Soaring 29%! How to Ride the Surge in SMCI Using Options?

Super Micro Computer, Inc. (SMCI) surged nearly 29% after the company announced it would replace its Chief Financial Officer (CFO), David Weigand.

On Monday, December 2 (ET), SMCI issued a statement saying it is actively seeking a new CFO, Chief Compliance Officer (CCO), and General Counsel. Kenneth Cheung, previously Vice President of Finance, will now serve as the company's new Chief Accounting Officer.

Meanwhile, following an external review by the company’s Special Committee of the Board and outside legal counsel, no misconduct was found. Specifically, the investigation by the Independent Special Committee concluded that the resignation of Ernst & Young (EY) as SMCI's auditor, and the claims mentioned in their resignation letter, were not substantiated.

On November 5, SMCI had previously disclosed that the Special Committee’s preliminary findings revealed no evidence of fraud or misconduct by management or the Board of Directors. These findings were confirmed in the final investigation, and the company is now disclosing details of the review and the recommendations made by the Special Committee.

The external review was conducted by a Special Committee of the Board with over 50 attorneys from the law firm Cooley LLP and a team from Secretariat Advisors. The Board has fully adopted the Special Committee’s recommendations, and the company will not revise its previously issued financial forecasts.

For SMCI, 2024 has been a turbulent year. The company failed to file its annual financial report by August, and in October, its auditor, EY, resigned, citing concerns about governance and transparency. Additionally, SMCI is under investigation by the U.S. Department of Justice and was the subject of a short-seller report from Hindenburg Research.

How to Ride SMCI's Surge Using Options?

A bull put spread (bullish credit spread) strategy could be a suitable approach for profiting from SMCI's upward momentum while limiting downside risk.

Bull Put Spread Strategy

This strategy involves selling a put option at a higher strike price while simultaneously buying a put option with the same expiration but a lower strike price for the same underlying stock. Since the premium collected from selling the higher strike put is greater than the premium paid for the lower strike put, the investor receives a net credit upfront.

When to Use:

1. Low-Risk Income: Ideal when an investor expects limited upside but wants to generate income with lower risk than selling a naked put.

2. Stock Acquisition at Lower Cost: A good way to potentially buy stock at an effective price lower than the market price.

3. Profit in Volatile Markets: Allows investors to earn limited profits in choppy markets while capping the downside risk.

SMCI Bull Put Spread Example:

SMCI is trading at $42. An options trader expects the price to rise to $55 within a month but wants to hedge against potential downside risks.

• Sell a $55 strike price put expiring January 3 at $15.00, collecting $1500.

  

  Buy a $42 strike price put expiring January 3 at $5.75, paying $575.

  

Profit and Loss Analysis:

1. Net Premium Income:
   $1500 (collected) - $575 (paid) = $925

2. Maximum Profit:
   Occurs when SMCI trades above $55 at expiration. Both options expire worthless, and the trader keeps the net premium income.
   Maximum Profit = $925

3. Maximum Loss:
   Occurs when SMCI trades below $42 at expiration. The trader will incur the maximum loss due to the difference in strike prices, partially offset by the net premium income:
   Maximum Loss = ($55 - $42) × 100 - $925 = $1300 - $925 = $375

4. Breakeven Point:
   SMCI’s price at which the net profit is zero:
   $55 - $9.25 = $45.75

Summary:

1. Maximum Profit: $925 (if SMCI ≥ $55)

2. Maximum Loss: $375 (if SMCI ≤ $42)

3. Breakeven Point: $45.75

4. Strategy Features: A suitable approach when anticipating limited upward movement for SMCI, providing defined risk and a capped return.

Would you like a graphical representation of this strategy?