SMCI Review "Clears," but Is It Still a Good Shorting Opportunity?

Although a special independent committee appointed by Super Micro Computer's (SMCI) board found no misconduct, JPMorgan remains cautious. The investment firm stated it would maintain a "neutral" stance on SMCI until compliance issues are better understood. Analyst Samik Chatterjee upheld the "underweight" rating on the stock.

Chatterjee noted, "Key issues investors should focus on include whether the new independent auditor, BDO, accepts the findings of the special committee or opts to conduct its own review, and whether Nasdaq supports SMCI's request for an extension to regain compliance with listing requirements. SMCI has outlined plans to file its 10-K and 10-Q reports within the compliance deadline."

On Monday, SMCI stated that the independent committee found no evidence of misconduct by the board or audit committee. The company also reported that no financial restatements are expected based on the findings. However, the committee recommended hiring a new CFO.

SMCI announced it would begin the search for a successor immediately, with current CFO David Weigand staying until a replacement is appointed. The company emphasized that the committee's thorough investigation contradicted conclusions raised during the previous auditor's resignation. This announcement boosted investor confidence, driving a nearly 29% surge in SMCI's stock on Monday, followed by a pre-market gain of over 7% on Tuesday.

Amid growing demand for SMCI's AI-optimized servers, the company remains a key player in the AI boom. However, it faces significant challenges, including delayed financial filings and auditor changes. In November, the stock experienced swings of more than 10% on 10 out of 19 trading days.

Previously, Ernst & Young resigned as SMCI’s auditor. While the company has stated its intent to submit financial reports on time and avoided revising past filings, the risk of Nasdaq delisting looms due to delays in filing its annual and most recent quarterly reports.

Bear Call Spread: A Short Strategy for SMCI

For investors considering shorting SMCI, a bear call spread could be a viable strategy.

What is a Bear Spread?

Bear spreads are options strategies used when traders anticipate a decline in the underlying asset's price. They provide a defined-risk way to profit from expected bearish moves. A bear call spread involves selling a call option at a lower strike price and buying another call option at a higher strike price, both with the same expiration date.

The main advantage of this strategy is its risk reduction compared to outright short selling, as losses are capped by the purchased call. For more flexibility, variations like calendar spreads can be considered.

Example of a Bear Call Spread on SMCI

Current Price: SMCI’s pre-market price is approximately $41.8. Suppose an investor expects the price to fall to $20 within a month. Here's how the bear call spread could be constructed:

Step 1: Sell a Call Option

• Strike Price: $20

• Expiration: January 3

• Premium Received: $2,140

  

Step 2: Buy a Call Option

• Strike Price: $42

• Expiration: January 3

• Premium Paid: $530

Net Credit (Profit Potential): $2,140 − $530 = $1,610

Profit and Loss Analysis

1. Maximum Profit:

   • Achieved if the stock price at expiration is $20 or lower.

   • Both call options expire worthless, retaining the net credit.

   • Max Profit = $1,610

2. Maximum Loss:

   • Occurs if the stock price at expiration is $42 or higher.

   • The spread between the strike prices triggers the maximum liability.

   • Max Loss = ($42 − $20) × 100 − $1,610 = $390

3. Break-Even Point:

   • Stock price where the net profit is zero.

   • Break-Even = $20 + ($1,610 ÷ 100) = $36.10

Strategy Overview

• Ideal Scenario: Stock price remains below $20.

• Risk: Limited to $390.

• Reward-to-Risk Ratio: $1,610 ÷ $390 ≈ 4.13, offering a high reward relative to risk.

For bearish investors, this strategy limits downside while maintaining a solid risk-to-reward profile.