I have run home-brewed BIO D in my 6.5L for several years now. I did have an issue with the optical sensor a couple of years ago and had to replace it. Whether it was due to the BioD or just time for service, I can't tell for sure.
I don't have any experience with the ATF, but I would want to make sure it was filtered really well. Plus, you'll have problems with cold starts and such if you don't do an aux. tank setup.
Casey
1995 K1500 Tahoe 2 door, 6.5LTD, 4L80E, NP241, 3.42's, 285/75R16 BFG K02's; 1997 506 block; Kennedy OPS harness, gauges, Quick Heat plugs, and TD-Max chip; Dtech FSD on FSD Cooler; vacuum pump deleted, HX35 turbo, Turbo Master, 3.5" Kennedy exhaust, F code intake; dual t/stats, HO water pump, Champion radiator; Racor fuel filter