Let me bring you up to speed: I wanted a leveraged, highly risky way to play the Bitcoin pump, so I bought MSTR – Microstrategy Inc.  I’m not completely crazy, so I decided to mitigate the risk by writing covered calls against my position.  I give up some of the upside, but I get some downside protection, so it seemed like a good compromise.

It did not work out as planned.

As expected, MSTR went up, which was great, but it went way up, very fast, so my covered calls blew up, and in many cases I had to buy them back, at a lose, to hold on to my shares.  Here’s the summary of my transactions in this experiment:

The final transaction was on March 12, when, with MSTR trading at $1,521, I sold the $1,800 calls expiring three days later.  I assumed there was no chance they wouldn’t expire worthless, which is what I wanted, but it was getting close, so on March 14 I bought them back for $10. If I had waited until the close on Friday they would have expired worthless, but I decided to book the profit and move on.  As you can see, the experiment cost me $296.41, which isn’t great. The only good news in this sorry tale is that on February 8, when I did the first covered write, MicroStrategy was trading at $580 per share.  On March 15 it closed at $1,782, so my share position is up $1,202, so the $296 loss doesn’t look quite so bad.

But that’s not where the story ends.

Not even close.

I started to ponder the opposite approach.  Instead of selling the calls, why not buy them?  As the chart above plainly indicates, when a bubble is inflating, the correct strategy is to ride the bubble.

So, on Friday March 15, I bought the March 22 $1,900 calls for $70.  MSTR was trading at around $1,600 at the time, so it was a stupid bet (although I only bought a half position since I’m stupid, but not insane).  I was betting that within one week, MSTR would go from $1,600 to over $1,970, which, ignoring the time value of money, is the break-even point.  I was betting on a 23% gain in one week.

On Friday Bitcoin was down, so you would expect MSTR would be down by an even greater percentage, given their leverage.

Nope.

Every idiot is piling in, and by 3:00 pm on Friday afternoon, while Bitcoin was down 2%, MSTR was up 7% to over $1,800.

(As an aside, the March 15 $1,800 calls that I sold and then covered for $10 were trading at $30 with one hour to go before expiry, so closing out that position was the correct strategy, although if I had waited until the close they would have expired worthless).

So, I said, “Thank you very much,” and at 3:00 pm on Friday, I sold the options for $140 that I had purchased for $70 earlier in the day.  A double in seven hours.

To be clear, this is a gamble.  I am not playing with big dollars.  If the options crash to zero I’ll be sad, but it won’t change my life.  This is entertainment, like buying a lottery ticket.

At what point do I sell the shares, bank the profit, and move on?

I have no idea.

It appears that everyone is playing the momentum trade, so MSTR will keep outperforming until it doesn’t.

Why is “everyone” buying Microstrategy?  On the surface, it’s stupid.  MSTR owns 205,000 Bitcoins, with a value of approximately $14 billion.  Microstrategy has a market cap of $30 billion.  Assuming the underlying software business is worth a few bucks, and adjusting for debt, MSTR is trading at approximately 2X the value of its Bitcoin holdings.

That’s crazy.  If you want Bitcoin, buy Bitcoin, or buy one of the ETFs, and don’t pay the premium.

But is is crazy to pay the premium?

Microstrategy is a stock, traded on Nasdaq, so anyone in the world can buy it.  Self custody is difficult, so institutional investors don’t want the hassle, and the ETFs are not available in every country, or even from every broker in the USA, so MSTR is a viable option.

But the biggest benefit, and risk, to owning MSTR is the leverage.  On March 15, 2024 MSTR announced another convertible debt offering of $525 million.  The convertible notes pay interest at 0.875% per annum.  That’s essentially zero, so MSTR can borrow at zero cost and buy Bitcoin.  The shares are convertible into stock, so if Bitcoin does well, the note holders can convert.  It’s a risky but enticing leveraged play.

One final point.  At the end of February, the short interest in MSTR was almost 3 million shares.  Many speculators have shorted Microstrategy while going long on Bitcoin, on the assumption that the 2X premium will shrink and they can pocket the difference.  It hasn’t happened, so many of those shorts will have to liquidate, and the short squeeze, which likely has already started, will drive MSTR higher.

Or so the theory goes.  It will be a fun ride.

One of these days I’ll get rekt.  Tune in next week to find out what happened!

 

 

The saga continues.  As I reported last week in How NOT to do covered writes on MSTR – MicroStrategy, I own MicroStrategy, and to “juice” my returns I’ve done covered writes (selling out of the money call options on my MSTR shares).

The strategy has been a dismal failure.

The theory is simple enough.  The premiums are huge, so why not pocket some of that premium?  For example, on Monday, March 4, while MSTR was trading around $1,300, I sold the March 8 call options, strike price $1,400, for $76.

Think about that: the options were out of the money by $100, and I sold them for $76, so effectively, I sold something worth nothing (other than the time premium) for $176.

All that had to happen for me to profit was for MSTR to go up by less than $100 (or 7.6%) in less than five days, and I’m a winner.

And what happened?

MicroStrategy went up by $125.

In five days.

