Uncover the hidden dangers of the MSTY ETF, from capped upside on MSTR stock to declining volatility and return of capital pitfalls. Learn why relying on MSTY for income could lead to financial losses.
Timestamped Overview
[00:00:00 - 00:08:14] Understanding MSTY Risks for Beginners
- MSTY is like betting on a stock (MSTR) by selling “options” – promises to sell the stock at a set price – to earn extra money, but this limits how much profit you can make if the stock rises a lot.
- It’s risky because you keep all the losses if the stock price drops, but give away big gains if it surges, like missing out on a jackpot while still paying for the ticket.
- The “income” from MSTY often includes returning your own money back to you, which can mess up your taxes later by lowering what you originally paid for the shares.
- As the stock becomes less unpredictable (lower volatility), the extra money from options shrinks, making MSTY less rewarding over time.
- MSTY also earns a bit from safe investments like US Treasuries, but the fund charges high fees (almost 1%), eating into your returns.
Notable Quotes
MSTY Strategy
It's writing covered calls on MSTR as the underlying stock. Basically, to write covered calls on mstr, you'd buy mstr... And then what you do is you sell out of the money calls against that long stock position.
Matthew Kratter @mattkratter
Upside Risks
Covered calls may make sense for a volatile stock because you're essentially monetizing a stock's volatility but in exchange for giving away your upside in the stock.
Matthew Kratter @mattkratter
Declining Volatility
MSTR's historical volatility has been declining. Lower historical volatility usually leads to the options market pricing in implied volatility going lower in the future. Lower implied volatility means lower options premiums.
Matthew Kratter @mattkratter
Return of Capital
Since inception, 55% of all distributions have been returns of capital rather than yield produced by the fund's option strategy. Now, return of capital. That just means getting your own money back.
Matthew Kratter @mattkratter
Tax Implications
Return of capital is used to reduce your cost basis in a stock... you'd be paying capital gains taxes on that entire amount... which is a really dumb thing to have to do since $2 of that was just the company returning your initial investment to you.
Matthew Kratter @mattkratter
Downside Exposure
The fund strategy will capture only a portion of potential gains if MSTR shares increase in value. The fund strategy is subject to all potential losses if MSTR shares decrease in value.
Matthew Kratter @mattkratter
Conclusion on MSTY
People who sell their BTC for MSTY are a lot like that guy who sold his birthright for a mess of pottage. One of the worst trades ever.
Matthew Kratter @mattkratter
X Posts
Do you think that this guy is into MSTY these days? pic.twitter.com/7seYQiMMLR
— Matthew R. Kratter (@mattkratter) July 22, 2025
Transcript
Matthew Kratter [00:00:00]: This is Matthew Craters, Bitcoin University. Today I want to talk about how to get ReKT by MSTY. If you’re relying on MSTY for income without understanding its underlying mechanics, you are probably going to be one of the ones who gets wrecked. So what’s MSTY’s investment strategy? It’s writing covered calls on MSTR as the underlying stock. Basically, to write covered calls on mstr, you’d buy mstr. You could also do a synthetic long using a swap, which is what it looks like this fund is doing. You could even go long calls and short puts. Do a synthetic long position position that way.
Matthew Kratter [00:00:32]: And then what you do is you sell out of the money calls against that long stock position, I. E. You sell calls at a strike price that’s higher than the price you paid for the stock. So for example, you’d buy MSTR at 440 or do the equivalent sort of long swap. You’d sell the 30 day calls at 450. You’d collect an options premium and then the stock gets called away from you. That’s why these are called call options. The stock gets called away from you if it is trading above 450@ options expiration or if that call gets deep in the money and someone chooses to exercise it.
Matthew Kratter [00:01:03]: Covered calls. Covered calls may make sense for a volatile stock because you’re essentially monetizing a stock’s volatility but in exchange for giving away your upside in the stock. And that in itself should give you some pause. Selling covered calls on Apple, for example, over the past decade was a terrible investment compared to just hodling Apple shares. It’s usually a bad idea to give away your upside in an asset that you expect to go up a lot just doesn’t make sense. So it’s pretty weird to hear about MSTR mega bulls buying MSTY and capping their upside. There’s yet another problem. MSTR’s historical volatility has been declining.
Matthew Kratter [00:01:37]: Lower historical volatility usually leads to the options market pricing in implied volatility going lower in the future. Lower implied volatility means lower options premiums just via Black Scholes options formula. Lower options premiums means lower returns for MSTY going forward. So we can see current implied volatility for MSTRs currently around the 53%. It’s been as high as 223% and as low as 43%. So it’s at the lower end of the range and it’s been trending down. As we can see here in this chart, the tan line is realized volatility, which is historical volatility, actual experienced volatility over the past 12 months and then implied volatility is being backed out of the options pricing that this is IV and we can see they’ve both been declining together, especially implied volatility has been going lower. MSTR stock volatility, both historical and implied and bitcoin yield have both been declining and should continue to decline due to the law of large numbers.
