Here's Why This Tesla-Focused ETF Crashed Today

Shares in the YieldMax TSLA Option Income Strategy ETF (NYSEMKT: TSLY) declined by 14.2% at 11:30 am today. The decline correlated with the fall in (NASDAQ: TSLA) shares following the release of its second-quarter earnings report. Here's the lowdown.

As the name suggests, the ETF uses option strategies to deliver returns to investors based on the performance of Tesla's stock. It gains long exposure to the stock by buying call options and selling put options – both positions reward bullishness. At the same time, the ETF's managers also sell call options, which "generally have a strike price that is approximately 0%-15% above the then-current share price of the Underlying Security." This is a bearish strategy that rewards the ETF as long as the price of the stock doesn't rise significantly.

The combination of strategies gives the ETF significant income generation in long periods of relatively low volatility for Tesla stock, particularly when Tesla stock is gently rising, but can underperform Tesla stock in sharply rising periods due to selling call options.

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Source Fool.com