MSTU Adds An Extra Layer Of Risk On Top Of A Leveraged Bitcoin Strategy

Summary MSTU offers 2X the daily performance of MSTR via options, introducing an additional layer of risk on top of a leveraged Bitcoin strategy. The ETF’s performance is highly sensitive to volatility and Bitcoin price swings, amplifying both upside and downside moves. Holding MSTU beyond a single day can lead to substantial gains or losses due to compounding effects and value decay, especially in flat or choppy markets. Given these risks and long-term value decay, I recommend a sell rating for MSTU, suitable only for very short-term trading strategies. The T-Rex 2X Long MSTR Daily Target ETF ( MSTU ) is a leveraged, single-stock ETF designed to provide traders with 2X the daily performance of the underlying asset, Strategy ( MSTR ). For those seeking a 2X inverse strategy on MSTR shares, one can consider the T-Rex 2X Inverse MSTR Daily Target ETF ( MSTZ ). Unlike many leveraged funds, MSTU uses a series of options to create a leveraged position in MSTR. MSTU does not hold any of the underlying stock and only trades derivatives to achieve its 2X daily performance target. In order to achieve the appropriate exposure, MSTU trades both long-long and short-short positions, or is a buyer of call options and a seller of put options. Corporate Reports In Q1’25, MSTU used Clear Street Derivatives, Cantor Fitzgerald Secured, and Marex Prime Services as counterparties for options trading. As part of its trading strategy, MSTU has 256% exposure to long call positions and -228% exposure to short put positions. Because of the leveraged positions, MSTU has a daily performance reset, meaning that the ETF only provides 2X the performance on a daily basis. If held for a longer duration, investors may realize a compounding effect on both the upside and downside during a period of consecutive directional trading days. As a medium-term strategy, in this case, a strategy that is held beyond a single-day holding period, this could potentially result in substantial upside or downside risk, depending on the percentage change and volatility of MSTR shares. It should be noted that 2X the daily performance is only a target and may not be consistently achieved from day to day as many exogenous factors may impact the performance of the leveraged strategy, including volatility, or Vega, Delta, or the relative change of the option’s price to the underlying stock, and Theta, or the time decay of the option. TradingView Comparing MSTU to MSTR for a longer holding period, we can measure the slight compounding effect to the upside. TradingView The same is true for downside potential as returns can be amplified to consecutive days of losses on the underlying stock. TradingView In addition to this, there may be a certain degree of value decay that needs to be considered during extended holding periods, resulting in MSTU experiencing substantial losses relative to MSTR performance. TradingView Looking at the underlying assets, MSTR shares are relatively correlated with Bitcoin performance. Given Strategy’s shift in focus from enterprise software to acting as a leveraged Bitcoin strategy, MSTU is essentially a derivative of a derivative, adding a certain layer of risk that may result in substantial gains during periods of Bitcoin price appreciation, or losses during periods of declines in the price of Bitcoin. TradingView Despite the year-to-date performance of Bitcoin and MSTR shares, MSTU has suffered substantial losses as a result of the relative flatness of performance of the underlying assets. TradingView Bitcoin can be seen as a hedge against global currency risk, acting as a decentralized investment strategy that cannot be controlled by central banks. Nonetheless, Bitcoin has some correlation to the broader market, suggesting that the asset isn’t a complete hedge against markets. TradingView Risks Related to Leveraged Strategies There are inherent risks in investing in leveraged strategies. Because these strategies are meant to achieve their stated multiple over the underlying index on a daily basis, holding these strategies beyond a single day can lead to skewed performance, especially following consecutive days of upside or downside risk. This can lead to a compounding effect as well as value decay as a result of the daily reset in the derivatives positions. Leveraged strategies also add an extra layer of risk to amplified downside potential. For example, if the underlying index were to appreciate by 2% in a single day, a 3x strategy would appreciate by 6%, meaning that an investment of $100 would increase to $106. If the following day results in a -2% decline in the underlying index, or a -6% decline in the leveraged strategy, the investment will decline to $99.64. Holding leveraged strategies for longer than a single day can lead to a compounding effect on one’s position, potentially leading to significant skews from the intended multiplier. During multiple days of downside risk, an investor can experience significant value decay, potentially resulting in the inability to recover losses. Liquidity must be considered prior to investing in a leveraged fund strategy. Given that these funds are designed to be traded daily, trading volumes must be considered to ensure that cost-in/cost-out isn’t deteriorated by spreads. You can review additional risks here . Before making a trading or investment decision in leveraged strategies, be sure to fully understand your risk profile and set a trading mandate to manage these risks. I believe preemptively setting parameters for selling out of a position is prudent in ensuring that an investor appropriately manages downside risk. Conclusion Overall, MSTU can provide traders with a leveraged trading strategy to achieve 2X the daily performance of MSTR shares. Given the investment strategy of MSTU, investors must consider long-term value decay, compounding, and added volatility before considering entering into a position in MSTU for longer than a single day. Given the long-term value decay of the portfolio strategy, I am recommending MSTU with a sell rating.

Source: Seeking Alpha