On paper, Super Micro Computer Inc (NASDAQ:SMCI) should easily rank among the top performers of the market. An information technology specialist, Super Micro builds the infrastructure — such as GPU server boxes and high-efficiency thermal solutions — that keep AI processes running smoothly. Still, SMCI stock is wildly choppy, going through streaks of bullish and bearish trends. As such, it's only up around 15% on a year-to-date basis.
Nevertheless, the choppiness could also offer an opportunity for adventurous traders. Primarily, SMCI stock exhibits buy-the-dip sentiments. After a period of bearish pressure, the perceived discount value of Super Micro rises. By measuring the expected response, we can get a better idea of likely forward outcomes. It all starts with objectification.
In social contexts, objectification is a loaded concept because it takes the richness of a person's being and compresses their value into solely their physical presentation. Likewise, when objectification is conducted in the financial market, you lose data richness and fidelity. However, if you wanted to conduct a sociological study — say, whether tall people get hired more often than people who are not tall — this value compression must occur.
A big reason why is that, by compressing people into discrete categories, we can better understand structure and patterns. Sure enough, a correlation exists in developed countries between labor market success and height.
So, my argument is very simple. If such correlations exist in sociology, similar observations and patterns can be observed in the financial markets. Instead of studying how height impacts labor market success, I'm looking at how sequences of bullish and bearish behaviors impact forward outcomes.
Granted, it's not an absolutely perfect science. Going back to the labor market, certain people who are not tall can outperform those who are incredibly tall. But over the long run, across many trials, broad patterns will emerge.
That's the core essence of my quantitative model. Convert price action into discrete states (i.e. up weeks and down weeks), break them into multiple trials and plot their trajectories onto a probabilistic framework.
Extracting Insight from the Geometry of Risk
For those who are really curious, the above process is a methodology that I've termed trinitarian geometry, an algorithm that combines probability theory (Kolmogorov), behavioral state transitions (Markov) and calculus (kernel density estimation).
Borrowing from baseball, what we're trying to accomplish is to calculate SMCI's barrel rate or quality of contact. By measuring this statistic, we can estimate where a struck ball is likely to end up — and we would know this because we studied similar barrel rates and observed where those balls mostly landed.
While success is of course not guaranteed, the concept is that similar barrel rates under similar conditions should yield generally predictable outcomes — with a clear recognition that outliers and freak incidents can occur and go against expectations.
To be honest, the math and algorithms that undergird these processes can be wildly complex. However, the end result is rather intuitive because we would have at our disposal a range of probabilistic outcomes — along with gradations that show where probabilistic outcomes become less likely to materialize.
When it comes to SMCI stock, the forward 10-week returns will likely range between $34 and $39, using past analogs as a guide (and assuming an anchor price or starting point of $35.35). More importantly, price clustering may be predominant at around $36.80.
The above assessment aggregates all 10-week trials since January 2019. However, we're interested in the current behavioral state, which is the 4-6-D sequence; that is, in the past 10 weeks, SMCI stock printed four up weeks and six down weeks, with an overall downward slope.
The sequence itself isn't particularly important. Rather, we're interested in how the market historically responds to the 4-6-D sequence. Based on the data, we may expect SMCI stock to range between $34.50 and $39.10, with price clustering being predominant at $37.40.
In a perfect world, we would buy an options strategy that essentially covers the premium associated with the realistic side of the distribution curve — and sell the rest that is unrealistically optimistic. Obviously, it's not a perfect world and this is where things get interesting.
Buying a Bull Spread the Smart Way
At $38, probability density — or the likelihood that SMCI stock in this case lands at a given price point — declines by 23.85% on a relative basis compared to the density at $37. However, the $38 level still lands near the meat of the probabilistic mass, translating to a reasonably high likelihood of success.
Interestingly, though, from $38 to $39, probability density plunges by 98.44%. If we're operating purely from an empirical lens, it would only make sense for us to place wagers up to $38. Beyond $38, the chance that a bullish wager would become successful deteriorates exponentially.
In other words, an options strategy such as the bull call spread is more than just a discounted long position. It's actually entrepreneurial, where you capitalize on the most likely path forward and dump the forward contract that is unlikely to succeed, thus subsidizing much of the cost of the most probabilistic component of the trade.
With all that said, I would take a long look at the 36/38 bull call spread expiring Jan. 16, 2026. This trade requires SMCI stock to rise through $38 at expiration to trigger the maximum payout of roughly 133%. Breakeven lands at $36.86, which is well within the realistic portion of the 4-6-D sequence's probabilistic mass.
Granted, upside is capped at $38 so you won't get a higher reward past 133%. However, because we calculated the risk geometry, we know that mathematically, the likelihood of a sustained rise above $38 is minimal. Therefore, we're only going to pay for the outcome that is likely and sell the outcome that is not.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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