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herp derp's avatar

Great article, this is the best breakdown yet I've seen of MSTR's overall strategy. Thanks for writing it!

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Johan Bergman's avatar

Thank you! I enjoyed writing it and putting my thoughts out there.

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Brett's avatar

Very nice Johan. Its a fun company to think about

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Johan Bergman's avatar

Thanks! It sure is!

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Nik K's avatar

👏🙏👍

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Thomas Borda's avatar

"There's also $MSTY—an ETF that employs a covered call strategy exclusively on $MSTR stock, providing enhanced income by capitalizing on the underlying stock’s volatility. This strategy further suppresses volatility."

Question: Are you saying that, paradoxically, the MSTY-covered call strategy decreases the inevitable volatility of MSTR? Or are you saying that the covered call strategy decreases the vol of the investment to each individual investor (aka the behavior of the individuals investment)?

I guess I don't understand how covered calls decreased vol of the underlying stock, in this case, MSTR. Thanks for any explaination!!

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Johan Bergman's avatar

Hi Thomas,

I was referring to the mechanics of market making. So, let’s say a lot of investors are buying $MSTY to get some fiat yield. In order to generate that yield, $MSTY needs to sell covered calls. But first, they need to buy the underlying stock — which is good for the volatility initially (a one-time effect, or cumulative if the fund keeps growing). Then they start selling covered calls.

But you have to ask yourself: who’s buying those calls in such large quantities? A lot of market making is involved to provide liquidity for $MSTY. Those market makers want to stay delta-neutral, so when they buy calls from $MSTY (as the counterparty), they’re also shorting stock at the same time.

The result is that when there’s a large notional open interest at specific strike prices and expirations, $MSTR’s price tends to gravitate toward those strikes. Why? Because if the stock price rises, the market makers’ calls become more valuable (higher delta), so they need to short more stock to stay delta-neutral — which puts downward pressure on the stock. And vice versa: if the price drops, and they’re already short, they need to buy back shares to rebalance — pushing the stock back up.

It’s a similar mechanic to what happens with the convertible notes and arb traders: if the stock price rises, they short more; if it drops, they buy back. The net effect is a compression of price action toward the conversion level.

In the article, I’m not trying to say or prove that these instruments dictate all of $MSTR’s price action. I just want to highlight that these forces are at play.

And yes, exactly — that’s where Bitcoin comes in. It injects an exogenous force into the stock and keeps the volatility alive.

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Johan Bergman's avatar

But, like I've added in the $BMAX part, if investors buying the convertible notes that do want to have directional exposure, you don't have that dampening effect. This too applies to MSTY and the option market. If a large chunk of the calls are being bought by traders and investors who want that long exposure, it doesn't dampen the volatility.

So thank you for your question, because I could have articulate it more clearly. It depends on the counterparty how it impacts the volatility.

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Thomas Borda's avatar

This is hands down the best explanation I’ve ever read on this topic. No one has ever been able to explain the mechanics to me that clearly. Thanks for all of your insight !

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Thomas Borda's avatar

"There's also $MSTY—an ETF that employs a covered call strategy exclusively on $MSTR stock, providing enhanced income by capitalizing on the underlying stock’s volatility. This strategy further suppresses volatility."

Question: Are you saying that, paradoxically, the MSTY-covered call strategy decreases the inevitable volatility of MSTR? Or are you saying that the covered call strategy decreases the vol of the investment to each individual investor (aka the behavior of the individuals investment)?

Expand full comment