Super Micro Computer (SMCI) experienced a significant bearish turnaround with high trading volume after reaching the 1,000 mark and achieving an all-time high on Friday morning. This sudden shift in momentum left investors uncertain about their next steps.
Initially opening on a positive note, Super Micro Computer stock quickly lost its gains within the first thirty minutes of trading. By midday, the shares had dropped approximately 12% with trading volume nearly six times above its usual levels.
The rapid and substantial movements seen in SMCI are unlikely to be sustainable. Since its breakout at 357 in January, the stock had tripled in value.
Observant investors may consider taking profits as the stock displays signs of reaching a peak. The recent surge exhibited characteristics typical of a climax top.
During the ascent to its peak, the stock rose for 18 out of 20 days, accompanied by significant trading activity and wide price spreads. In a climax scenario, stocks typically surge by 25% to 50% within two to three weeks, demonstrating wide daily price ranges.
Furthermore, the stock’s value was over 200% higher than its 200-day moving average, a level that often indicates a climax top. Additionally, being more than 100% above its 50-day moving average further suggests overheating.
Moreover, the stock emerged from a late-stage base, which historically presents a higher risk of failure compared to an early-stage base.
Risk Management Approach for Super Micro Computer Stock
For investors who maintain faith in the company and prefer not to sell immediately, there are strategies to hedge against potential losses. One such method involves purchasing put options to mitigate risks. A put option grants the right to sell 100 shares of the stock at a predetermined price known as the strike price.
To offset losses effectively, investors can consider acquiring two put options for every 100 shares held, utilizing a strike price with a delta of -0.5. The delta value indicates the option price movement relative to the underlying stock. With a delta of 0.5, one put option essentially counteracts a decline equivalent to 50 shares, while two puts offset 100 shares.
In the context of Super Micro Computer stock on Friday, the April 19 puts with a 970 strike exhibited a delta of -0.5.
As the stock continues to decline, the delta value will also decrease. However, this adjustment implies that gains from the put options may surpass the losses incurred from the stock.
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