payouts. We may have to wait out further payouts to be able to say for sure, but payouts are not conservative for sure. It will again be aggressive, perhaps matching MSTY. If it turns out to be lower, it does not make IMST's case any better anyway - unless there are investors who are more bullish about MSTR and hence want to use IMST over MSTY. As of now, there is no material visible difference, but IMST could open up that differential use case for some investors. Three, executional excellence. That is, IMPS simply does exactly what MSTY is doing in methodology and payout and yet does the option positioning, adjustment or leverage better. That kind of difference is a possibility. IMST vs MSTY could become a debate in terms of total returns vs drawdowns. But for that, too, we will need historical evidence to start believing (as the on paper methodology offers little reason to expect any difference). As of date, with whatever little performance data we have, it seems MSTY does total returns better. That opens up scope for IMST to do better on downsides (no data on that yet, as there hasn't been a significant downside since IMST's inception). Data by YCharts Lower total return could be a result of IMST going more aggressive in its option positioning, hurting total returns as MSTR rallies but helping reduce drawdowns better. Or it could be overall execution issues showing IMST having structural issues with a similar drawdown profile as MSTY with lower total returns as well. IMST on Watchlist There are two reasons why I am keeping IMST on a watchlist while maintaining a Sell on MSTY. One, there is possible better volatility management (i.e. drawdown management) with IMST due to executional differences. And more reluctantly two, it could gain more on MSTR bull runs if the yield turns out lower than MSTY (that too a tactical use opening up rather than a true income plan advantage). I will review IMST after a few months of data as yields stabilize, and some drawdowns are weathered. But I am not expecting much difference or reason enough to overturn MSTY's Sell into an IMST Buy, given most of the structural disadvantages are retained.
