Selling Covered Calls on MSTR
Selling covered calls on MSTR is a great way to generate additional income and profit from the volatility of owning MSTR shares.
Why MSTR is a Prime Candidate for Covered Calls
Strategy Inc. (MSTR), once a traditional business intelligence firm, has evolved into one of the most leveraged public plays on Bitcoin. With a large portion of its corporate treasury allocated to Bitcoin, MSTR’s stock price is highly correlated with cryptocurrency markets. This results in elevated volatility — an essential ingredient for generating high options premiums. For investors already holding MSTR shares, selling covered calls can offer a consistent income stream while reducing portfolio risk.
The Mechanics of a Covered Call on MSTR
A covered call involves owning at least 100 shares of MSTR and selling a call option with a set strike price and expiration. The seller collects a premium upfront, which is theirs to keep regardless of the stock’s movement. For example, if MSTR is trading at $1,300, an investor might sell a one-month $1,400 call option for $80 per share. If the stock stays below $1,400 through expiration, the investor retains both the shares and the premium. If it rises above $1,400, the shares are “called away,” and the seller earns a capped profit plus the premium.
Benefits of Selling Covered Calls on MSTR
- High Premiums: MSTR’s volatility, driven by Bitcoin price swings, results in elevated implied volatility. This allows for large option premiums compared to less volatile stocks.
- Lowered Cost Basis: Regularly collecting premiums can significantly reduce the average cost of holding MSTR over time.
- Income Generation: Selling monthly or weekly calls can create a steady income stream, ideal for long-term holders seeking yield.
Risks and Considerations
- Capped Upside: If MSTR rallies sharply, covered call sellers may miss out on large gains beyond the strike price.
- Potential Losses: If the stock drops significantly, the premium may only partially offset portfolio losses.
- Liquidity and Spreads: MSTR options may have wider bid-ask spreads than more liquid names, potentially reducing trade efficiency.
- Tax Implications: Frequent option sales can lead to short-term capital gains, which may have a higher tax burden.
For experienced investors, selling covered calls on MSTR offers a high-risk, high-reward income strategy. The key to success lies in carefully selecting strike prices, managing position size, and being comfortable with the potential to forfeit upside gains. With proper risk management, MSTR’s volatility can be turned into an asset for generating yield in a volatile market.