So, once again, I should have done nothing, but instead I gave up some of my profits by selling calls.

Here’s the sorry saga of the week:

On March 1 I sold the March 8 $1,050 calls for $76, and then MSTR announced they bought more Bitcoin, and in a day it was up to $1,300, so I bought back the calls for $255, for a massive loss of $179.  I then immediately sold the March 8 $1,400 for $76, and by the end of the week MSTR was up again so I had to buy them back for $27.50, so I made a profit of $48.50, but overall on this trade I am down, big time:

I am down $318.87 on this strategy.  In other words, if I had just done nothing, I would have an extra $318.87 in my pocket.

The only good news in this sorry tale is that on February 8, when I did the first covered write, MicroStrategy was trading at $580 per share.  It closed on March 8 at $1,425.59 per share, so my profit per share is $845.59, which more than offsets my loss on the options of $313.87.

So what will I do this week?

The correct answer is to do nothing.

We are in a massive Bitcoin bull market, and MSTR is a leveraged play on that bull market.  Bitcoin hit a new all-time high this week, and investors who want to own the best-performing asset over the last 15 years now have an easy way to do it: Spot Bitcoin ETFs.  They are putting in a lot of money, and that is driving the Bitcoin price higher:

Will that stop this week?  No, if anything, it is just getting started.

“Old school” financial advisors took a “wait and see” approach when the ETFs were launched.  But every day their clients are phoning them up saying “why don’t we buy some?” and the advisors, reluctantly, say, “okay, let’s take a 1% allocation and see what happens.”

At current trends Bitcoin will be $100,000 USD before the summer, and it could happen much faster.

$250,000 USD by year-end is possible and would be comparable to growth rates in previous cycles.

Is that what I’m predicting?

No.

I have no idea.

But from a risk/reward perspective, putting 1%, or 5%, of your portfolio in Bitcoin, or a Bitcoin ETF, or a leveraged Bitcoin proxy like MSTR is a no-brainer, so that’s what everyone is doing.

So what will I do this week?

On Monday, nothing.  The time premium doesn’t erode much on Monday or Tuesday, so perhaps I’ll wait until Wednesday, or wait until a big move, and then sell more out of the money calls.  But if I do, I will sell them way out of the money, perhaps $200 or more over the current price.  Otherwise I will get “rekt” again.

The saga continues.  Thanks for reading.  More next week.

How NOT to do covered writes on MSTR – MicroStrategy

March 2, 2024

I have no idea what will happen, but here’s how I’m playing it: As I noted last week in my post two weeks ago, Not Even Close: Thoughts on Bitcoin and Microstrategy, I own a small MSTR – Microstrategy Inc. position, and to “juice the returns,” I’m doing covered writes against it. The theory is simple.  […]

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Bitcoin: Sideways, Then Up or Down

February 24, 2024

Here’s the current Bitcoin chart, with the uptrend channel starting in mid-October: As I write this at 7:00 am on Saturday, Bitcoin is just over USD 51,000, exactly where it traded on Wednesday.  The $49,000 level is of interest, which represents either significant support or resistance, depending on which side of the line we are […]

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Not Even Close: Thoughts on Bitcoin and Microstrategy

February 17, 2024

Last week, I said: Bitcoin: The (Temporary) Top is In.  When I wrote that, Bitcoin was trading at around $47,000 USD.  Bitcoin hit just under $52,900 USD on Thursday. Apparently, the top was not in.  Here’s the five-year chart: As I write this at 6:30 am Saturday morning, February 17, 2024, Bitcoin is trading at […]

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Bitcoin: The (Temporary) Top is In

February 10, 2024

Today, a deeper dive into Bitcoin.  Let’s start with the five-year chart: I’ve drawn the long-term trend line, starting with the peak in 2019, and then pivot points in 2021, 2022, and 2024.  I’ve also drawn in a shorter-term trend line starting at the October 2022 peak.  I’ve circled the pivot points: Keep the big […]

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Here’s the Thing

February 3, 2024

The market sure looks over-extended: The S&P 500 Index is up 126% from the pandemic lows.  It’s up 42% since the lows of October 2022.  The economy doesn’t look great.  Unemployment is increasing, inflation remains problematic, wars are ongoing, immigration is a massive problem in North America, and we are in an uncertain election cycle.  […]

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The Macro View

January 27, 2024

Let’s start with the macro view: specifically, when will the recession start? I am on record as expecting a recession last year, and it does not appear that a recession started last year, so what’s the deal? The deal is that “fiscal stimulus” is still a thing.  The federal governments in both the USA and […]

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The Pre-Collapse Holding Pattern

January 20, 2024

I have no idea if we will have a collapse.  The S&P 500 made a new all-time high this week, which is either proof of a new bull market or a sign of a double top (since the market is now back to the peak set at the start of 2022). Gold is also stuck […]

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Bitcoin: The Only Story This Week

January 13, 2024

That was quite a week, eh? As was widely expected, on January 10 (the last day possible, given the results of a 2023 court case), the SEC approved 11 spot Bitcoin ETFs.  The big question was “what would that do to the price of Bitcoin?”  Here’s what I said last week: My guess is it […]

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