Covered Calls in Mega-Cap AI Stocks — Evening Brief – 06.05.24
Artificial intelligence (AI) has an enormous influence on a wide range of industries, including manufacturing, medical testing, aerospace, defense, finance, banking, and insurance, and many others.
Even the boring utilities sector, which has been held down by higher-for-longer interest rates, is trading substantially higher on the prospect of quickly expanding demand for water and electricity to power the massive data centers springing up around the world.
Today, the AI industry is valued at an estimated $196 billion, having doubled since 2021 from just over $95 billion, and is expected to expand tenfold by 2030, reaching roughly $2 trillion.
Spending on AI-centric systems is expected to exceed $300 billion by 2026, with a 27% compound annual growth rate (CAGR) from 2022 to 2026. Between 2022 and 2030, the market for AI is predicted to expand at a 33% CAGR. There appears to be a path for exceptional growth in AI over the next six years.
Investors can participate in the AI craze through a variety of channels, including companies that provide infrastructure to support enterprise data, workloads across multiple domains, deployment of tools to install machine learning (ML) models used in open-source frameworks and databases, and manufacturers of advanced memory and storage systems.
Investing in AI isn’t limited to growth investors. Income investors can potentially profit from the trend by implementing a proactive covered-call option strategy. Based on the major businesses with sufficient funds to apply AI at scale, investors can select many stocks for growth and income.
Yields on most asset classes do not match the rise in inflation. The alternative for investors seeking income from AI-heavy companies is that option premiums on the leading AI stocks are high enough that selling call options well out of the money may create an income stream while mitigating the potential risk of the underlying holdings being called away.
By generating income from writing covered calls, it makes sense that the quickly improving fundamentals for capital investments into those AI-related companies will likely witness stronger sales/earnings growth and higher volatility. Option premiums rise when stocks experience higher volatility, and as we saw in 2023 and have seen in 2024 so far, the AI sector is indeed unpredictable.