Strategy Inc Has Unusual Call Options Volume Today - Popular Covered Call Play

Strategy Inc (MSTR) stock has been flat for almost 2 months despite Bitcoin's gyrations. Today's huge volume of out-of-the-money MSTR call options is unusual. Investors may be taking advantage of high premiums in a covered call play.

MSTR is at $127.00 in midday trading, which is close to where it was on Feb. 4 ($129.09). MSTR is known as a Bitcoin treasury stock, given its huge holdings of Bitcoin. Bitcoin is not moving much today. So, why are investors piling into MSTR call options today? 

This can be seen in Barchart's Unusual Stock Options Activity Report. It shows that over 5,400 call options contracts have traded for expiration on April 17, 18 days from now.

The call option strike price is $142.00, or +11.8% over today's price - i.e., “out-of-the-money.” That implies that investors buying these calls may believe MSTR will rise almost 12% in the next 18 days.

On the other hand, the midpoint premium for these calls is $3.20, or $320 for an investor who buys 100 shares at $127.00 for $12,7000. That provides the following yield to a short-seller:

  $320/$12,700 = 0.0252 = 2.52%

In other words, an investor can make a 2.52% income yield immediately by offering to sell their shares at $142.00 on or before April 17. The total potential return is:

  11.8% capital gain + 2.52% income received = 14.32% total potential return

That makes me believe that the initiators of these trades are likely investors who are selling covered calls, rather than buyers of the calls.

In other words, they believe that MSTR may stay below $142.00 for the next 18 days. They are taking advantage of this huge yield and potential total return opportunity.

So, should investors copy this play?

Downside Risks

One risk with this kind of play is that MSTR rises over $142.00, or 11.8%, on or before April 17. That could result in missed upside. But is that really a concern?

Most investors will be happy to collect 2.52% for 18 days. After all, if this can be repeated each month for three months, the total potential income is:

  90 days/18 days = 5.0

  5 x 2.52% = 12.6% total income yield

In other words, if this play can be repeated 5 times during the next three months, an investor could potentially make 12.6%. Moreover, if the stock rises to the out-of-the-money strike price, the potential capital gain will increase that return.

However, the delta ratio is just 0.282, implying just a 28% chance that MSTR will rise to $142.00 in the next 18 days. That might be a low enough probability to induce some investors to make this trade.

The bottom line is that shorting covered MSTR calls for April 17 at the $142.00 strike price might be an attractive income play. Some investors who are willing to take on some risk should consider this play, especially if they are already MSTR shareholders.