AMDY: Time To Buy With Upturned Underlying And Elevated Volatility

Introduction

I mentioned my hesitation to own YieldMax Income Option ETFs for fast-growth companies on top of owning the underlying stocks in my previous article. Another key reason is that the individual ETFs such as YieldMax AMD Option Income Strategy ETF (NYSEARCA:AMDY) have high volatility in the stock prices and the stock trends are very dynamic. The timing of creating or adding positions may matter a lot to the payment amount of the monthly distribution. The holding capital could also be largely affected because of the base price. AMD’s stock price is in an uptrend and the volatility has increased to an elevated level. It is a good time to accumulate AMDY shares for super high yield (51.62%) and a good total return in the near term. I have a buy rating on AMDY and recommend it to income investors who also want to have certain exposure to the promised land of AI Chip Rush.

AMDY ETF Highlight

AMDY is an actively managed ETF for generating super high monthly income off of a single stock, AMD. The following is the official description:

The YieldMax™ AMD Option Income Strategy ETF (AMDY) is an actively managed fund that seeks to generate monthly income by selling/writing call options on AMD. AMDY pursues a strategy that aims to harvest compelling yields, while retaining capped participation in the price gains of AMD.

The ETF is able to create an income stream with a high distribution (currently estimated at around 51%) by writing and selling covered calls off the synthetic AMD positions. The following are the top holdings:

The July 19 $165 Calls are the bulk of the income, while the high-quality short term fixed income securities are the collateral. Keep in mind that the ETF’s yield is a variable that depends on call premiums sold in the market. With AMD’s volatility level, the call premiums should be highly sustainable for the fund to produce a double-digit yield.

AMDY has total assets of $120.39M. It is a reason size for this new ETF incepted on September 18, 2023. The daily trading volumes are high recently, exceeding 250K. Expense Ratio of 0.99% is a bit high for an ETF, but it is the same as the other YieldMax ETFs.

The following shows AMDY’s historical record about price NAV behavior:

AMDY will benefit from AI Chip Rush

The AI Chip market is growing fast. It is where the real AI growth is currently observed. The powerful AI chips are in great demand to build AI infrastructure, such as AI computers and AI data centers. AMD is viewed as the #2 chip manufacturer. It is also recognized by investors.com in a report, which states:

Nvidia currently dominates the market for graphics processing units, or GPUs, used for running computationally intensive AI workloads. But AMD has proven to be an able fast-follower.

AMD holds a strong position in the AI Chip Rush, working with big names like Microsoft by powering Microsoft’s Azure OpenAI Service Workloads with AMD AI chips. The AI chip market is estimated to reach $400 billion in 2027 with an annual growth rate of about 20%. The big AI data centers and cloud players often require multi-vendor solutions, so AMD’s latest AI chip products will play important roles in the AI infrastructure build-up. I highly expect AMD to return to fast growing mode in the foreseeable future.

As mentioned in my write-up on TDV, fast-growing technology companies don’t often pay dividends, or just offer the nominal yield and will usually be highly unstable. The main reason is that reinvesting in R&D is the key driver for the new growth and competitiveness of companies in fast-paced technology areas. Dividend should not be the focus for them. This is why YieldMax ETFs seem to gain an increasing popularity among income investors. These income ETFs often offer the exposures to the latest and the greatest technologies and fast-growing companies in the world while producing the ultra high yields for the monthly distribution that income seekers love to have. AMDY deserves a place in one’s income portfolio for the red hot AI chip market.

Timing looks promising for adding AMDY positions

For covered calls, the income comes from the option premium, which is largely driven by the volatility of the underlying stock. It is expected to sell high premiums for the call options if the stock price is highly volatile. On the other hand, the volatility causes the stock price to change in a wide range, causing risk in preserving the holding capital. The downtrend will cause the capital base to decrease, which reduces the dividend base as well. The timing matters to the distribution quite a bit. There will be good price levels for the patient investors to get great deals. AMDY is in one of these entry points.

I typically use a “volatility model” to spot great candidates for option income ETFs. The following is a summary for AMDY based on the current dataset:

• “Volatility” – It is nice to have IV of the underlying options to be over 50%. High yields can be generated from call options with high IVs. As shown below with the August Call Options, AMD’s historical volatility is 38.52%, which is under 50%. But the call options have IVs over 50%, which are acceptable for the option premiums.
• “Liquidity” – Represented by the option volumes, the high volume shows the high option interests, and, produces a good spread of bid and ask prices. AMD options often trade at great volumes (10s of thousands). Spread of bid and ask is very close.
• “Popularity” – The trading volume of the underlying stock AMD is the key measurement. AMD trades with a volume over 60 million on a daily basis. It is a heavily traded stock in the market.

A quick snapshot on the underlying AMD will reveal that the stock is turning into a positive uptrend, as shown below. I believe that AMD will continue its current bullish movement before its earning date estimated on August 1.

It is also very interesting to note that the volatility is rising to an elevated level with the 30-Day IV Rank reaching 78%, as shown below:

I view this a good time to buy AMDY shares. The high volatility will likely produce higher monthly income due to high call premiums that can be sold. The uptrend of the underlying stock price will help to minimize the price erosion for AMDY itself thanks to the strong AI Chip Rush tailwind.

Risks & Caveats

In the AI Chip Rush, AMD is a distant second at the moment. The following is a growth comparison between NVIDIA and AMD. AMD is significantly lagging behind the growth curve with only an 11.46% forwarding estimate of the revenue growth, which is only 1/7 of NVIDIA’s growth estimate. AMD could be out of the AI Chip Rush and become irrelevant if the company fails to execute its AI chip strategy.

The current price uptrend of AMD could be reversed quickly if AMD can’t generate enough excitement in the next earning report. AMDY could work just fine for sideway changes or range bouncing from the underlying stock. It may cause a big disappointment to investors who also seek substantial capital gains from AMD in the fast growth AI market.

The ETF has a single underlying stock and hence is a non-diversified portfolio. Interested investors should read YieldMax ETF Prospectus about the risks before they invest in AMDY. In addition, I recommend that investors place a weight limit on the AMDY holding in the portfolio. I would also restrict the total weight of the holdings with similar AI exposures.

Conclusion

AMDY provides income investors exposure to the huge and fast-growing AI Chip market. It offers an ultra high yield though its monthly dividend distribution that is highly sustainable due to the high volatility and option liquidity. It is a good time to buy and keep the AMDY positions to collect the huge income without worrying about short-term changes. I rate AMDY a buy.