AMZY: Now is the right time to sell upside calls on Amazon (NYSEARCA:AMZY)

The worst sector so far in 2024 is consumer discretionary. The SPDR Consumer Discretionary ETF has only delivered a 5% total return year to date, dragged down by the generally weak performance of its two mega-stocks. Weights, Amazon (Amazon) and Tesla (TSL). Smaller retailer stocks have been doing better recently thanks to a strong retail sales report for July, but the world’s largest online retailer hasn’t fared particularly well.

However, I have a buy recommendation for the YieldMax AMZN Option Income Strategy ETF (NYSEARCA:AMZY). I argue that with AMZN’s implied volatility between 20% and 30% and shares struggling to climb above key resistance levels on the chart, owning AMZY to generate options income ahead of Amazon’s quarterly earnings report in two months is an optimal strategy.

Sector since the beginning of the year Yields: Consumer discretionary weakest SPX sector

Year-to-date returns: AMZY and AMZN outperform XLY but lag behind SPY

According to the IssuerAMZY is an actively managed fund that seeks to generate monthly income by selling/selling call options on AMZN. AMZY follows a strategy that seeks to generate attractive returns while maintaining a limited participation in AMZN’s price gains. The Fund’s strategy will limit its potential gains if the value of AMZN shares increases. The Fund’s strategy is subject to any potential losses if the value of AMZN shares decreases, which may not be offset by any income received by the Fund.

AMZY is a small ETF with only $170 million in assets under management (as of August 26, 2024). annual cost ratio is high at 1.01% and the ETFs Expected dividend yield is 39.8%. Of course, potential investors need to be aware that AMZY’s return comes almost entirely from the sale of option premiums, not from the cash flows generated by the underlying business. The trade-off for the ultra-high yield is capped on the upside by the fund’s sale of calls on Amazon stock.

AMZYs Share price dynamics is pretty bad right now, but that’s because AMZN continues to trade below the $200 mark and AMZY’s net asset value drops when it pays dividends. AMZN can a risky fundHowever, given the high historical standard deviations, AMZY is not highly liquid Given an average daily volume of more than 260,000 shares, YieldMax ETFs points out that AMZY’s median bid/ask spread over the past 30 days is high at 0.19%, so I think it makes sense to use limit orders during the trading day.

When I analyze an options income ETF, I look at implied volatility trends. The chart below from Fidelity shows that while implied volatility on AMZN is where it would normally be more than 30 days before an earnings report – between 20% and 30% – it is currently only slightly higher than normal. This tells me that there is a reasonable premium to selling call options.

AMZN: Historical and implied volatility trends

AMZY’s monthly payouts have historically ranged from $0.36 to $0.95.

Another factor currently in AMZY’s favor is that AMZN’s price trend is trending slightly downward until October. Averaged over the past 10 years, September is AMZN’s worst month of the year, so if the trend holds, it might be worth selling upside calls.

AMZN: Weak seasonal phase favors covered calls

Amazon’s event calendar is often full of movie releases, as we are seeing right now. But the company’s management team is also expected to speak at Goldman Sachs Communacopia and Technology Conference from September 9-12, which could lead to volatility ahead of the unconfirmed release of third-quarter 2024 results on Thursday, October 24.

Amazon Risk Calendar for Corporate Events

The technical view

Given the relative weakness in the consumer discretionary sector, mediocre to slightly favorable implied volatility trends, and tough seasonality ahead, AMZN’s technical chart illustrates the stock’s problems. With shares below key resistance between $190 and $200, I think it’s still a good time to sell calls on AMZN. Note in the chart below that the stock hit a new high above $200 in early July, but the bears soon prevailed. A large gap following the earnings release brought AMZN to key support in the mid-$100s, and shares have recently nearly closed that gap.

Also, take a look at the long-term moving average for the last 200 days. It is positively sloping, which is bullish for the stock, but the trend rate is slowing down as the bears try to gain control of the main trend. Moreover, the RSI momentum oscillator at the top of the chart shows a weakening trend, suggesting that the price may follow this trend. Finally, there is high volume relative to the price between $150 and $190, suggesting that this current range is here to stay for quite a while, making AMZY attractive to earn a high return without having to take on a large opportunity cost compared to AMZN.

AMZN: Bearish risk of false breakout, support $145-150

The conclusion

I have a buy recommendation on AMZY. I argue that the AMZN covered call ETF will outperform in the coming months amid slightly elevated AMZN implied volatility, with the seasonal view and the stock’s technicals pointing to further sideways price action.