What if TSLA paid you a 70% dividend yield? Meet TSLY

AMEX:TSLY   YieldMax TSLA Option Income Strategy ETF
This an Exchange Traded Fund by YieldMax ETFs kicked off in Nov 2022. The Fund’s primary objective is to provide income by selling TSLA options for premium and distributing them back to investors as dividend payments.
The Fund’s secondary objective is to provide exposure to the share price of the common stock of Tesla (subject to a limit on potential investment gains). That means that TSLY will go up & down in price as TSLA stock moves up & down. (I will explain the disclaimer later).
Since its inception the fund has already paid the equivalent of 70% yield (based on Friday’s close of $14.33) and has an expense ratio of 0.99% per year. Impressive numbers. Now let’s look at how it works. what are the risks and what the advantages of investing in TSLY.
First, how does this fund generate returns? It does so as follow:

The Fund income strategy centers around selling covered calls. But instead of buying TSLA stock and selling out of the money covered calls on their shares, the fund instead buys synthetic stock (for leverage), and sells covered calls on the synthetic stock.
So, what is synthetic stock? It is when you sell Puts and buy Calls for the same strike. In this way, the premium you receive from selling the puts is used to buy the calls and thus you breakeven! You are now long TSLA with every dollar up in TSLA being a dollar up for you too (just like owning the stock). The time decay component of options premiums has now been neutralized.

So why does the Fund do this instead of just buying shares? Answer: Leverage. It supercharges their returns. It does so because it consumes much less buying power than if they bought TSLA shares outright with cash. It actually consumes only 20% of their buying power in comparison to cash. So now you can buy 5x as much stock theoretically for the same amount of cash.
This is not to say that they are leveraged 5 to 1. It just means that they can better allocate their cash as per the fund strategy. The Fund’s target actually is to have between 50% to 100% of the Fund’s net assets in cash and treasuries. The remaining 0% to 50% of the Fund’s net assets will be the cost of the options package. The 0-50% is more productive now since they are using synthetic stock instead of real stock. The combination of these investment instruments provides investment exposure to TSLA that equal to at least 100% of the Fund’s total asset.

As the Funds options contracts that it holds are exercised or expire, the Fund will enter into new options contracts, a practice referred to as “rolling.” If upon rolling, the expiring options contracts don’t generate enough profits/proceeds to cover the cost of entering into new options contracts (with new expiry dates into the future), the Fund then, may experience losses. Which means a lower TSLY price and less in dividend payments.

The call options purchased by the Fund and the put options sold by the Fund will generally have six-month to one-year terms and strike prices that are at the money when the contracts are traded.

So, what are the risks? I can’t list all of the legalese in the prospectus. But here are the main points:
1) There is no assurance that the Fund will make a distribution in any given month.
2) You are exposed to TSLA stock so you can still lose money. In fact, TSLY’s negative swings are almost on par with the underlying stock.
3) Capital gain is capped. If TSLA stock goes up 100%, TSLY will not give you the same gain. This scenario happened already and TSLY gave you only 30%. This is due to the nature of covered calls. You forgo most capital gains for income.
4) If TSLA’s volatility drops, and it will, then the dividend paid to you will become less. The fact that TSLY now exists will likely dampen future volatility of TSLA as such options writing vehicles tend to arbitrage volatility (imo).
5) If TSLA stock decides to pay you a special dividend that does not mean you will receive it if you own TSLY. Remember they own synthetic stocks not real stocks. But this risk is unlikely.
6) Finally, the fund uses the cash generated from premium selling to buy US treasuries with it. This is better than cash in a sense since it will provide income but if they need liquidity again to buy the next options package or due to investor redemptions, they may have to sell the treasuries for a loss. This can escalate out of control as it has taken out a couple of regional banks here who did the same recently if you remember.

So, what are the positives of investing in TSLY?

1) Since inception is has generated 70% yield and the 12-month period is not even done yet! If you double your money, you can withdraw principal and keep profits in as “the house’s money”.
2) TSLA already made massive swings lower in the past 9 months and TSLY has surprisingly done very well. Each time TSLA stock swung lower, TSLY also swung lower but at a slightly better percentage. For example, when TSLA dropped 48% in Dec-Jan period, TSLY only dropped 38%. That’s excellent.
3) Every time investors give TSLY more money, it will be able to average down on its holdings as it buys better priced options package with at the money strikes that reflect current TSLA prices. This is good in ensuring that high premium covered call sales continue instead of being so out of the money that the dividend paid is compromised. This is an added advantage to owning TSLY in its growth phase before it matures in NAV.
4) Finally, if TSLA doesn’t go anywhere for a year then TSLY will pay you for sitting even if the stock doesn’t appreciate. So, you will have income and your account/position value will remain the same with no unrealized losses.

I will be buying TSLY in my retirement account. I will collect dividends until I have a 100% return. Then I will buy something else with the dividends cash and keep the original principal in TSLY to see what happens. If it makes more dividends then great. I will keep collecting dividends until it goes bankrupt or I find something better.
This is what I am doing with my money. You do you.
Please give me a boost if you liked my work. I am new here.
Good luck!

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