SMCI Volatility Soars: Is a Shorting Opportunity Emerging?

On November 18, Super Micro Computer (SMCI) announced that it has hired BDO, the world's fifth-largest accounting firm, as its independent auditor and submitted a compliance plan to Nasdaq to meet listing requirements. This move aligns with Nasdaq's regulatory expectations for listed companies and aims to bolster investor confidence in SMCI's future compliance.

SMCI expects to file its annual report for the period ending June 30 and its quarterly report for the period ending September 30. During Nasdaq's "review of the compliance plan," the company will remain listed on the exchange.

In a statement, SMCI CEO Charles Liang emphasized:
"This is a critical step in updating our financial statements and demonstrates our commitment to operating with rigor and urgency."

Back in August, SMCI failed to file its FY2024 annual report on time. Subsequently, its previous auditor, Ernst & Young (EY), resigned in October. Around the same time, prominent short-seller Hindenburg Research disclosed a short position in SMCI, citing "new evidence of accounting irregularities" in its report. The Wall Street Journal later reported that the U.S. Department of Justice had launched a preliminary investigation into the company.

From early 2022 to March 2024, SMCI's stock price skyrocketed over 20-fold. However, compliance issues caused a dramatic sell-off, with the stock plunging over 76% in the past six months.

Following the news, SMCI’s stock surged more than 40% in after-hours trading on Monday, reflecting some market confidence in the company’s latest compliance measures. This development may buy SMCI more time to resolve regulatory challenges and restore investor trust.

SMCI's High Volatility Creates Investment Opportunities

SMCI currently offers investors a potential trading opportunity. Its implied volatility (IV) stands at 184.8, placing it in the 99th percentile. This means IV was lower 99% of the time in the past year. Furthermore, the current IV (184.8) is 31.3% above its 20-day moving average (140.7), indicating that implied volatility is trending upward.

How to Short High Volatility?

In options trading, strategies for shorting volatility typically involve selling options to capitalize on time decay, as options lose value when volatility decreases. Below are several common strategies:

1. Sell Straddles or Strangles

   • Straddles: Sell both a call and a put option with the same strike price. This strategy is effective when the underlying price is expected to remain stable.

   • Strangles: Sell a call and a put option with different strike prices, suitable for low-volatility scenarios with uncertain price directions.

   • Key Consideration: Both strategies involve naked selling, which carries high risk. Significant price swings or rising volatility can lead to substantial losses.

2. Iron Condor

   • Sell out-of-the-money call and put options while buying further out-of-the-money options as protection.

   • Best used when the underlying price is expected to remain range-bound with low volatility.

3. Iron Butterfly

   • Similar to an iron condor but centered around a single strike price (like a straddle) for the sold options, with protective options further out.

   • This strategy also profits in low-volatility conditions but has more limited profit and risk compared to naked short straddles.

4. Calendar Spread

   • Sell short-term options while buying longer-term options at the same strike price.

   • As volatility decreases, the short-term options decay faster than the long-term options, generating a profit.

5. Short Single-Leg Options

   • Sell either a call or put option when expecting the underlying to remain stable or move minimally.

   • This straightforward strategy carries higher risk and is suitable for confident directional bets.

6. Ratio Spreads

   • Sell more options contracts than you buy, often used when anticipating a decline in volatility.

   • For instance, selling two options while buying one of the same type can amplify profits if volatility drops, but the risk of loss increases if volatility rises.

Risk Management is Critical

Shorting volatility requires careful risk management, as unexpected market swings or rising volatility can result in significant losses. These strategies are best suited for markets where volatility is clearly expected to decrease.