High-Yield Nasdaq Play: TQQY's Options Strategy and the Risks Behind Its Monthly Dividend

Investors chasing income in a volatile market may find intrigue in GraniteShares YieldBOOST QQQ ETF (TQQY), which recently declared a monthly dividend of $0.1829, translating to an annualized yield of nearly 49.9% based on its net asset value (NAV) of $25.59 as of January 2025. But beneath its flashy distribution lies a complex strategy leveraging options on Nasdaq-100-linked ETFs—a blend of high risk and high reward. Here's what investors need to know.

The Income Engine: Selling Puts on Leveraged ETFs

TQQY's primary income source stems from selling out-of-the-money (OTM) put options on the ProShares UltraPro QQQ ETF (TQQQ), a leveraged fund that aims for 200% daily exposure to the Nasdaq-100 Index. By selling these puts, TQQY collects premiums upfront, which are distributed to shareholders monthly. For example, if TQQY sells a put option with a strike price below the current TQQQ price, it retains the premium even if the option expires unexercised.

This strategy works best in range-bound or upward-trending markets, as volatility and time decay favor option sellers. However, it carries significant risks. If TQQQ's price plummets below the strike price, TQQY could be obligated to buy the ETF at a loss, potentially eroding its NAV.

Risk Mitigation: Deep Out-of-the-Money Puts as a Safety Net

To offset downside exposure, TQQY buys deep out-of-the-money put options on the same leveraged ETFs. These protective puts act as a cushion: if the Nasdaq-100 suffers a sharp decline, the purchased puts gain value, mitigating losses from the sold puts. This dual approach aims to limit catastrophic drawdowns while maintaining income generation.

Cost Considerations: Fees and the Expense Ratio

While the monthly dividend is enticing, investors must account for management fees and expenses. TQQY charges a 0.99% management fee, contributing to an annual expense ratio of 1.07%—higher than many broad-market ETFs. These costs eat into returns, especially in stagnant or declining markets. Additionally, the fund's contractual expense cap of 1.15% through December 2025 offers some fee stability, though it may rise afterward.

The Double-Edged Sword of Leverage

TQQY's exposure to leveraged ETFs like TQQQ amplifies both gains and losses. For instance, if the Nasdaq-100 rises 1%, TQQQ (the underlying) could gain 2%, but TQQY's returns depend on its options strategy's effectiveness. Conversely, a 1% Nasdaq-100 drop might magnify losses due to the 2x leverage and the obligation to buy TQQQ at lower strike prices.

Compounding effects further complicate matters. Leveraged ETFs reset daily, meaning returns over multiple days aren't simply additive. Over time, this can erode capital even if the index ends flat or slightly higher—a phenomenon known as “volatility decay.”

Distribution Sustainability and Tax Implications

The $0.1829 monthly distribution (as of July 2025) is eye-catching, but its sustainability hinges on TQQY's ability to consistently collect premiums exceeding its costs. In volatile markets, premiums may shrink, and losses from exercised puts could reduce payouts. Worse, distributions might include return of capital, which reduces the investor's tax basis and could lead to capital gains taxes upon selling.

Who Should Consider TQQY?

• Income-Seeking Speculators: Investors willing to accept high volatility for monthly payouts, especially those betting on Nasdaq-100 stability.
• Active Traders: Short-term players who can monitor market conditions and adjust portfolios if the strategy falters.

Avoid TQQY if:
- You're risk-averse or prioritize capital preservation.
- You don't understand options, leverage, or the compounding risks of daily-reset ETFs.

Final Take: A High-Octane Income Play with Caveats

TQQY offers a novel way to tap into Nasdaq-100 income through options, but it's not a buy-and-forget investment. Its 49.9% annualized yield is unsustainable without sustained market stability and favorable volatility conditions. Investors must weigh the allure of monthly payouts against the risks of leverage, fees, and potential NAV erosion.

For the right investor—one comfortable with volatility and skilled in market timing—TQQY could be a niche tool for income generation. For others, its complexity and risks make it a gamble best left to professionals.

Disclaimer: Past performance does not guarantee future results. TQQY's strategy involves significant risks, including leverage, derivatives exposure, and market volatility. Consult a financial advisor before investing.