Since April, ULTY’s NAV has held steady thanks to a few explosive stocks. With the help of technical analysis, their charts can reveal what could happen next to the ETF.
Hey - Love that you're producing some great data for the community - QQ: it seem that given the NAV is primarily dependent on underlying stock holdings (+/-) price appreciation + option premium and option premium is driven by IV that you'd be tracking the basket weighted IV (and ongoing delta of IV to prior days). That would give you a better sense of where the NAV is headed. Maybe you're tracking this and I just don't see it because I'm thick as a whale sandwich ;-)
Hey! Great question -- you're right. To do it properly, there's actually some complexity behind it that I've been investigating. It's in my backlog to play around with more, but not ready to roll out in any shape or form. The simple proxy would be just to average the IV of the underlying stocks, but I need to check how accurate that actually is since it's not the proper method.
The other thing to keep in mind is that we can track share price in real time. I can't current track options price in real time. Also, the options are a fairly small percentage of the value of the fund. For example, even if they gain $20-40M daily in net options premium, that's only 2% of a $2B AUM ETF. Where as the stocks are 80%+ weight minimum
Thanks for the reply! Totally get the balance of share appreciation to options premium capture being unbalanced - that tends to be even more true in upward trending markets (until your calls get ITM and then, well then it's a mess :-)), like we've been in for a while. I guess what I'm most interested in is what would potentially happen to NAV in a sideways market, the potential impact to NAV shifts, fairly dramatically the other way. Of course in a down market, basket share price dominates again. I guess what I'm looking for is a better look at how this balance/in balance portends movement in the NAV. From a put risk management perspective, this is super important. I think a lot of folks who hold these funds are just hanging on for dear life w/o thinking about how to mitigate downside risk proactively. One thought as you noodle, given that IV30 is not the best proxy for shorter dated options movement, you can use the sqr root of 7/30 as a proxy (for style points you could adjust that number +/- based on the IV slope of the basket). Anyway, thanks for your contributions!
Got it, all that context helps and I'll think about it a little more. There's a few other resources I'll put out first.
And I completely agree -- a lot of people are going in blind or just plan to set and forget. Just because the ETF is actively managed doesn't mean you don't have to actively manage your investment in it.
Thank you for reporting the bug on the P&L tracker. There was an error in the worksheet and it should be fixed (the column labeled 25th should have been yesterday, the 24th).
Question: the 1.4% fee to the ETF...is that pinched out when buy or when you sell?
And one more: it seems odd that the ticker price sticks so closely to NAV. When the price drops, the yield based on the price (I realize yield is based off NAV) paid gets better, that is, the yield goes up as a % of lower price...assuming the distribution remains flat. Just on this alone, the price would be bid back up, no? I'm struggling with the various relationships here as you might have guessed:)
Hey! For Q1: You never really see or feel the ETF fee. It's baked into the ETF's performance (NAV).
For Q2: There some interplay at hand. If the underlying stocks are flat or go down, then the ETF can capture more premium from its options trades. If the underlying stocks go up (and skyrocket), then the stock prices blow through the covered calls they had and it's expensive to close (and rollover) those trades, so the fund then makes less or even negative premium. It's maintaining the yield temporarily through ROC (return of capital) instead of paying out the premium it earned. The distribution remaining flat is more the decision from Yieldmax. They want a stable distribution because that's the main goal of the ETF. Except for some outliers and exceptions (or a daily oddity), almost all ETFs have a stable relationship between price and NAV (and market makers help ensure that).
Yes, awesome. So the market makers can destroy and add new ETF shares at their discretion. Seems that this is how they maintain a price somewhat equal to the NAV. Yet, buyside volume causes the price disparity between the NAV and market price... It's why I bought shares at $6.38 when the nav was at 6.31.
