MSOX: Maximum Leverage on Cannabis, How to Use It (NYSEARCA:MSOX)

If there's one area of ​​the market that doesn't live up to the hype, it's the cannabis industry. Legalization has been on the agenda for a long time and has not yet happened happened. The cops clung to every news story as if it was “the right one.” Like this one.

The Senate Judiciary Subcommittee on Crime and Terrorism, chaired by Senator Cory Booker (D-NJ), is scheduled to meet for discussion on Tuesday.

The meeting, titled “Federal Decriminalization of Cannabis: Necessary Steps to Address Past Harm,” is expected to address a long-awaited measure that Senate Democrats planned to introduce this week to legalize marijuana at the federal level, Marijuana Moment reported.

Source: Seeking Alpha.

Got excited? You shouldn't. It is from June 2022.

In the Meanwhile, most businesses continue to waste cash as they contend with extremely hostile conditions for using expenses on their tax returns. Of course, we expect this to happen, and the same applies to the sponsors of our protagonist ETF for the day. Advisorshares Msos 2x Daily ETF (NYSEARCA:MSOX).

The deposit

According to the website, the fund is designed to give you 100% leverage on the AdvisorShares Pure US Cannabis ETF.

The AdvisorShares MSOS 2x Daily ETF is aimed at sophisticated investors seeking greater exposure to the US cannabis sector. As an actively managed, leveraged ETF, MSOX seeks to generate increased cannabis exposure by typically investing in swap agreements for the AdvisorShares Pure US Cannabis ETF (MSOS). MSOS is designed to provide access to U.S. companies across a variety of industries that are expected to benefit from the increasing legalization of medical and recreational cannabis.

Source: MSOX.

For those unfamiliar, the Cliff Notes release states that AdvisorShares Pure US Cannabis ETF (MSOS) is the true US cannabis offering. The lack of legalization at the federal level means that traditional ETFs can only do this through companies that are actually on the edge of this potential boom. MSOS, on the other hand, “invests” in these companies via the unique total return swap.

Currently, the ETF is unable to invest directly in some U.S. cannabis companies due to federal and custodial restrictions. We expect this to change over time. Until then, the ETF receives exposure to these companies through a total return swap agreement with a broker (the broker is the “counterparty” to the swap agreement).

A total return swap is a commonly used derivative contract between two parties that exchange cash for the return on a financial asset. In our case, we are exchanging cash for the performance of certain publicly traded US cannabis companies.

Source: MSOS.

MSOS holds the following companies via total return swaps.

Anyone who follows this space knows that Green Thumb Industries Inc. (OTCQX:GTBIF), Curaleaf Holdings, Inc. (OTCPK:CURLF), Trulieve Cannabis Corporation (OTCQX:TCNNF), and Verano Holdings Corp. (OTCQX:VRNOF) the “go-to” names for exposure. That's good because MSOS owns 76.2% of these four names alone. Of course you won't get these 4. You get these 4 with the additional leverage of 100%.

Risks

You're probably here because you've seen MSOX's performance year to date.

73.48% vs 44.37% seems legit for a 2X fund. What's not to love? Well, let's back up a bit. With a time span of 6 months, you're basically neck and neck.

Why does a 2X fund perform so poorly? We'll get back to this in a moment, but first let's make the question even more interesting by looking at a different time frame. We start here on January 1st, 2023.

MSOS is up about 42% during this period, while MSOX is barely able to maintain breakeven.

This is essentially the feature (not the bug) of 2X funds. They tend to perform very differently over a period of time other than a day than their name suggests. Constant realignment is the reason for this drift. The more volatile the underlying asset, the higher this drift is. So Treasury Bond 2X funds would actually perform as you would expect. For the most part, the Direxion Daily Gold Miners Index Bull 2X Shares ETF (NUGT), which backs gold mining stocks, won't do anywhere near what you'd expect over medium time periods.

MSOS is the most volatile underlying asset you can find, so MSOX will move with insane volatility.

Outlook and how to play it

So close to the election, the chances of legalization are extremely slim. Of course, that won't stop rumors and cracks and more rumors and crashes. For longer-term positions, MSOS makes more sense. There is no decay as things actually resolve by mid-2026 compared to next week. Even there, we classify this as an extremely risky product and would allocate 1% or less to it.

For those who want to play MSOX, there is a way that actually works. This allows you to use the extremely high implied volatilities to your advantage. Buying the stocks and selling short-term calls at the money offers a very good return profile, even if the stocks falter. For example, if the ETF is trading near $6.12, you can sell the $6.00 covered calls for August 2024 for about $2.50.

Your annual return on invested cash increases to 187.99% assuming MSOX stays just above $6.00. If the value falls below $6.00 by the time the option expires, your cost basis is now $3.62.

So when you buy a lottery ticket like MSOX, it's best to also sell your own version of the lottery ticket to someone else. We personally won't trade it, but with all 2X and 3X funds, selling volatility is the best counterweight to trading on the long side.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly it isn't. Investors are expected to conduct their own due diligence and consult a professional who understands their objectives and limitations.

Editor's Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please note the risks associated with these stocks.