Xiaolu Chu
A Wild Ride
Indexing has produced some interesting strategies over the years – from ETFs that utilize a complicated mix of derivatives to create the movement of two or three times the daily volatility of the underlying index, to a fund that can’t go down (though, it probably could), innovators in the ETF space are always finding new ways to offer investors ways to gain exposure to narrow slices of the market.
The Tidal Trust II YieldMax TSLA Option Income Strategy ETF (NYSEARCA:TSLY) occupies a unique space among these already-unique instruments, in that it gives owners the opportunity to take yield on Tesla (TSLA) stock through the selling of options. This is not, we should note, YieldMax’s only single-stock income option, as the fund offers option-selling ETFs on a variety of popular names.
Incepted in November 2022, the fund currently has a little less than $600 million in assets and boasts a whopping 51% dividend yield as of this writing.
What we want to explore in this article is what exactly this fund could be used for, and what sort of investor it might appeal to. Let’s get to it.
Background
The fund overview for TSLY describes the fund thusly:
The YieldMax™ TSLA Option Income Strategy ETF (TSLY) is an actively managed fund that seeks to generate monthly income by selling/writing call options on TSLA. TSLY pursues a strategy that aims to harvest compelling yields, while retaining capped participation in the price gains of TSLA.
Up front, this is simple enough. It’s also incredibly important for investors to know, (as it is stated in bold on the summary prospectus) that an investment in the fund is not an investment in TSLA.
The above statement means exactly what it says: TSLY does not own any underlying Tesla stock. This might seem counterintuitive, but remember that this fund is essentially a play on the volatility of Tesla. The premise, then, is that traders like to trade in Tesla, and the fund seeks to profit off of that volatility.
To do this, the fund engages in a synthetic covered call strategy, utilizing the exchange traded options market and FLEX options (which are essentially privately structured options). A synthetic call strategy essentially attempts to replicate the returns of the position as if the holder were long the underlying security. The primary benefit of this arrangement for TSLY is that it is far cheaper to purchase and hold the options than it is to buy the represented shares outright.
The monthly distributions, then, are distributions of option premiums to shareholders. Now, it should be said that a 50% annualized dividend is not normal if we’re thinking about a regular bell-curve distribution of dividends, but it is theoretically possible given the massive options volume for Tesla.
In fact, according to TradeStation, Tesla’s average options volume is the highest of any single stock, with an estimated 2.3 million contracts trading hands per day. The stock is so busy that the estimated options volume is only bested by the Invesco QQQ Trust (QQQ) and the SPDR S&P 500 ETF (SPY).
The fund states that it seeks to replicate its long position with options that are generally dated between six months and one year while selling call options against these positions approximately 5%-15% above the current share price. Thus, to generate a consistent return, the options market for Tesla needs to remain thick, i.e., a lot of people need to continue to trade in the options in order to generate a premium of any significance.
How Has It Performed?
It should be clear by now that this particular ETF has a significant amount of risk that is a bit out of the norm for a vanilla ETF that tracks a basket of stocks. For one, holders of TSLY have all the same risks that shareholders of Tesla have, in that movements in the price of Tesla will affect the price of TSLY.
Second, as we have written before, covered call options are not the end-all-be-all for income. It is often the case that covered calls generate stunted returns due to the capped upside while retaining downside exposure.
TSLY vs TSLA (Koyfin)
To this end, consider the total returns of TSLY versus Tesla (pictured above), which tracks returns of a security as if the dividends were reinvested. Since November 2022, TSLY has underperformed Tesla by a significant margin, returning a total of 13% to investors while the underlying security has posted a 43% gain.
The Bottom Line
There may be tactical reasons why an investor would want income options or options exposure to Tesla, and for those certain strategies, TSLY may be an interesting option. However, for those looking for income, we think that there are better options available, given the fact that TSLY engages in a strategy with a capped upside. While the dividend is certainly eye-popping, thus far the massive volume in Tesla’s options market does not seem to have done TSLY investors much good, judging from the total return of the ETF thus far. Investors should approach any investment with caution, and TSLY is no different.
