During the past five years, Strategy (NASDAQ: MSTR) has been one of the top-performing stocks in the world. It’s up a head-spinning 3,200% during that period. And it shows no signs of letting up anytime soon. Year to date, Strategy (formerly known as MicroStrategy) is up 32%.
But here’s the thing: If you want regular cash flow and a steady stream of high monthly income, those capital gains aren’t going to help you. You will only generate income if you sell the stock.
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As an alternative, you could invest in the YieldMax MSTR Option Income Strategy ETF (NYSEMKT: MSTY). This exchange-traded fund (ETF) generates monthly income for investors using options tied to Strategy stock. There’s a lot to unpack, so let’s take a closer look.
What is MSTY?
The YieldMax MSTR Option Income Strategy ETF is an investment product that offers extreme exposure to Strategy stock. You can think of it as a “1-stock ETF,” except that you don’t actually own the underlying stock in the ETF. Instead, the ETF generates income by selling (i.e., “writing”) call options on Strategy stock.
This income for the investor is measured in terms of distribution rate. This refers to the income generated by the ETF as a percentage of its net asset value. The higher the distribution rate, the more money you receive. Right now, the distribution rate of MSTY is 93%.
That’s much higher than the distribution rates of other popular YieldMax ETFs. For example, the distribution rate of the YieldMax ETF for Tesla stock is 59%. The distribution rate of the YieldMax ETF for Apple stock is 32%.
This high distribution rate is the result of a nifty feat of financial alchemy that uses derivatives (i.e., options) to transform a non-yield-bearing asset (MSTR stock) into a yield-bearing asset (the MSTY ETF). In short, you’re able to generate a yield from Strategy stock, even though it pays no dividends to investors. That’s Wall Street magic.
What are the trade-offs involved?
As you might have guessed by now, there are some trade-offs involved. After all, on Wall Street, there is no such thing as a free lunch. So, in exchange for giving up some of the high upside potential of MSTR stock, you get a steady monthly income. The strategy is designed to work best when the price of MSTR is not expected to soar dramatically in value.
Image source: Getty Images.
This is very important to keep in mind, since Strategy is highly leveraged to the price of Bitcoin. If the price of Bitcoin surges in value dramatically, then you could be losing out on some of the potential upside of holding MSTR stock. Yes, you will still be generating income and earning a regular yield via the ETF, but it might leave you feeling a bit disappointed, since you do not own shares in the company.
On the other hand, if the price of MSTR does not surge in value or falls only slightly, you should come out ahead, because people will still be buying call options on that stock. Thus, you will still be earning income.
As YieldMax advises potential investors, this ETF product is best for those who are neutral to moderately bullish on Strategy, and who want monthly income and regular cash flow. It should be used for diversification purposes, and should not compromise a significant portion of your overall portfolio.
Caveats about options
Before investing in the YieldMax MSTR Option Income Strategy ETF, I would highly advise becoming familiar with call options, just to understand how they behave under different scenarios. At the very least, you should familiarize yourself with basic option payout charts.
This YieldMax ETF employs a covered call strategy, meaning any call option is written against a stock that is already owned. Technically, this YieldMax ETF employs a “synthetic” covered call strategy, since it uses a combination of different options to simulate a covered call position, without actually owning the underlying stock.
As an investor, all of this happens behind the scenes, and you don’t need to know anything about options for the strategy to work. So, even though this might sound incredibly complex, YieldMax does all the heavy lifting for you.
At the end of the day, if you’re hunting for some extra monthly income and are excited about generating some yield from an investment that normally does not offer any, then the YieldMax MSTR Option Income Strategy ETF could be worth a closer look.
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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Apple, Bitcoin, and Tesla. The Motley Fool has a disclosure policy.
