Summary I believe MSTY's 100% dividend yield is sustainable due to BTC's high volatility, as the ETF can generate substantial option premiums from MSTR's price swings. By monetizing MSTR's volatility to generate income, MSTY is appealing for income-oriented or more prudent investors seeking Bitcoin exposure. MSTY can outperform MSTR in range-bound markets, moderate bullish movements, and even declining BTC markets by offsetting losses with premium income. Even during a BTC surge, MSTY can outperform if MSTR's premium to NAV compresses, leading to lucrative premiums and incredible dividends. Let me start by saying that I’ve recently become a Bitcoin ( BTC-USD ) believer. I think this is highly relevant because, let’s face it, any talk about crypto-related securities like the one we are examining today is inevitably shaped by the author’s stance on the industry. So, let me be clear that I am a Bitcoin bull gradually evolving into a Bitcoin Maximalist. Now, I won't spend time trying to sell Bitcoin as the (potentially) best asset in the world. There are plenty of resources out there for you to study Bitcoin and decide for yourself as to how you feel about it. What I do want to discuss, however, is YieldMax MSTR Option Income Strategy ETF ( MSTY ), which is a fitting vehicle for those seeking to capture the upside of Bitcoin (through Microstrategy ( MSTR )) with reduced risk. This is because one could still generate massive returns regardless of whether BTC surges or bounces up and down in a certain range while still maintaining a wide margin of safety should BTC decline. What might immediately catch your attention once you go over any of MSTY's key financial data is its sky-high 100% dividend yield. You would be right, of course, to assume that such a high yield is likely unsustainable at first glance. MSTY Dividend Yield % (Koyfin) However, there are certainly compelling reasons to support that MSTY’s unique structure and strategy can maintain such a tremendous payout potential in the foreseeable future. To put it simply, by taking advantage of the extreme volatility of MSTR stock, MSTY can generate substantial short-term option premiums, which, in turn, explains its staggering yield. As you can see, roughly half of MSTY's holdings are a batch of calls expiring next month with a strike price of $315. The current MSTR of the price of $375 implies that MSTY would miss on the additional upside if the option were to expire today. Still, MSTY is able to generate massive yields in the process while capturing the up-to-$315 upside. MSTY Options chain (Seeking Alpha) So, I will attempt to briefly explain how MSTY operates, why its yield is likely to remain high, and the scenarios in which it could even outperform MSTR itself. MSTY: A High-Yield ETF Built on Volatility So, what does MSTY even do? Well, it is certainly no ordinary ETF. It employs a covered call strategy on MSTR stock, which, in turn, is famous for its extreme price swings due to its significant BTC holdings and highly speculative (or not so speculative if you are a BTC bull like me) nature. By selling call options on MSTR, MSTY generates regular income from the premiums it collects. These premiums are then paid out to investors as dividends, creating a consistent stream of income that drives MSTY’s remarkable yield. Clearly, this strategy makes MSTY particularly appealing (but not limited) to income-oriented investors who want exposure to Bitcoin’s upside potential but with less risk than directly owning MSTR stock (or BTC to that extent). And since MSTY essentially monetizes the volatility of MSTR to generate income, the higher the volatility in MSTR and BTC, the higher the income potential. With both assets likely to remain highly volatile in the foreseeable future (and beyond), MSTY is likely to be able to maintain its current triple-digit yield. Let me explain more thoroughly... Why MSTY’s 100% Yield Could Be Sustained The main reason I believe that MSTY's yield could be sustained is due to BTC sustaining its high volatility, which, in turn, should sustain MSTR’s wild price swings and own volatility. Following the convertible bonds strategy MSTR has employed, its stock essentially is a leveraged proxy for BTC's performance. This volatility translates directly into high implied volatility for MSTR options, which in turn leads to massive premiums when MSTY sells covered calls. Take a look at MSTR's Feb 28 options chain. Assuming MSTY were to execute a covered call with a strike price of $400, that would translate to a monthly yield of just under 10% while capturing all the upside from the difference between $400 and the current stock price (for the opportunity cost, of course, of any potential upside beyond that price point). MSTY Options Chain (Seeking Alpha) Therefore, you can see how MSTY maintains the potential for a 100%+ yield today and additional share price gains. Importantly, this remains the case despite MSTR's volatility having somewhat eased from December's highs (it's still, of course, incredibly high, hence the massive premiums). MSTR/MSTY volatility (Koyfin) Therefore, as long as BTC remains highly volatile—which is likely given the crypto space is hotter than ever, especially following President Trump's recent executive orders on cryptocurrencies that have drawn significant investor attention—the case for MSTY sustaining a triple-digit yield with the potential for further upside remains highly compelling. When MSTY Could Outperform MSTR (and other scenarios) Now let's examine when MSTY could even outperform MSTR, as well as what we should expect in other scenarios. i. Sideways or Range-Bound Markets MSTY best thrives when MSTR’s price remains in a defined range. In this case, it could outperform MSTR. For instance, if MSTR trades between $350 and $400 over the next several months, MSTY should be able to repeatedly sell call options at strike prices near the upper end of this range (like the Feb 28 $400 covered call I mentioned earlier). The options will expire worthless if the stock doesn’t exceed the strike price, allowing MSTY to keep the premium income while continuing to own the shares, thus outperforming MSTR common holders. ii. Moderate Bullish Movements Even in a moderately bullish BTC market, MSTY can still perform very well. If MSTR’s stock price rises gradually without notably exceeding the strike prices of the calls, MSTY will benefit from both the high premium income and some price gains. This scenario can result in MSTY outpacing the returns of MSTR, even if you end up losing some of the additional upside of the modest MSTR gains beyond the strike price. iii. Declining BTC Market In a bearish BTC market, you should also outperform MSTR by holding MSTY. Obviously, this is because MSTY’s income will provide a cushion against losses. While MSTR holders face direct exposure to price declines, MSTY’s premiums will offset some of the downside risks, reducing overall losses. As I mentioned earlier, this makes MSTY particularly appealing for investors who want to capture some of the tremendous upside BTC/MSTR offer, with much lower risk. Here's a specific example. As you can see, in the 3-month period between June 5th and September 6th, MSTR declined by 32.55%, but MSTY's total returns were at a negative 22.5%, with the dividend income offsetting some of the nominal share price losses. MSTR/MSTY Total Returns (Koyfin) A BTC Surge Can Still Result In MSTY Outperformance Finally, I want to draw your attention to something especially intriguing. That is, MSTY can still outperform MSTR, even in a scenario in which BTC surges. Normally, in this scenario, MSTR should outperform MSTY, as MSTY's gains are likely to be capped at levels that MSTR stock can surpass, assuming a strong BTC rally. This is basically what has happened since the ETF's inception. As you can see, even though the ETF has delivered a tremendous return of 255.6%, it has underperformed MSTR's ridiculous 418.7% over the same period. MSTR/MSTY Total Return (Koyfin) However, assuming MSTR's premium to net asset value (NAV) gets squeezed, we could see any BTC-rally-related gains offset by a "multiple compression" that could flatten MSTR stock. In fact, this trend has already started to materialize, with the premium to NAV down from about 3.5X to 2.0X. MSTR NAV Premium (MSTR Tracker) In such a scenario, MSTR's violent movement, yet relatively sideways trading, could lead to MSTY outperforming by a wide margin, with premiums set to be extremely lucrative under this setup. We have already seen this play out with the ongoing P/NAV compression against a strong BTC price leading to MSTY paying out incredible dividends.
