Alright investors, The Dividend Prince here, and you know I can’t just scroll past a headline screaming “OVER 100% YIELD!” My DMs have been buzzing, people are asking, “Mourad, what’s the deal with this MSTY thing? Is this even real?
And honestly? When I first saw the YieldMax MSTR Option Income Strategy ETF (ticker: MSTY) and its frankly bonkers distribution rate, we’re talking numbers that have flirted with 120%, even higher at times, a part of me, the part that loves seeing those dividend notifications pop up, did a little happy dance. But then, the other part of me, the seasoned investor who’s seen a few rodeos, raised an eyebrow.
Because let’s be brutally honest: when something in the investing world looks too good to be true, it often is. Or, at the very least, it comes with a skyscraper-sized pile of risks that aren’t immediately obvious. So, I did what I always do: I rolled up my sleeves, brewed a strong cup of coffee, and dived in.
So, What Exactly is This MSTY Thing? And How Does It Cook Up That Crazy Yield?
First off, MSTY isn’t your typical dividend ETF that buys shares in boring old companies and passes on the profits. Oh no. MSTY is playing a different game, a much faster, more complex game centered around MicroStrategy (MSTR) stock. And here’s the kicker: for a while, they didn’t even own MSTR stock directly! (Though, full transparency, their latest documents say they might buy actual equity now, along with some other fancy financial instruments like swaps).
Their main magic trick involves a few key ingredients:
1. The “Synthetic Long”: Instead of buying MSTR shares, MSTY creates a “synthetic” position. Think of it like this: they buy call options (giving them the right to buy MSTR at a certain price) and sell put options (obligating them to buy MSTR if it falls to a certain price). Together, these moves are supposed to mimic the performance of owning MSTR stock. It’s like they’re pretending to own it, option-style.
2. Selling Covered Calls: This is where the “income” part really comes in. Against that synthetic MSTR position, they sell call options, usually “out-of-the-money” (meaning the strike price is above the current MSTR price) and often with short expirations (like weekly). Think of it as renting out the potential upside of MSTR. If MSTR stays below the strike price of the calls they sold, MSTY pockets the premium from selling those options. Ka-ching! This is the primary engine of that massive distribution.
3. The “Covered Call Spread” (Sometimes): Occasionally, instead of just selling a call, they’ll sell a call and buy another call at an even higher strike price. This is a more nuanced play. It generally means less upfront premium (income) but offers a bit more participation if MSTR takes off.
4. The MSTR Factor: And why MSTR? Because MicroStrategy, with its massive Bitcoin holdings, is one VOLATILE stock. Seriously, it swings around like a monkey on a caffeine bender. High volatility means high option premiums. If MSTR was a sleepy utility stock, you wouldn’t see these kinds of premiums.
So, you’ve got high volatility on MSTR pumping up option premiums, and MSTY is scooping up those premiums by selling calls. And during periods when MSTR (and by extension, Bitcoin) has been rocketing upwards, this strategy has looked like genius, even posting a mind-boggling 188% cumulative return in its early days (from Feb 21, 2024, to Oct 31, 2024, according to one of their reports).
But Here’s The Million-Dollar Question: Can This Insane Yield Actually LAST?
This is where The Dividend Prince pumps the brakes. Hard.
That massive yield isn’t like the steady, reliable dividends from a Johnson & Johnson or a Procter & Gamble, which come from actual company profits and years of consistent business. MSTY’s yield is manufactured from option premiums, and that’s a different beast entirely.
Here are my big worries:
What Happens When the MSTR/Bitcoin Party Stumbles? This strategy has thrived in a largely bullish environment for MSTR and Bitcoin. But what if MSTR’s price tanks?
The synthetic long position will suffer losses, just like owning the stock.
The covered call spreads? Pretty useless if the stock isn’t going up.
The covered calls will still generate some premium, but as one analyst report I read pointed out, if MSTR drops significantly, liquidity for those out-of-the-money options could dry up. And while a big crash might spike volatility (and thus premiums) temporarily, a prolonged bear market could see lower premiums overall.
The fund’s own prospectus is pretty quiet about what happens if the underlying stock price “decreases significantly.” That silence is loud to me.
The Dreaded NAV Erosion: This is a biggie. Those huge distributions? They might not all be “earned” income. Some of it could be a “return of capital” (ROC). That means they might be giving you your own money back, and if that happens consistently without the underlying strategy truly generating enough to cover it, the Net Asset Value (NAV) of the ETF will shrink. It’s like sawing off a piece of the chair you’re sitting on to feed the fire. Sure, you’re warm now, but eventually…
Upside is CAPPED: Remember those calls they sell? That caps how much MSTY can participate if MSTR stock truly skyrockets. You get the premium, but you miss out on some (or a lot) of the big gains. This is standard for covered call strategies, but with something as explosive as MSTR can be, that cap can feel pretty restrictive if you’re bullish.
It’s Actively Managed and Complex:This isn’t a set-it-and-forget-it ETF. The managers are making active decisions on which options to sell, at what strikes, and when. And now they can also buy stock, use swaps… that’s a lot of moving parts. Plus, it comes with a 0.99% expense ratio, which isn’t chump change.
So, Who Is This MSTY Beast For? (If Anyone…)
Look, I’m not here to tell you what to buy or sell. I’m just a guy sharing what I’ve learned on my own dividend journey. And MSTY? It’s definitely not for the faint of heart, and it’s a million miles away from my core strategy of investing in solid, dividend-paying companies for the long term.
This ETF might appeal to:
Sophisticated investors who really understand options and the risks involved.
Investors who are very bullish on MSTR/Bitcoin in the short-to-medium term and want to generate high income while riding that wave, understanding it could reverse sharply.
Traders looking for high cash flow from a speculative asset, possibly to reinvest elsewhere (one of my friends even mentioned using MSTY distributions to buy actual MSTR stock, an interesting, if risky, approach).
But for your average dividend investor looking for steady, reliable, and growing passive income? This probably ain’t it. The income stream is highly dependent on market conditions for a single, volatile stock and the manager’s ability to navigate the options market.
My Final, Brutally Honest Thoughts
That 120%+ distribution rate is one heck of a siren song. It’s tempting. It makes you dream of early retirement on a beach somewhere.
But as The Dividend Prince, my crown is built on the bedrock of sustainable, understandable, and growing dividends from real companies selling real products and services. MSTY is a fascinating financial instrument, a high-wire act of option strategies. It’s exciting to analyze, but it’s not a cornerstone for my financial castle.
Could you make money? Maybe, especially if you time it right and MSTR keeps its volatile, upward trajectory (for a while). Could you lose a big part of your capital if things go south or if those distributions are mostly your own money coming back to you? Absolutely.
There’s no free lunch in investing, my friends. Especially when the advertised lunch is a 12-course meal for the price of a starter. For me, I’ll stick to the businesses I understand, the dividends I can trust, and a sleep-at-night factor that a 120% yield from synthetic options on a Bitcoin-proxy stock just can’t offer.
That’s it for today! If you found this post helpful, subscribe to my newsletter or visit my website for more valuable content on stock and dividend investing. You can explore tools for dividend investors in the Resources/Tools section!
Disclaimer: The content shared here is for general information and learning, not as a direct guide for your specific investment choices. I always recommend doing your own thorough homework and/or chatting with a qualified financial advisor before you decide on any investment moves.
Leave a Reply