What a week for Bitcoin, going over 81k today. People are starting to ask, is the bear market over? We shall see, but if we look at MSTR and compare it to MSTE, we can see the trade-off of using covered calls during explosive moves up over short periods of time. MSTR is up about 38% over the past month, with most of that move happening in the past week. And with Bitcoin continuing to push higher, this could be more by the end of the week, or maybe we get some profit taking and a bit of a pullback. MSTE is up about 26% on price over the same period despite using roughly 25% leverage. One of the reasons for the lag in price performance is the covered-call strategy. Add in the distribution and MSTE actually slightly outperformed MSTR on a total-return basis for the month. But most of the recent move is over the past week and this is where we see a performance gap with the covered calls. When the move up is explosive over a short period of time, the calls MSTE has sold can quickly move into the money. The fund then either has to let the shares get called away or buy back the calls, potentially at a loss, and look to sell new ones at higher strikes. MSTR is up about 31% over the past week while MSTE is up about 26%, a gap of roughly 5 % This is why flat markets or markets that are slowly moving higher generally work better for covered calls, because the fund can keep collecting premium without giving up as much of the upside. This is a great example of the trade-off of covered calls during a fast recovery. Add in the recent cut in distributions MSTE announced and investors are also getting less income this month, while the covered-call strategy has resulted in less share appreciation during the sharp move higher. If MSTR starts to level off and slowly grind higher, the performance gap may not be as wide. But if MSTR keeps running higher quickly, the gap could continue to widen.
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2 Comments
Andrew T@andt987 · 39m
When comparing CC ETFs don’t look at price changes, it’s about the total returns as you have to factor in the distribution which comes out of the NAV. For 1 month return MSTE is 31.4% vs 30.97% for MSTR
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