Transcription
Good morning everyone. My name is Adam Livingston and I am the Bitcoin Wizard.
All right, let's talk about MSTY once more. If you guys didn't know, for some reason, the greatest performing video I have ever created was about MSTY. I have no idea why that video has so many views in my opinion. I talk about things that are a lot more interesting than the mechanics of a covered call ETF, but hey, a lot of people seem to like it.
Now, this thing has performed so badly that if you show the chart to an SEC examiner, they would immediately schedule a wellness check. It is down 73% year-to-date, which puts it in a very special category of financial products that are known as stop emailing us advertisements for your dividend yield because we know exactly how this yield is being created. But a lot of people don't know, and that's why I'm making this video to talk about it, because we all know that MSTY has managed to underperform almost everything on the planet, stocks, bonds, gold, and Argentina.
If you bought MSTY at the start of this year, well, you just enrolled in a clinical trial of NAV erosion. And this is the insane part, STRATEGY, the underlying equity that enables this thing to exist. Well, that's down 50% over the year, which means that MSTY has collapsed during STRATEGY's downtrend. It did not get destroyed by anything else, it was wrecked during one of the worst drawdowns for the underlying asset. So, even in a declining market where covered call funds are supposed to look stable, well, MSTY said no thanks and drove its NAV off of a cliff.
And this is the moment where I have to zoom out and just say the quiet part out loud. MSTY didn't malfunction. It didn't break. And really, there is no mystery. This is exactly what happens when you attach an income extraction strategy to one of the most volatile assets in capital markets. You get a monthly distribution that looks generous and you get a net asset value that ages like dairy.
So, what I'm going to do is walk through the mechanics exactly, not the marketing pitch, not the influencer-friendly explanation. I'm going to talk about the real mechanics that explain why the chart looks like a crime scene and why this outcome was coded into the structure from day one. You are about to understand at an uncomfortable level of detail how a covered call ETF can pay you consistent yield while slowly vaporizing its own balance sheet. And the funny part is, is that I kind of explained exactly this in my first MSTY video. And I've had a lot of people leaving comments under that video saying, "Adam, do you still stand by this?" Yes, I stand by it. I'm literally just explaining the mechanics. I never told you to buy it. The amount of people out there who literally will not even listen to what I say, but because I made a video about it, that to them means yes, buy this thing despite the guy telling them not financial advice. It's amazing. Some people are extremely stupid.
So now it's time to begin. But really quick, I want to thank Horizon for sponsoring this video. Horizon is amazing. They let you buy Bitcoin with your home equity. That's correct. You know, the equity that you already have in your home, not including the basement that keeps your meth lab. Horizon helps you take the home equity that you have. They help you use it to buy Bitcoin. And there's no debt. There's no monthly payments. And there's no term limits either. The Bitcoin is fully yours to hold however you want. They will help you every step of the way. It's really easy. Join horizon.com. Click the link down in the description below and I'll talk more about them at the end of the video.
So, before I get into the foundational mechanic of every covered call ETF, including MSTY, well, we're going to look at the total return graph here. I went ahead and made this just to get a visual, but the red line is the MSTY price only. The green line is the MSTY total return if you have reinvested your dividends, which kind of defeats the purpose of a covered call ETF because you want income. But hey, I included that anyway. And the yellow line there, maybe orange on your screen, that is the MSTR total return for the same exact date range. This is the growth of $10,000 if you have invested it since the beginning of MSTY. Everybody knows it's been a volatile ride. Absolutely. But we do see that the total return from MSTR from that point in time is actually slightly above that initial date in April of 2024.
So if you decided to invest in MSTY just for fixed income, you didn't want to reinvest your dividends, you invested in it to live on, well, your principal has been totally decimated by the negative NAV erosion. As you can see, $10,000 has morphed into under $2,000. Nobody likes 80% returns. And if you have reinvested your dividends into MSTY, well, you have underperformed MSTR, which is why I have always advocated for owning MSTR and then just selling covered calls on top of this position because then you would have outperformed MSTY and you would have made covered call income on top of that. Check out my video on MSTR covered call selling. That is an amazing way to get income. In fact, I do do one-on-one consultations that teaches you my strategy. It's not investment advice because I can't legally give that out. But if you want education, I can help you. In fact, I've done about 50 to 100 of these calls and every single person has loved them. So, if you want to know how to sell covered calls and get some income, just let me know. Email me. My email is in my X profile. It's on my YouTube profile. Send me a nice email and I'll get back to you. But anyway, those are the total returns.