Matthew Kratter [00:02:39]: So for example, adding 10,000 new Bitcoin on a base holding of 100,000 Bitcoin, if that’s what the whole company were holding, that’d be a 10% yield. Bitcoin on Bitcoin yield, adding 10,000 new Bitcoin on a base holding 500,000 Bitcoin, that would just be a 2% yield in terms of Bitcoin being added to the base holding of bitcoin. Now volatility could take off again if Saylor decides to take on a lot of new leverage. But but that of course comes with its own risks Finding this video interesting so far? I’ll just pause really briefly here to ask you to help to support this channel’s educational mission. Hit the subscribe button. That does really help. Leave a Like leave a comment question suggestion for a future video. Share this video with a friend or family member.
Matthew Kratter [00:03:19]: Now there are other problems with msty. If we take a look at their distribution, it looks pretty nice when it’s been annualized almost 72%. But when you dig down into it, it’s not nearly as attractive as you might think. So for example, let’s look at the most recent distribution. Here we are the at the Home Home web page for this ETF. The most recent distribution on July 7, 2025 contains 96.86, so nearly 97% return of capital and 3.14% income. This is a problem when your own capital is being returned to you. As Thomas Greif points out here, msty’s quote unquote dividends are skewing how the average investor perceives the fund’s Yield.
Matthew Kratter [00:04:01]: Since inception, 55% of all distributions have been returns of capital rather than yield produced by the fund’s option strategy. Now, return of capital. That just means getting your own money back. And to be quite clear, I’m not a tax professional, so none of this is tax advice. But here’s my understanding of return of capital from ETFs. Most US taxpayers will not pay capital gains taxes on return of capital right away. Return of capital is used to reduce your cost basis in a stock. So let’s say for example, you bought 1,000 shares of MSTY at $20 per share and you received a dividend that was $2 worth of return of capital.
Matthew Kratter [00:04:38]: That would just lower your cost basis by $2. So your cost basis would now be $18. So then if you turned around and sold the stock for $22, you’d be paying capital gains taxes on that entire amount from 18 to 22. In other words, you’d have a capital gain of $4 and you pay taxes on that, which is a really dumb thing to have to do since $2 of that was just the company returning your initial investment to you. It was literally return of capital. And as we saw here, that 55% of the returns have just been return of capital. Now, once your cost basis hits zero, if you keep getting these dividends, you’ll need to start paying capital gains taxes on the return of the capital on the return of capital for the year in which it was received because your cost basis can’t go below zero. So just imagine paying capital gains taxes because you gave someone some money and then they gave back to you that same money.
Matthew Kratter [00:05:28]: Some people will say here, but I’m holding MSTY in a tax advantaged account. Congrats if it’s a regular ira, a regular IRA you’re deferring paying taxes on getting your own money returned to you and you really shouldn’t be paying taxes on it anyway. Of course it’s a little bit better in a Roth ira, but this is still a problem. So where else does msty’s yield come from? It comes from US Treasuries, the most exciting and profitable investment out there. If you love clipping 4% coupons while true inflation is at 8%, we can look at the ETFs holdings because they’re doing these long swaps, they can have some of their collateral. As I understand it, in US treasuries, which are yielding around 4.4.5% else does the MSTY yield come from comes from capital appreciation of MSTR. So in that example where we bought MSTR at 440, we sold the calls at 450. You obviously get to keep the options premium, but you also benefit from that capital gain going from 440 up to 450.
Matthew Kratter [00:06:25]: So if MSTR goes from 440 to 540, for example, while your short calls at 450, you’re only going to capture that $10 from 440 to 450 and that $10 of capital gains before the stock gets called away from you at 450, you’re going to get to keep the premium too. So that adds maybe another $30 to the trade. $30 premium plus $10 capital gains is $40 in terms of gains both from the options premium and that capital appreciation. The stock going from 440 to 450 but the stock just went up $100. So you gave away massive upside. This is the problem with capping your upside using covered calls. So you really better have conviction that MSTR’s implied volatility will stay extremely high so that the options premium price, the options premium piece of returns makes up for that lost upside. So in summary, the summary of msty, you cap your upside if MSTR does really well, you retain all the downside if MSTR collapses.
Matthew Kratter [00:07:24]: And this is not just something I’m making up, you can go look at the risks Risks in their prospectus. The fund strategy will capture only a portion of potential gains if MSTR shares in increase in value. The fund strategy is subject to all potential losses if MSTR shares decrease in value, which may not be offset by the income received by the fund. So who’s best positioned to profit massively from msty? Remember, this is Wall street, so it’s of course the issuing company. They charge almost a 1%, a 0.99% annual management fee, which is quite high when it comes to ETFs. So in conclusion, I would I would conclude that people who sell their BTC for MSTY are a lot like that guy who sold his birthright for a mess of pottage. One of the worst trades ever. If you enjoyed this video, be sure to hit the subscribe and like buttons.
Matthew Kratter [00:08:14]: Hit the notification bell if you want to be notified when I publish my next video and let me know your questions and comments in the comment section below. Thanks a lot for watching and I’ll see you in the next video.