Tidal’s YieldMax Bitcoin Option Income Strategy ETF(NYSEMKT: YBIT) offers investors a unique way to generate income from Bitcoin‘s (CRYPTO: BTC) volatility. It does that by constantly writing covered calls on its own “synthetic long” positions in Bitcoin, and it currently pays an annual distribution rate — or the yield an investor would receive if its most recent distribution (including option income) stays the same for the full year — of 41.5%.
That massive yield makes YBIT an income juggernaut, but is it really just a high-yield trap? Let’s dig deeper and see how YBIT actually churns out its distributions.
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To understand why YBIT creates synthetic long positions in Bitcoin, we should discuss how covered calls work. A covered call is an option that lets an investor earn a premium by agreeing to sell an underlying security if it reaches a certain price by a certain date. If that security doesn’t hit that strike price before the expiration date, the call expires, and the investor keeps the premium. If it reaches the strike price, the investor keeps the premium but must sell the underlying security.
Many investors sell covered calls on their own stocks to generate extra income. More volatile investments net higher premiums, since there’s a higher chance they’ll hit their strike prices. That’s why Bitcoin’s high volatility makes it an ideal candidate for writing covered calls.
However, an investor who directly holds Bitcoin in a digital wallet can’t write covered calls on that position in the same way as stocks or exchange-traded funds (ETFs), because there’s no way to verify and collateralize your Bitcoin holdings for the options market. Therefore, the closest alternative is to buy a Bitcoin ETF to write covered calls.
Yet YBIT also doesn’t directly buy Bitcoin ETFs because it would tie up a lot of its cash and isn’t tax-efficient. Instead, it simultaneously buys calls and sells puts on the iShares Bitcoin Trust(NASDAQ: IBIT) to build a “synthetic long” position in the ETF with less cash. It then writes covered calls on that synthetic position in IBIT to churn out options income, which could be comparable to writing calls on the ETF, and it usually parks the rest of its cash in U.S. T-bills to earn interest and support its future options trades.
Covered call strategies work best when the underlying security trades sideways, since it can generate consistent income but won’t rise enough to be called away. Therefore, YBIT can keep paying out its big distributions (usually around 30%-40%) even if Bitcoin’s price stalls out. Letting YBIT automate the covered calls process with its synthetic stake in IBIT is also a lot simpler, cheaper, and more tax-efficient than manually writing covered calls on Bitcoin ETFs. It also gives you some conservative exposure to Bitcoin: Even though the covered calls will limit your upside potential, its big distributions could also protect you from any steep declines.
That said, YBIT’s complicated strategy of writing options on top of other options could result in unstable returns in volatile markets. Most of its distributions (over 90% in 2024) also came from a return of capital (ROC) instead of its options income. Therefore, YBIT was merely returning its investors’ cash as distributions while adding a single-digit percentage through its covered call options. That percentage was further reduced by its high gross expense ratio of 0.99%.
That fee might be worth it if YBIT delivered impressive market-beating gains. But over the past 12 months, YBIT’s shares declined 38% as Bitcoin’s price rose 76%. Even with reinvested distributions, it generated a total return of 15%. That slightly beat the S&P 500’s total return of 13% — but it’s unimpressive for a speculative “high-yield” ETF.
YBIT might seem like an interesting way to churn out some extra income from Bitcoin’s volatile swings, but it’s not a great investment. If you want some exposure to Bitcoin, it’s smarter to simply buy the cryptocurrency or a spot price ETF. If you want some extra income, it might be smarter to invest in a traditional dividend-oriented ETF instead of one that charges high fees, uses complicated options strategies, and funds most of its distributions with its investors’ own cash.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
