65% Yield from the YieldMax MSTR Option Income Strategy ETF (MSTY): Is It Real?

Quick Read

The YieldMax MSTR Option Income Strategy ETF (MSTY) could deliver a giant 64.53% annual cash distribution yield, paid out weekly. However, the MSTY ETF’s yield cannot be guaranteed for the future, and the fund’s share price is constantly in jeopardy. A recent study identified one single habit that doubled Americans’ retirement savings and moved retirement from dream, to reality. Read more here.

Straddling the intersection of cryptocurrency and the stock market, Strategy (NASDAQ:MSTR) stock tends to follow the price moves of Bitcoin (CRYPTO:BTC) but also has a mind of its own. Yet, like Bitcoin, MSTR stock doesn't pay dividends and only enriches its investors when the price rises.

Yet, YieldMax offers an exchange traded fund (ETF) that could bring you the best of both worlds: big price moves like you'd see with Bitcoin, but also distributions like you'd expect from a dividend-paying stock.

As we'll discover, there's a YieldMax fund that, for the moment at least, offers a jaw-dropping passive income opportunity. If you like Strategy stock and big yields, this fund may be right up your alley. At the same time, informed investors should want to know whether this ETF's yield is too good to be true, so let's jump right into the essential details.

Using Options for Large Weekly Payouts

As you would surely guess from its name, the YieldMax MSTR Option Income Strategy ETF (NYSEARCA:MSTY) is based on Strategy stock. The fund doesn't directly hold shares of MSTR stock, though; instead, it approximates share ownership through synthetic option trading strategies.

Since the MSTY ETF effectively replicates ownership of Strategy shares, the fund is able to derive income by selling covered call options and/or call option spreads. These sophisticated strategies enable the YieldMax MSTR Option Income Strategy ETF to generate income and deliver it to the shareholders each and every week.

That's right: the MSTY ETF pays out cash distributions on a weekly basis, which is a nice feature of this fund. Not only that, but the YieldMax MSTR Option Income Strategy ETF currently advertises a gigantic 64.53% annualized distribution rate.

That's hard to resist, but be aware that YieldMax doesn't guarantee the MSTY ETF's distribution yield for the future. It can be cut on any given day, whether it's tomorrow or next month or a year from now.

Nevertheless, even if you collect a 60%+ yield for a little while, that's nothing to sneeze at. Besides, weekly cash distributions can be reinvested into more shares of the YieldMax MSTR Option Income Strategy ETF, leading to wealth compounding possibilities.

Story Continues

The Dark Side of Fast Passive Income

If everything goes well, the MSTY ETF could be a lightning-speed passive income machine. However, not everything in life goes according to plan. Again, the fund's distribution rate is subject to change and this could lead to negative surprises.

It's also worth mentioning that the YieldMax MSTR Option Income Strategy ETF deducts 0.99% worth of annualized operating expenses from the share price. That's not a major problem if the fund's yield stays high, but it's still something to factor into your calculations.

More importantly, we need to think about how the MSTY ETF derives its weekly income. As you'll recall, the fund sells covered calls and/or call spreads to generate cash for weekly distributions to the shareholders.

The potential issue is that selling covered call options is an income-generating method that tends to limit the share price's upside. It would be disappointing if Strategy stock jumped higher but, due to the limitations involved with selling covered calls, the share price of the YieldMax MSTR Option Income Strategy ETF barely went up at all.

Furthermore, whenever the MSTY ETF pays out a weekly cash distribution, the fund's share price will decline by that same amount. Over time, this can have a deeply negative impact on the share price of the YieldMax MSTR Option Income Strategy ETF.

Now that you know the inner workings of the MSTY ETF, it's easier to see why this fund's share price fell 80% over the past 12 months. During that same time frame, Strategy stock sank 58% and
Bitcoin declined 28.5%.

Don't Push Your Luck With MSTY

To be clear, the 64.53% distribution rate of the YieldMax MSTR Option Income Strategy ETF is "real" today, though it could change at any point in the future. Also, it's worth noting that YieldMax does explain the potential pitfalls of the MSTY ETF in the fund's prospectus.

But then, the YieldMax MSTR Option Income Strategy ETF is vulnerable to hazardous share-price downturns. The cash distributions are frequent and large (for now), but investors will need to constantly monitor the price movements of the MSTY ETF.

The main takeaway, then, is that safety-seeking investors may choose to avoid the YieldMax MSTR Option Income Strategy ETF even if the yield is "real." If you decide to buy the MSTY ETF, just be aware that it involves risks not inherent to Bitcoin and Strategy stock, so moderate position sizing will be of vital importance.

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