If you’ve been watching MSTY in your brokerage app lately, you might have felt the same whiplash I did.
- Bitcoin sells off hard.
- MicroStrategy (MSTR) follows.
- MSTY suddenly drops 8–12% in a single day.
You open the holdings page for comfort and see… a pile of short-term U.S. Treasuries.
Wait. How can something that looks like a T-bill fund on the surface trade like a leveraged Bitcoin sidecar underneath? Shouldn’t those Treasuries give it some kind of floor? And if the market price is down double digits, why is the discount to NAV only 0.03% or whatever your broker shows?
Let’s walk through what’s actually going on.
This is a case study in how synthetic income ETFs really work.
If you haven’t read it yet, the earlier post How These ETFs Actually Work gives the big picture. MSTY is the specific, slightly terrifying example.
MSTY Is Not a Treasury Fund With a Side Hustle
On the surface, MSTY looks simple:
“Holds mostly short-term U.S. Treasuries. Designed to generate income linked to MicroStrategy.”
If you stop there, your mental model is probably:
“Okay, so this thing owns a bunch of safe T-bills, sells some options on MSTR on the side, and hands me the premium as yield.”
That would be comforting.
That would also be wrong.
What MSTY actually does (simplifying a bit, but directionally accurate):
- Parks cash in Treasuries
- Uses those Treasuries as collateral
- Builds a synthetic long position in MSTR using options (long calls + short puts)
- Then sells more calls / call spreads on top of that to generate income
Economically, you’re not holding “mostly Treasuries plus a little options overlay.”
You’re holding MSTR exposure built out of options, secured by Treasuries in the background.
Those Treasuries are the fuel tank, not the destination.
What Those Treasury Holdings Really Mean
If you look at a snapshot of MSTY’s portfolio, you’ll see line items like:
- U.S. Treasury Bill, 0.xx%, maturing in 2026
- U.S. Treasury Note, 0.xx%, maturing in 2027
Over and over.
It makes the ETF look calm. Boring. Fixed-income-ish.
But those T-bills are doing two jobs:
- Collateral for the options book
- Small yield from short-term government debt
You don’t own:
“One slice of Treasuries”
plus
“One independent slice of options”
You own a single machine where:
- The Treasuries are the collateral pool
- The options are the engine that can add or subtract from that pool every day
A decent analogy:
Think of a casino that keeps all its cash in a vault full of T-bills.
You don’t own some untouched T-bills and then go play roulette on the side.
The roulette table is settled against the same pile of T-bills.
When the bets go badly, the vault empties. The fact that the chips say “Treasury-backed” doesn’t stop the balance from going down.
How NAV Can Drop 10% in a Day
This is the part that feels unintuitive if you look at the holdings list and forget about the options.
NAV for an ETF is just:
(Value of all assets – value of all liabilities) ÷ shares
For MSTY, that includes:
- Treasuries and cash
- Long MSTR options (assets)
- Short MSTR options (liabilities)
All of those option positions are marked to market every single day.
They don’t wait for options to expire. They don’t average things over a week. The accountant looks at that day’s closing prices for every call and put and revalues the book.
When MSTR drops hard:
- The synthetic long piece (long call + short put) loses value
- Extra short calls / call spreads may gain some value, but not enough to cancel the hit
- Volatility often jumps, which can make some legs even more painful
The net effect can easily be:
“Options book lost ~10% of the fund’s value today.”
Even though the Treasuries themselves barely moved, the claim against those Treasuries changed radically.
So MSTY’s NAV is down 10% not because Treasury prices crashed, but because the options layered on top of them did.
“But the Discount to NAV Is Only 0.03%…”
This is another easy place to get confused.
Your broker might show something like:
- Price change: –10.4%
- Premium/discount to NAV: –0.03%
That does not mean:
“NAV is fine, the market is just overreacting.”
It means:
“The market price and NAV are basically the same, and both just dropped 10%.”
ETFs like MSTY have authorized participants (APs) who can create and redeem shares in big blocks. If the ETF trades way below NAV, APs can:
- Buy shares in the open market
- Redeem them with the issuer for the underlying basket (Treasuries + options)
- Lock in the difference
That arbitrage process tends to keep price glued to NAV, even on chaotic days.
So a tiny discount or premium just tells you the ETF plumbing is working. It doesn’t say anything about whether the underlying structure is safe.
Where’s the “Floor”?
Intuitively, you might think:
“If this thing holds mostly Treasuries, there has to be a limit to how far it can fall unless Treasuries blow up.”
In a simple bond fund, that would sort of make sense.
In a synthetic options fund, it doesn’t.
Here’s why:
- The fund’s short puts and synthetic long positions effectively tie the entire collateral pool to the behavior of MSTR
- When MSTR plunges, those short puts get hammered
- The losses hit NAV, which is backed by… the Treasuries
There’s no separate “safe pile” of T-bills sitting off to the side, immune to what’s happening in options land. The options wins and losses are booked against that same collateral.
So the question is not:
“How much of this is in Treasuries?”
It’s:
“How much of the Treasury collateral is being put at risk by the options strategy tied to MSTR?”
The answer, for a product like MSTY, is: a lot.
“Don’t Options Take Weeks to Clear?”
Another natural instinct:
“Okay, but if MSTY is selling calls that expire in a few weeks, shouldn’t the damage show up more gradually? Don’t we have to wait for expiration?”
No.
There are two separate timelines:
- Settlement
- When the cash and collateral formally settle (T+1, T+2, etc.)
- Valuation
- When the fund marks positions to market for NAV
NAV is based on valuation, not “time until expiration.”
So even if MSTY uses options with two or three weeks left:
- As soon as MSTR moves, the market prices of those options move
- Those prices are used to revalue the book today
- NAV changes today
You don’t wait until expiry to find out how much you gained or lost. The ETF’s internal P&L line updates every day, just like your own options positions would.
Why This Matters for OppenFolio
On OppenFolio, I divide things into:
- Shell – boring, stable stuff like TFLO, JAAA, VRP
- Core – covered-call ETFs on big diversified indexes
- Fuel – exotic single-name or leveraged plays like MSTY
MSTY very much lives in the fuel bar.
It’s not a sneaky replacement for the shell, no matter how many Treasury CUSIPs show up on the holdings screen. It behaves like what it is:
A synthetic income reactor wired directly to MicroStrategy and, indirectly, to Bitcoin.
That’s not inherently bad. It’s just a different class of risk.
If you size it small, accept that it can swing wildly, and remember that the Treasuries are collateral, not a cushion, it can make sense inside a broader machine.
If you look at the holdings page, think “Treasury fund with a little spice,” and size it like a bond fund, you’re misreading the schematic.
The Takeaway
When you see MSTY drop 10% in a day while the “premium/discount to NAV” barely moves, here’s what’s really happening:
- The NAV itself is falling because the options book tied to MSTR is taking a hit
- The Treasuries are collateral, not a separate safe bucket
- ETF plumbing is working as designed, keeping price ≈ NAV
- There is no real T-bill floor in the way your brain wants there to be
This is why I keep hammering on the idea that these funds are machines, not magic boxes.
- Read the schematic
- Understand what the engine actually touches
- Size them for what they are, not what the marketing language or holdings table makes them feel like
Once you see MSTY clearly, days like this stop being mysterious. They’re still volatile. They’re still stressful. But they’re no longer surprising.
And that’s the whole goal: less surprise, more choice.
You can always reach me at [email protected] if you want to go deeper.
Disclaimer: This post is for informational purposes only and reflects personal opinions, not financial advice. OppenFolio is not an investment advisory service. See site disclaimer for full details.