Why Manually Writing Options On (Micro)Strategy Is Better Than Owning MSTY

Summary MSTR has significant potential as a platform for premium-selling strategies, but we still feel as though MSTY is a suboptimal option for those seeking income and growth. A manual covered call campaign on MSTR can generate substantial income while retaining the stock’s upside, outperforming both MSTY and MSTR in total returns. We recommend a ‘Hold’ rating on MSTR and suggest a manual options strategy to enhance returns without the downside of MSTY. A number of weeks ago, we put out a ‘ Sell ‘ rating on MSTY , the Yieldmax MSTR Option Income Strategy ETF . In an article titled: ” MSTY: Stop Selling Off Your Upside For Cents On The Dollar “, we argued that the fund was a lousy choice for most investors, due to the underlying stock’s trendiness, volatility, and propensity for blowing past short option strike prices. While we did concede that the ETF was proficient at producing cash income, when it comes to principal decay, we ultimately think MSTY has serious issues. At the same time, Strategy ( MSTR ) is a stock with a lot of potential as a premium-selling platform. With considerable volatility, combined in a package with robust long-term appreciation potential, the idea of selling options on the stock appears sound. The tricky bit is figuring out how to do it successfully – and perhaps more profitably – than MSTY. Recently, we upgraded MSTR on the basis that the company’s premium to NAV had come back into a reasonable range. Now, with continued expansion of the firm’s bitcoin holdings, we think the time could be ripe to begin a net long, manual, covered call campaign on the stock. Such a campaign could produce significant income, while also retaining basically all of MSTR’s upside potential. Today , we’ll outline where MSTR currently sits, explore our manual option selling campaign, and explain why we think it should outperform MSTY and MSTR on total returns, while generating considerable income. Sound good? Let’s dive in. Defining Terms Before jumping into the option selling campaign and how it might perform, let’s first take stock of – broadly – what we’re even talking about. In case you’re unfamiliar, MSTR is a leading, leveraged, bitcoin holding company. The firm issues stock and debt, and uses the proceeds to buy Bitcoin ( BTC-USD ). As such, MSTR’s rise can be seen as ‘leveraged’ to the broader outperformance that BTC has experienced: TradingView As you can see, depending on the day, MSTR’s performance largely mirrors – with a greater amplitude – BTC’s own price action. This obviously shows up in the upside – like the rally from early 2024 through late 2024, but it also happens to the downside. From the end of 2021, MSTR underperformed the BTC, until the rally in 2024. This trendiness lends itself well to generating volatility premiums, but it can also make it difficult to ‘time’ in terms of selling options. As we mentioned earlier, we recently upgraded MSTR, as the company’s premium to NAV had come back into a reasonable range, from 3x to roughly 1.6x: MSTR-Tracker At the time of writing, this has since crept up a little bit back to the 1.7x area, but we’d argue this isn’t a deal breaker. Bulls (and we) argue that the company deserves some premium to assets simply due to the active management you’re getting in the form of ‘institutionally cheap’ convertible debt. Taking out a personal loan to buy BTC is far, far more expensive, hence the premium. Of course, the stock could trade below NAV, but this seems unlikely, at least for the time being. Going forward, we’re anticipating further price appreciation and trendiness, derived from the company’s underlying BTC holdings. This thesis is the same one that drove the creation of MSTY, the YieldMax option selling ETF. As discussed in previous articles, MSTY sells call options and call spreads on MSTR in order to capture the volatility and crystalize it into a cash payout for investors: IR This is all well and good, and the fund has produced some solid cash flows since inception: Seeking Alpha However, if you look at MSTY’s performance over the last few years, you can see that the fund’s NAV is starting to slip, which we expect will continue: First, let’s look at the performance gap just by looking at price return: TradingView Since inception, MSTY has decreased in price by roughly 13.22%, while MSTR has increased in price by more than 230%… [O]nce you add back in dividends, MSTY underperformed MSTR by more than 90% over the last year alone: TradingView While these charts are much closer in performance, [there’s still a large gap]. What if there was a way to generate significant option premiums (income) without experiencing as much of the downside or principal decay? Thankfully, we think there’s a way to achieve this. What Is A Covered Call Campaign? In case you’re new to options, a ‘covered call campaign’ is a method of investing where you buy an underlying stock and sell options on it continuously, rolling the options every so often so as to prevent assignment and generate further cash flow. The strategy (in theory) should leave the core holding ‘alone’, while the investor manages the layered option position in order to generate additional returns ‘on top’. This may sound complicated, but in reality, it’s simple. Let’s take a gander at what this would look like in MSTR over the last half-year or so. First, we start with a long position in MSTR. 6 months ago, on the 17th of October, the stock was trading at $193. Let’s assume we buy 100 shares of the stock for $19,300. From there, the goal of the option selling campaign is to generate solid cash flows while retaining basically all of the underlying stock’s upside. In the case of MSTR, we’ll look to sell options that are closest to expiring 30 days away, with the closest delta to 15 . These options are FAR out of the money, but should still generate solid percentage premiums. 