So now let's talk about MSTY itself. This is the foundational mechanic of every covered call ETF, including MSTY, that you are trading future upside for present income. The fund, they sell call options on their underlying shares. They collect the premium. They hand it to you as a distribution. That sounds fine on the surface, absolutely. But remember, the cost is permanent. Every single time that the fund sells a call, it is giving up a portion of growth potential of the asset. This is not some hidden clause or an obscure footnote. This is literally the entire strategy. You get a monthly payout, which is a weekly payout now, and the fund loses exposure to any significant upside move. The problem becomes obvious when you attach this structure to a high volatility asset like MSTR. You are locking yourself into a model where you miss upside repeatedly and history has literally just told us that while they have been absorbing every single moment of downside volatility. So instead of compounding with the underlying asset, the ETF slowly steps backwards. It generates income by selling off a part of the position that actually generates long-term wealth. This is why all covered call ETFs always look stable in brochures and always look exhausted on the charts. Just look at all of them. The marketing teams, they like to highlight the yields. The performance charts highlight the consequences. And this slide is the core premise. Income today comes at the cost of growth tomorrow. And MSTY has clearly pushed this trade to a limit.
Now, I'm not of the opinion that covered call ETFs don't apply to everybody. I do think that they do make sense for some investors, people who don't want to put in the effort to learning how to sell covered calls themselves. Even though it's extremely easy, they'd rather pay a management fee and have somebody else do it for them. Glorious. You know, when I talk to people about this, this is the metaphor that I think of in my head. You guys know that I think of metaphors. I don't know. My mind works in interesting ways if you haven't been able to tell by now. But the way I think of MSTY and covered call ETFs in general is that you have a wet towel. You are giving them a wet towel. You give them your money which represents that wet towel and every single week they ring out a little bit more and more and eventually that towel becomes dry over time. Cool. They paid you the yields. But remember that yield is often classified as return of capital. They're literally giving you your own money back because you gave them the wet towel. Are you starting to get it?
So, now let's dive into the part that nobody talks about because it ruins the sales pitch of these things. Covered call ETFs do not only struggle during massive rallies, they struggle even harder during prolonged declines. And MSTY is the perfect case study because when the underlying asset goes up, the ETF, well, they forfeit gains because the calls get exercised. You miss the appreciation and then you get your small premium instead. Fine, which is annoying but predictable. And when the underlying asset goes down, well, the ETF has zero mechanism to protect itself. It collects a small premium and then it eats the entire drawdown. There is no hedge. There is no buffer. There is no magical offset. The premium is tiny compared to the loss in the net asset value. This is exactly why MSTY collapsed while STRATEGY dropped 50% over the past year. There was hardly any upside to sell. There was no appreciation to suppress. There was nothing to convert into yield. It was just steady grinding volatility that did oscillate a little bit and there were repeated drops in the underlying obviously, but the ETF is structurally required to absorb all of it which literally just happened. So, while people imagine covered call ETFs as slow and predictable income machines, well, the reality is a lot uglier in a downtrend. You get the worst of both worlds. You lose the upside during the rebounds and you take full damage during the declines. There is no situation in a choppy or downward market where this model outperforms.
Now, I want to talk about YieldMax's structure, their approach to the covered call selling. There is some text on this slide, but to be more clear about my opinion, this is what I mean. You can look to see what they do with their trading strategy. Okay? So, when I use terms like exceptionally aggressive, that's obviously subjective, and that's my opinion. You can look at their own methodology, their own strategy, and come up with whatever adjective you want to use to describe it. But the covered call strategy that I like to employ is very consistent. It's very low delta, and it's 30 days out. It's really simple. But if YieldMax decides to sell aggressive near-the-money calls, well, that is not necessarily a conservative strategy. That might be a maximum extraction model designed to push out the highest possible monthly payout with no regard for long-term capital preservation. Now, this is the reality. I don't have their trades pulled up in front of me. I'm not going to say that they are hyperaggressive all the time. I don't know. I'm just saying that sometimes YieldMax might decide to not be so conservative to make their monthly payout look better. Now remember, the near-the-money calls, they generate more premium but they sacrifice more upside. So the ETF, they might repeatedly sell calls at strike prices that sit on top of the current share price. And that's how you engineer the ETFs with very high yields and very short half-lives. The premium is real, absolutely, but the cost to the underlying position is a lot greater and over a long enough time horizon, this becomes a slow liquidation process conducted through monthly distributions. Pair that with a volatile underlying like STRATEGY, well, the decay is going to accelerate. The high volatility doesn't necessarily help the ETF as it relates to capital preservation because it does not provide any extra protection. It simply increases the number of times that the fund sells away potential gains and absorbs full losses during retracements. So I'm not a bear in the sense that YieldMax decided to malfunction. Absolutely not. It has done what it has designed to do. It extracted monthly income. It handed it to the shareholders and it allowed the net asset value to degrade month after month and that choice is very deliberate. The design choice of covered call ETFs are deliberate. It is literally that the outcome is unavoidable when paired with a high beta asset. Okay, so I hope that you kind of remember that these things are built for payouts and not durability. Not financial advice, just my opinion.
