MicroStrategy funds resort to risky strategies amid MSTR, bitcoin dip
Although bitcoin and MicroStrategy (MSTR) are both up on the day, Michael Saylor’s company is still roughly 30% below last week’s all-time high. In search of an explanation, investors are looking beyond simple metrics like bitcoin (BTC) holdings and analyzing the dynamics of fund management and options pricing.
MicroStrategy is unique in its size and depth of liquidity, but it’s not alone in its corporate BTC acquisition strategy. This morning, another NYSE-listed company doubled on its announcement that it was buying $50 million worth of bitcoin, and there are other copycats like Semler Scientific and MetaPlanet.
Nor is the company unique in its use of leverage. However, it does have the biggest amount of options and fund exposure of any BTC company. By far the largest publicly traded asset linked to BTC’s price, there are a cornucopia of leveraged and institutional MSTR products.
Leverage for retail and institutional traders alike
Consider just two examples. RexShares sponsors a Nasdaq-listed, 2X ETF leveraging MSTR’s intraday price movements, MSTU. YieldMax sponsors a dividend-focused MSTR ETF, MSTY.
MSTR also denominates a long chain of options contracts extending into 2027 with strike prices ranging from $30 to $1,080 per share. For context, MSTR is currently trading at $378.
Saylor’s company is worth $88 billion, dwarfing even bitcoin’s largest spot ETF, Blackrock’s $45 billion IBIT. Because MicroStrategy is so large, traders can access its liquidity in various products beyond its common stock. Institutional investors can access its commercial paper like convertible bonds.
Leveraged products are always a favorite on Wall Street.
Read more: The math behind MicroStrategy’s bitcoin bet
Within the MSTR options chain is a suspicious amount of trading activity. Although there are certainly retail investors buying simple call options to leverage gains in the event that the company continues to outperform, there are also a variety of market participants in this market.
Some fund managers are probing some of the largest transactions in MSTR options. For example, a single fund manager spent $70 million yesterday to open a single position in MSTR $350 strike calls.
Although some speculated that this trade was a hedge to neutralize a long equity or gamma position, sophisticated market observers explained that it was probably fund managers like MSTU using options to satisfy their prospectus objectives.
Read more: Is Michael Saylor the Do Kwon of this bitcoin cycle?
MSTU options-hedging amid MicroStrategy’s decline
Typically, leveraged ETFs will roll affordably priced futures contracts with narrow spreads to accomplish an investment mandate of 2X intraday price tracking. Liquid futures expose fund managers to far less slippage than options contracts which typically have a much wider bid/ask spread.
However, because MSTU published its prospectus swearing to track MSTR’s intraday price movements on a 2X basis, it must use either leveraged stock purchases, swap agreements, or options. Unfortunately, and unlike oil or gold, MSTR does not denominate any futures contracts. Moreover, MSTU may not use BTC to acquire leverage per its prospectus.
With so few products available to funds like MSTU to accomplish its mandate, it has resorted to privately negotiated swap agreements and options with deeply in-the-money strike prices.
For example, MSTU owns calls with $220, $225, $235, $300, and $320 strikes, all of which are deeply in the money.
Of course, there are privately owned and unlisted funds that are leveraging MSTR through options and privately negotiated contracts. All of these participants distort the pricing of MSTR — and by extension the market’s premium on its 386,700 BTC — through a complex interplay of retail trading, hedging, and fund management.
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