6 months ago, these options were the $290 strike, November monthly options. These options paid $4.40 in premium per share, or $440 per contract, as you’ll see below: PropNotes Now, moving forward from here, management of this strategy is simple. When the option is about to expire, we have a choice to make. If the option is expiring worthless , then we’ll look to sell another option roughly 30 days out (or close to it), with a delta of 15. Easy! 15 delta options are typically the farthest out of the money you can go while still finding solid liquidity. If the option is in the money , which is unlikely, then two things are true. First, you’ll be sitting on a big unrealized gain in the underlying stock, which is great. Secondly, you’ll need to buy back the option and sell another one. However, in this case, we won’t look to sell another 15-delta option as it likely won’t cover the buyback cost. Remember, we’re looking for cash-positive rolls only. Thus, we’ll zoom out and look for options with a high probability of expiring worthless, while having a higher premium than the buyback. This ensures we always have cash from our positions coming in the door. It’s a simple strategy, but it’s quite effective, especially for highly volatile stocks like MSTR. Let’s now look at how a campaign like this in MSTR would have performed recently. Performance Comparison Alright, so here’s where the rubber meets the road. We’re going to invest almost $20,000 into our campaign, MSTR, and MSTY in order to see which performs best, and what kinds of cash flows are generated. First up, we’ve got MSTR. This one is simple – shareholders buy into the stock at $193 per share on Thursday, October 17th. Then, 6 months later, they sell out of the position at $317.20. This implies a P/L of roughly $12,420 – a 64% gain. Not bad! Similarly, for MSTY, the math is easy. We buy into the stock in mid-October with the same amount of capital, netting 690 shares. Over the following 6 months, those shares generate nearly $12,900 of dividends, although the fund’s price does decrease a bit, causing a ~$5,000 loss. In terms of total returns, this is a gain of $8,300, or roughly 43%. Less than MSTR, but still solid on a nominal basis. Finally, we get to the option campaign. As we mentioned, the campaign only takes a few trades, selling considerably OTM call options to generate premiums. In the first month, MSTR rallies significantly, which requires us to look for a further out, higher delta option to sell for positive cash flow: PropNotes This turns out to be the $540 strike February contracts. Following that, though, all of the other options expire worthless, leaving us with an easy-to-manage campaign. Finally, we buyback the $460 strike (May) option. In that whole series, the campaign retained 100% of MSTR’s upside, while generating positive option cash flow of nearly $2,000. Of course, this is quite a bit less than 1/6th of the income that MSTY generates, but we’d wager that investors would much rather keep 100% of the upside and principal intact, instead of holding a decaying product. Not only that, but the campaign also produces the highest level of total returns out of the three options: PropNotes For comparison’s sake, it’s also worth mentioning that the option campaign – even though the cash flow is less than MSTY – still produced an average of $303 in monthly distributions. On the capital invested, this represents 1.5% per-month cash on cash returns, which annualizes to nearly 19%. Not bad! Summary Given the choice, we’d guess that many MSTY investors may prefer to generate double digit yields while keeping 100% of MSTR’s upside, as opposed to losing principal while generating triple digit yields, which is MSTY’s payout profile. Of course, the results we’ve laid out are historical in nature and premiums going forward may decrease, but we think the overall risk/reward of a manual campaign is worth the effort. Similarly, decreasing premiums would also impact MSTY payouts. Additionally, for those who are only interested in MSTR, adding a campaign to generate additional returns on top of the stock’s existing appreciation may be of interest. As a result, we re-iterate our ‘ Sell ‘ rating on MSTY, our ‘ Hold ‘ rating on MSTR, and advocate for a slightly higher effort, but potentially rewarding options strategy that you can use to boost returns. Stay safe out there!

Source: Seeking Alpha