Without question, Super Micro Computer has shown extra large price swings in recent days. Here's a way to profit from this volatility: Try a double butterfly setup in SMCI stock.
Speaking of volatility, last week's column commented on the market's recent outsized moves. I continue to watch the VVIX (a measure of volatility in the Cboe Market Volatility Index). It has been fading somewhat. This suggests we might have some grinding markets ahead.
So, looking at ideas of positioning for outsized moves, I look at stocks that have high implied volatility and are likely to make fair-sized moves.
Let's look at both sides of either the continuation of the savage downside move, or a recovery bounce, in SMCI stock. Indeed, its high level of implied volatility gives us a sweet spot to trade.
As a reminder, we never know the direction of the moves ahead. But we can estimate the magnitude of the move using the ATR (average true range) as measured on the weekly chart.
We also study the implied moves that the market makers have priced into the move.
SMCI Stock Today: The Setup
Let's position a long call butterfly in such a way that the "long wing" of the trade gives us a likelihood of returns. We use the short wing to finance part of the trade.
In a long call butterfly, both the long call spread (a bullish position) and the short call spread (a bearish position) share the middle strike:
- Buy to open one SMCI Oct. 18-expiration 590 call
- Sell to open two SMCI Oct. 18 600 calls
- Buy to open one SMCI Oct. 18 610 call
The call butterfly above will cost approximately $0.25 per share per set of contracts, based on recent trading, or $25 per set of calls. It serves as the maximum loss for this position. That also makes the max profit $9.75 before commissions, or $975 per 100-share block. Total profits will begin to erode if SMCI stock stays above 600.
The Put Spread
For the long put butterfly, we position it so the "long wing" of the trade gives us a likelihood of returns. The short wing finances part of the trade. And, the long put butterfly — this is a long put spread (bearish position) — and short put spread (bullish position) share the middle strike.
Buy to open one SMCI Oct. 18 310 put
Sell to open two SMCI Oct. 18 300 puts
Buy to open one SMCI Oct. 18 290 put
The put butterfly above will cost $0.25, or $25. A maximum loss for this position in SMCI stock of $25 makes the max profit $975. Total profits will begin to erode if SMCI stock stays below 300.
If we take both butterfly trades, we risk a maximum loss of around $0.50. It opens room for profit all the way up to $9.50 or $950 per spread position.
The goal of taking the unbalanced butterflies like the one above is to take advantage of higher implied volatility as the undercurrent of markets shifts.
Identify Key Chart Levels
The near-term relative resistance zone in SMCI stock sits right around 600. Relative support sits near 300, a level that should bring buyers to the chart of SMCI stock.
The double butterfly spread strategy provides three choices to exit the trade.
One, sell the entire butterfly spread after earnings once the middle strike of either spread is tested. Set price alerts for both 300 and 600. Why? We are looking for either butterfly to deliver positive results. Two, sell the spreads once they hit your loss threshold. And this will happen with extreme movement. Finally, sell the spread into the week before expiration, if all is going well and you have decided to hold the trade closer to the end of expiration. But I have had many a trade go sideways taking it down to the wire while not capturing gains, so I do not advise this.
It is fairly customary for these types of trades to deliver anywhere from 65% to 300% gains, statistically speaking. Plus, it is ill advised to hold these types of positions into the expiration week.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on X at @AnneMarieTrades