The market makers are acting on behalf of the market. Basically, they are taking all the buy/sells orders from investors/institutions/firms and managing the bid/ask -- so just a small correction since they aren't operating "at their discretion" (they are essentially middlemen). Google might do a good summary, but this could help too: https://www.rbcgam.com/documents/en/articles/what-is-the-role-of-the-market-maker-for-etfs.pdf
Well, to be fair...if the market maker we're actually doing his job, there really wouldn't be any disparity in pricing between the NAV and the market price. It appears the ETF dictates what stocks or basket of stocks that they will take in on exchange for the ETF shares which it then parcels out to market buyers. The only way you get a disparity in pricing is if you have a whole flood of sell orders and or buy orders in a given time, pushing the price one way or the other.
I've seen comments from others that suggest sell on Friday and buy on Tuesday. Does this at all reflect anything you've seen in terms of price movement?
1-how would the NAV have fared if the underlying stocks it holds, remained flat April til today? Remember the market just had the best 3 month rally in decades if ever.
2- since now thousands on the internet (including myself) are bragging about buying $ULTY and DRIPing into exponentially more shares, at some point isn’t there a ceiling on the amount of options available for the underlying stocks $ULTY uses?
1) Flat to slightly up performance in the underlying stocks would actually be the best case scenario for ULTY. We won't know for sure, but NAV would have likely remained stable and they they would have extracted more premium from their trades. When the underlying stocks skyrocket, there's costs for them to close/roll their covered calls since the strikes were blown through. This takes away from the net premium captured for the distributions.
2) Yes. And YieldMax has commented on this. The general consensus is that is a long term potential challenge. In the short to medium term, the stocks they are invested in are large caps and have enough liquidity in the stock and options for ULTY to continue to scale into them when needed.
Theoretically yes. But we really don't know until we experience it. The likely hood that 20 stocks in the basket are all flat at the same time may not actually happen. We even see today that all it takes is 2-3 to be up and that impacts the daily price. Plus, they might evolve the strategy in a flat market too.
Just discovered you on Reddit and appreciate the constant work. My next ULTY payout I'll be upgrading! 💪🏾
Thank you, glad you find value in the data! 💪
Hey - Love that you're producing some great data for the community - QQ: it seem that given the NAV is primarily dependent on underlying stock holdings (+/-) price appreciation + option premium and option premium is driven by IV that you'd be tracking the basket weighted IV (and ongoing delta of IV to prior days). That would give you a better sense of where the NAV is headed. Maybe you're tracking this and I just don't see it because I'm thick as a whale sandwich ;-)
Hey! Great question -- you're right. To do it properly, there's actually some complexity behind it that I've been investigating. It's in my backlog to play around with more, but not ready to roll out in any shape or form. The simple proxy would be just to average the IV of the underlying stocks, but I need to check how accurate that actually is since it's not the proper method.
The other thing to keep in mind is that we can track share price in real time. I can't current track options price in real time. Also, the options are a fairly small percentage of the value of the fund. For example, even if they gain $20-40M daily in net options premium, that's only 2% of a $2B AUM ETF. Where as the stocks are 80%+ weight minimum
Thanks for the reply! Totally get the balance of share appreciation to options premium capture being unbalanced - that tends to be even more true in upward trending markets (until your calls get ITM and then, well then it's a mess :-)), like we've been in for a while. I guess what I'm most interested in is what would potentially happen to NAV in a sideways market, the potential impact to NAV shifts, fairly dramatically the other way. Of course in a down market, basket share price dominates again. I guess what I'm looking for is a better look at how this balance/in balance portends movement in the NAV. From a put risk management perspective, this is super important. I think a lot of folks who hold these funds are just hanging on for dear life w/o thinking about how to mitigate downside risk proactively. One thought as you noodle, given that IV30 is not the best proxy for shorter dated options movement, you can use the sqr root of 7/30 as a proxy (for style points you could adjust that number +/- based on the IV slope of the basket). Anyway, thanks for your contributions!
Oh, I forgot to ask - looks like 7/24 data is missing from your daily P&L tracker, at least it is for me :-)
Got it, all that context helps and I'll think about it a little more. There's a few other resources I'll put out first.
And I completely agree -- a lot of people are going in blind or just plan to set and forget. Just because the ETF is actively managed doesn't mean you don't have to actively manage your investment in it.
