Recently, $SUPER MICRO COMPUTER INC(SMCI)$ has come under scrutiny by Hindenburg Research, a well-known short-seller. Hindenburg claims the server manufacturer has “accounting manipulation” issues.
The report alleges Supermicro has serious accounting problems, undisclosed related-party transactions, sanctions and export control failures, and client issues. Hindenburg’s investigation involved interviews with former employees and legal records, suggesting the company has “obvious accounting issues” and has been struggling with accountability since 2018.
Back then, Supermicro was temporarily delisted by $NASDAQ(.IXIC)$ for failing to file essential financial reports. The SEC accused the company of widespread accounting violations, leading to inflated sales, earnings, and margins. Hindenburg points out that Supermicro rehired executives tied to previous scandals just three months after settling with the SEC for $17.5 million.
The report also claims that soon after the SEC settlement, Supermicro resumed “improper revenue recognition,” “recognizing incomplete sales,” and “bypassing internal accounting controls.” Former employees reported that the company’s internal culture hadn’t improved since the SEC charges.
Additionally, Supermicro faces challenges in maintaining key partnerships. It openly supported Dell, a competitor, in May 2024. Important clients like CoreWeave and Tesla have shifted their business to Dell, impacting Supermicro’s market position.
After a prolonged rise, some investors are looking for shorting opportunities. For a company like Supermicro, a risk-limited shorting strategy using options is wise to avoid the risk of a margin call. Consider a put ratio spread to hedge against potential losses.
What is a Ratio Spread?
Ratio spreads address a key limitation of traditional spreads, which often have capped profits in both directions. This strategy can be a game-changer.
A ratio spread is an options strategy where traders buy one or more at-the-money (ATM) or out-of-the-money (OTM) options, and sell at least two or more of the same type of OTM options. If the trader is bearish, they'll use a put ratio spread. If bullish, they'll use a call ratio spread. The typical ratio is buying one call option and selling two puts, but this can be adjusted based on the trader's outlook.
The put ratio spread also known as a defensive bear spread, involves selling one put option with a higher strike price and buying two put options with the same expiration date but lower strike prices, in a 2:1 ratio. This strategy allows investors to potentially profit significantly if the stock price drops sharply. However, it can also yield some profit if the stock price rises quickly. This approach is ideal for investors with a bearish outlook on the market.
Example on $SUPER MICRO COMPUTER INC(SMCI)$ Ratio Spread
Let's consider Super Micro Computer (SMCI), which closed at $443.49 on August 28. If you're bearish on SMCI and believe the stock might drop significantly in the near term, a ratio spread can help manage risk.
Step 1: Sell one ATM put option with a strike price of $440, currently trading at $44.38. By selling this put, you'll collect $4,438 in premium.
Step 2: Buy three put options with a strike price of $350, currently priced at $13.60 each. The total cost for these puts is $4,080.
Ratio Put Spread: Purpose, Strategy, Risk, and Advantage
The investor paid $4,080 to buy three put options and received $4,438 for selling one in-the-money put option. Therefore, the net premium received from this strategy is $358.
If $SUPER MICRO COMPUTER INC(SMCI)$ 's stock drops to $1 at expiration, the investor would earn $349 × 100 × 3 = $104,700 from the three purchased puts. However, the sold $440 strike put would result in a loss of (440 - 1) × 100 = $43,900.
In this extreme scenario, the net profit from the puts would be $104,700 minus $43,900, plus the initial premium of $358, totaling $61,158.
This example shows that the ratio spread strategy limits the maximum loss from a short position, while allowing for substantial gains if the market moves as expected. Even if the prediction is wrong, the losses are relatively small. Additionally, the strategy’s effectiveness can be adjusted by varying the number of puts bought and sold.
The put ratio spread is suitable for markets with significant swings. Compared to double buyer strategy, it has slower time decay. And compared to single buyer strategy, it still offers potential gains even if the market moves against you. It’s a valuable addition to any investment portfolio.
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