Okay, now I do want to talk a bit about safety. Because when I think of the type of investor that might like MSTY, I am starting to struggle to think of who might find it useful. Maybe if you're 99 years old on your deathbed and you want to live it up in your last few weeks right before you decide to euthanize yourself at age 100 and you want to ring out some income, just a little bit, and then pass it on to your kids. I don't know. But hey, I think that this single fact of this drawdown has kind of exposed the entire illusion around covered call ETFs being safe or more stable during any downturns. Because in my opinion, there's nothing stable about attaching a yield extraction strategy to one of the most volatile assets in public markets today and then expecting it to behave like some defensive income product. When MSTR fell 50%, MSTY didn't have any protection, no hedge, no cushion, no structural mechanism to offset that loss. The call premiums were nowhere near large enough to counteract the decline. And when you have a drop in volatility in the MSTR common stock during a long-term sustained drawdown, well, that is going to be very ugly for MSTY. This created a loop where the ETF just consistently lost ground over the course of the year and never recovered any of it.
So, the important point that I just want to make is this. MSTY didn't collapse in some bull market where it missed a giant rally. It collapsed during a bare to sideways year where the underlying had nothing to give. This is the exact environment where covered call ETFs marketed as income products, they quietly implode. And this slide just shows the mismatch. And this is the part of the story where the marketing just meets the accounting because most of MSTY's distributions are classified as return of capital. There is a certain percentage of their distributions, the dividends, that are classified as return of capital, which means, hey, we're giving your own money back to you. The term sounds harmless. If it sounds familiar, it's because STRATEGY's preferred equities pay out ROC dividends. ROC, return of capital. It sounds like the fund is being generous, but in reality, it just means a portion of every distribution is simply your own principal being handed back to you. Now, return of capital, that lowers your immediate tax bill, which is nice because it lets you defer taxes. That's pretty cool. It also lowers the fund's net asset value, which is not. When the ETF classifies distributions as return of capital during a year where the underlying asset is down 50%, it creates a double drain. The net asset value is shrinking from market losses and it is shrinking again from the fund paying out principal. And this is why the distribution yield looks very generous on paper. It is not yield that is generated by productive strategy. It is a structured extraction from the fund's remaining capital. As the net asset value continues to fall, the percentage yield appears even larger. So the investors, they see 30% or 40% yield without realizing the payout is a mathematical artifact of a collapsing denominator. This is how inexperienced buyers they have ended up excited about income streams that are literally tied to the vaporization of their own investment. MSTY's return of capital distributions during a prolonged decline magnified the damage. It paid out cash while its underlying full exposure to downside compressed the asset base. This is literally what happened. Every distribution accelerated the shrinkage of the fund's financial foundation. I am trying to explain why the income was real. But remember the wet towel metaphor that I gave you. This is the entire story just condensed into one conclusion.
Okay? MSTY didn't collapse because of any bad luck, bad management, or some hidden operational error. It collapsed because the structure guaranteed this outcome once you place it on top of a hypervolatile asset that declined 50% in a year. Covered call ETFs simply are not built for long-term capital durability. So, if you were buying it thinking that was the case, well, sorry, but you're wrong. They are built to convert volatility into short-term income. That's why they exist. That model fails when the underlying spends a year dropping then rebounding slightly and then dropping again. There is no environment that is more destructive to this strategy than some choppy downtrend. Every component of MSTY's design contributed to this decline. There might be some cap upside. There might be some full downside exposure if they're aggressive near-the-money call writing sometimes. Well, that can contribute as well. The return of capital distributions drain the principal during a falling market. When you combine these mechanics, well, a 73% drawdown is not really surprising, especially when you look at every single one of YieldMax's covered call ETFs that have done the exact same thing. It's just mathematically consistent. The result of pairing an income extraction model with one of the most violent assets in modern markets during a prolonged downtrend. This was kind of what was mathematically guaranteed to happen. MSTY did exactly what it was engineered to do. So, if you bought it and you didn't understand that, well, that's just on you. It generated income, absolutely, but then it just slowly erased its capital base month after month. If anything, the shock isn't that MSTY dropped 73%. The real shock is that people believed that this structure would survive a year like this without imploding. And now that you understand the mechanics, well, the chart makes perfect sense. There was never any mystery, just the physics of a strategy that could not handle the environment that it was deployed into.
So now I hope that you understand, my dearest little goblins, my name is Adam Livingston. I am the Bitcoin Wizard. I hope you enjoyed this content. Please like this video and subscribe to the channel because I am on the front lines bringing the orange gospel of Bitcoin to the masses every single day and I need your help. Leave a comment below. That really helps with the algorithm and let me know what content you would like to hear next. Have a terrific day. Do not party too hard. Class dismissed.
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