SMCI Options

 

SMCI Options: A Strategy Breakdown

Options trading can be a powerful tool for investors looking to enhance portfolio returns and manage risk. Recently, I implemented a strategy by selling PUT options on Super Micro Computer, Inc. (SMCI). In this post, I’ll walk through the rationale behind the trades, the potential outcomes, and how this strategy fits into a broader investment approach.

The Trades:

• 10/10/2024: Sold SMCI $40 PUT expiring on 10/25/2024 for a premium of $81.
• 10/11/2024: Sold SMCI $40.5 PUT expiring on 11/01/2024 for a premium of $55.

Both trades involve collecting premium income while managing the risk of potentially acquiring shares of SMCI at prices lower than their current market value.

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Why SMCI?

SMCI, or Super Micro Computer, Inc., is a company on the cutting edge of high-performance computing and server solutions, benefiting from major tech trends like AI, cloud computing, and data center growth. In 2023 and 2024, SMCI has seen a significant boost in stock price, driven by the strong demand for computing infrastructure in AI development.

Given the volatility and recent upward movement in the tech sector, SMCI presents a prime opportunity for selling options, particularly PUTs. Here’s why:

1. High Volatility: Higher volatility in stocks leads to higher option premiums, which translates into more income for PUT sellers.
2. Growth Potential: If I end up being assigned shares at my strike price, I could own SMCI at a discount to current levels, which is attractive considering the company’s long-term growth potential in AI and data infrastructure.

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Understanding the PUT Options Strategy

What’s a PUT Option?

When selling a PUT option, I’m agreeing to potentially buy 100 shares of the underlying stock (SMCI in this case) at a specific price (the strike price) if the stock falls below that price by the expiration date. In return, I collect a premium upfront, which is my income regardless of the outcome.

Breakdown of My Trades:

1. SMCI $40 PUT, expiring 10/25/2024

   • Premium Collected: $81
   • Breakeven Price: $40 (strike price) - $0.81 (premium) = $39.19
   • Outcome: If SMCI stays above $40 by 10/25, I keep the $81, and the option expires worthless. If it falls below $40, I’m obligated to buy 100 shares of SMCI at an effective price of $39.19.

2. SMCI $40.5 PUT, expiring 11/01/2024

   • Premium Collected: $55
   • Breakeven Price: $40.50 (strike price) - $0.55 (premium) = $39.95
   • Outcome: If SMCI stays above $40.50 by 11/01, I keep the $55. If it drops below $40.50, I buy 100 shares at an effective price of $39.95.

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Potential Scenarios and Outcomes

1. Scenario 1: Both PUTs Expire Worthless
   In the ideal scenario, SMCI’s stock price stays above $40 and $40.50, and neither PUT is exercised. This means:

   • I keep the total premium of $136 ($81 + $55) as profit.
   • I don’t have to buy any shares, leaving my cash available for future trades.

2. Scenario 2: One or Both PUTs Are Assigned
   If SMCI’s stock falls below $40 or $40.50, I’m obligated to buy 100 shares per contract at the strike prices. Here’s the math:

   • For the $40 PUT, my effective purchase price would be $39.19.
   • For the $40.50 PUT, my effective purchase price would be $39.95.

   These prices could represent an attractive entry point into SMCI if I believe in the company’s long-term growth prospects, particularly with its positioning in AI and data center markets.

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Strategic Fit: Income Generation and Risk Management

Selling PUT options like these can be a great way to generate additional income, especially when the stock in question is one I wouldn’t mind owning at a lower price. Here’s how this strategy fits into my broader investment approach:

• Income Generation: The premiums collected act as an income boost, which complements the dividend income from my broader portfolio. In this case, $136 in premium over two trades.
• Risk Management: By selling PUTs, I only buy the stock at prices I’m comfortable with. The breakeven prices of $39.19 and $39.95 are attractive compared to the current market price of SMCI, and I believe the company has strong long-term growth potential.
• Flexibility: If the PUT options expire worthless, I can always re-assess and potentially sell more PUTs or consider a different strategy, like selling CALLs if I own the stock.

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Final Thoughts: Maximizing Returns While Managing Risk

The beauty of selling PUT options lies in the flexibility and income generation it provides. If the stock never dips below the strike price, I keep the premiums without ever needing to buy the shares. If it does, I acquire SMCI at prices I’ve deemed favorable, which could lead to additional gains if the stock appreciates in value over time.

With the rapid advancement of AI and SMCI’s pivotal role in providing the infrastructure to support this revolution, I’m confident that owning shares at an effective price around $40 would be a solid long-term investment. But for now, I’ll monitor the stock and enjoy the premiums as I continue exploring options strategies to complement my portfolio.

Let me know your thoughts and how you’re using options in your strategy!