Thank you for reporting the bug on the P&L tracker. There was an error in the worksheet and it should be fixed (the column labeled 25th should have been yesterday, the 24th).
Great stuff here. Thank you.
Question: the 1.4% fee to the ETF...is that pinched out when buy or when you sell?
And one more: it seems odd that the ticker price sticks so closely to NAV. When the price drops, the yield based on the price (I realize yield is based off NAV) paid gets better, that is, the yield goes up as a % of lower price...assuming the distribution remains flat. Just on this alone, the price would be bid back up, no? I'm struggling with the various relationships here as you might have guessed:)
Hey! For Q1: You never really see or feel the ETF fee. It's baked into the ETF's performance (NAV).
For Q2: There some interplay at hand. If the underlying stocks are flat or go down, then the ETF can capture more premium from its options trades. If the underlying stocks go up (and skyrocket), then the stock prices blow through the covered calls they had and it's expensive to close (and rollover) those trades, so the fund then makes less or even negative premium. It's maintaining the yield temporarily through ROC (return of capital) instead of paying out the premium it earned. The distribution remaining flat is more the decision from Yieldmax. They want a stable distribution because that's the main goal of the ETF. Except for some outliers and exceptions (or a daily oddity), almost all ETFs have a stable relationship between price and NAV (and market makers help ensure that).
Did that help clarify some things?
Yes, awesome. So the market makers can destroy and add new ETF shares at their discretion. Seems that this is how they maintain a price somewhat equal to the NAV. Yet, buyside volume causes the price disparity between the NAV and market price... It's why I bought shares at $6.38 when the nav was at 6.31.
The market makers are acting on behalf of the market. Basically, they are taking all the buy/sells orders from investors/institutions/firms and managing the bid/ask -- so just a small correction since they aren't operating "at their discretion" (they are essentially middlemen). Google might do a good summary, but this could help too: https://www.rbcgam.com/documents/en/articles/what-is-the-role-of-the-market-maker-for-etfs.pdf
Well, to be fair...if the market maker we're actually doing his job, there really wouldn't be any disparity in pricing between the NAV and the market price. It appears the ETF dictates what stocks or basket of stocks that they will take in on exchange for the ETF shares which it then parcels out to market buyers. The only way you get a disparity in pricing is if you have a whole flood of sell orders and or buy orders in a given time, pushing the price one way or the other.
I've seen comments from others that suggest sell on Friday and buy on Tuesday. Does this at all reflect anything you've seen in terms of price movement?
I will be working on an analysis to the age old question: When is the best time to buy ULTY?
Hang tight!
Two important questions for the $ULTY experts:
1-how would the NAV have fared if the underlying stocks it holds, remained flat April til today? Remember the market just had the best 3 month rally in decades if ever.
2- since now thousands on the internet (including myself) are bragging about buying $ULTY and DRIPing into exponentially more shares, at some point isn’t there a ceiling on the amount of options available for the underlying stocks $ULTY uses?
thank you!
Hey Eduardo! I can try to tackle these:
1) Flat to slightly up performance in the underlying stocks would actually be the best case scenario for ULTY. We won't know for sure, but NAV would have likely remained stable and they they would have extracted more premium from their trades. When the underlying stocks skyrocket, there's costs for them to close/roll their covered calls since the strikes were blown through. This takes away from the net premium captured for the distributions.
2) Yes. And YieldMax has commented on this. The general consensus is that is a long term potential challenge. In the short to medium term, the stocks they are invested in are large caps and have enough liquidity in the stock and options for ULTY to continue to scale into them when needed.
Hello. Sorry for the late reply.
1-I thought in that case the NAV would suffer from erosion since the underlying stocks "are not moving". ?
Theoretically yes. But we really don't know until we experience it. The likely hood that 20 stocks in the basket are all flat at the same time may not actually happen. We even see today that all it takes is 2-3 to be up and that impacts the daily price. Plus, they might evolve the strategy in a flat market too.
It's always a trade off.