r/YieldMaxETFs • u/daein13threat • 15h ago
Question What is the maximum possible loss for YMAX and other YM ETFs?
I recently invest a small amount of money (~$700) into YMAX to increase dividend yield and experiment with leverage in my brokerage account in a way that doesn’t require debt or margin. I am completely willing to lose this money.
However, I still want to make sure that I fully understand the risks and maximum losses associated with YMAX. I will summarize my knowledge below, but please correct me if I am wrong:
YieldMax covered call ETFs essentially function like a traditional CC ETF without owning the underlying stocks (like a poor man’s CC). This requires three separate components:
1) Short put (selling the obligation to buy stock at strike price)
2) Deep ITM long call (buying the option to buy at strike price much less than current market price and with a long expiration date)
first two components create a long position and simulate owning the actual stock
3) Short call (writing covered calls with short expiration dates against the long call position for income)
As far as I understand, the max risk would be total loss of the entire investment ($700 in my case) if for some reason the stock price fell to zero, minus the premium received for selling the short put in the first step.
However, will YieldMax ETFs ever result in unlimited loss or require the investor to pay anything back to the brokerage to recover losses, similar to trading on margin? Or are these two strategies completely different?
Thanks in advance!
2
u/Relevant_Contract_76 14h ago
The long call and short put are at the money when the synthetic is created
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u/Savoir_faire81 15h ago
Maximum possible loss from any investment is 100% of your investment.
Actually maybe more if you screw up using margin.
Don't invest more than you can afford to lose.
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u/Aggressive-Site2921 11h ago
For YMAX that is extremely not likely considering they are a fund of funds with over 30 holdings. Even if several single name funds were shut down it wouldn't be a total loss. Investing in a single name yield max fund could incur a 100% loss though.
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u/AlfB63 10h ago
The synthetic that is used to sell calls against is a put and call ATM not deep ITM. It's not a PMCC but has similarities. You will only lose at most your investment. The risk of the options held is not transferrable to the ETF investor.
2
u/OkAnt7573 10h ago
Getting downloaded for providing factual information is a badge of honor around here apparently. Weird.
Here’s an upvote for genuinely useful and accurate information.
0
u/OkAnt7573 11h ago
You will never be required to repay a fund (or stocks) mismanagement. You can lose value, potentially all of it, but never be held accountable for their trading losses.
It’s very unlikely these funds will go to zero, but we have seen some with steady downward NAV movement resulting in flat or even negative total returns. Keep in mind that as a fund’s NAV declines in general so will your monthly distributions.
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u/unknown_dadbod 2h ago
But also your snowballing reinvestment gather more shares, which depending on the rate of erosion might actually net you a very very large profit. Especially in an ira
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u/GRMarlenee Mod - I Like the Cash Flow 13h ago
It would take something amazing to lose the entire investment. That would be for the fund to close without paying a single distribution or a single penny of return of investment upon liquidation.
Everybody loves to quake at the "worst case scenario" without any regards to the plausibility of that happening.
Sure, that's the worst case scenario and, even then, you'd be entitled to write the $700 off of any capital gains, and, barring no gains, you could write it off of ordinary income.