Without a doubt, Supermicrocomputer (SMCI) has been showing extra large price swings in recent days. Here’s a way to profit from this volatility: Try a double butterfly setup in SMCI stock.
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Anne-Marie Baiynd: Feel at home when trading on the shooting range
Speaking of volatility, last week’s column commented on the recent outrageous market moves. I continue to watch the VVIX (a measure of volatility in the Cboe Market Volatility Index). It has been declining somewhat. This suggests that we may be in for some crunching markets.
So when I look at ideas for positioning for outsized price moves, I look at stocks that have high implied volatility and are likely to make significant price moves.
Let’s look at both sides of continuation of wild down move or recovery bounce in SMCI stock. High level of implied volatility indeed gives us a sweet spot to trade.
AAs a reminder, we never know the direction of the moves ahead. But we can estimate the size of the move using the ATR (average true range) as measured on the weekly chart.
We also study the implicit movements that the market makers have discounted in the movement.
SMCI Stock Today: The Plan
Let’s position a long call butterfly so that the “long wing” of the trade gives us a probability of return. 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 costs about $0.25 per share per set of contracts, based on recent trading, or $25 per set of calls. That’s the maximum loss for this position. That also makes the maximum profit $9.75 before commissions, or $975 per block of 100 shares. The total profit will start to erode if SMCI shares stay above 600.
The Put Spread
For the long put butterfly, we position it so that the “long wing” of the trade gives us a probability of return. 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 a SMCI Oct 18 310 put
Sell to open two SMCI Oct 18 300 puts
Buy to open a SMCI Oct 18 290 put
The put butterfly above costs $0.25, or $25. A maximum loss for this position in SMCI stock of $25 makes the maximum profit $975. The total profit will start to erode if SMCI stock stays below 300.
If we do both butterfly trades, we risk a maximum loss of around $0.50. It opens up room for profit up to $9.50 or $950 per spread position.
The goal of taking unbalanced butterflies like the one above is to profit from higher implied volatility as the undercurrent of the markets shifts.
Identify key chart levels
The short-term relative resistance zone for SMCI stock is around 600. The relative support is around 300, a level that should attract buyers to the SMCI stock chart.
The double butterfly spread strategy offers three options to exit the trade.
A, Sell the entire butterfly spread after profit 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 reach your loss threshold. And this will happen with extreme movement. Finally, sell the spread in the week before expiration, if everything is going well and you decided to keep the trade closer to the end of expiration. But I have seen many trades go sideways, making it to the end without making a profit, so I advise against this.
It is quite common for these types of trades to yield anywhere from 65% to 300% statistically. Furthermore, it is unwise to hold these types of positions until the expiration week.
Anne-Marie Baiynd is an experienced stock, options and futures trader with 20 years of experience and is the author of “The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology.”She has no positions in the investments she writes about for IBD. You can find her at X at @AnneMarieTrades
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