Sometimes, what I write about stocks and option strategies is very security-specific. This is different. And in some ways, it might be the most impactful insight I will have to share with Barchart readers for some time. 

Why? Because it is a stark reminder of how managing investment risk is a proactive process. If not, you might end up holding the proverbial bag. 

Not sure what I’m talking about? Ask unhedged shareholders of Super Micro Computer (SMCI).  

SMCI missed earnings and saw its stock crater more than 20% in morning trading on Wednesday, Aug. 6. This isn’t SMCI specific, as earnings misses routinely create more volatile reactions now than they ever have. 

This is why, in other than the most undervalued equity markets, I own stocks in one of two ways: small position size (unhedged), or larger position size (hedged). 

Collars, married puts, or some other approach? That’s less important, and a personalized decision. But the mass casualties of this current earnings season are just part of the stock market’s identity now. And that is not going to change any time soon. If anything, it will get more volatile over time. This is a very opportunistic market. But it’s filled with potholes. 

SMCI was a prime candidate for a collar. And I was able to grab a picture of the option tables before Wednesday’s open, in order to show a “before” view of this stock. And specifically, how a collar would have made sleeping Tuesday evening much easier for large holders of the stock. 

Oh, and there are some large holders. That’s what a performance like this will do. If you have ever dreamed of  buying a little $2 stock and seeing it go to $57 a share in about 5 years, that’s what SMCI did. 

However, after the market closed, when there was nothing you could do about it, the stock dropped like it was shot out of the sky. That $57 stock was under $48 and still falling. And there’s not a stop-loss order in the world that could stop that loss. Stop orders don’t work that way. 

This is the type of stock that, if I’m taking a large position, rather than a “garnish”-sized one in my portfolio, I’m not holding without a safety net. 

In the case of SMCI, as we’ll see below, the chart was set up for success. But earnings reports change all of that.

The trailing price-earnings ratio is just under 30x, which is not terrible for a company that is arguably on the rise. And, which had successfully come through an accounting concern last year. 

Charting SMCI

First, the daily chart. The stock got ahead of itself, but was in good form entering earnings. Then just like that, it retreats overnight to its late-June level, giving up all of its recent gains. And essentially producing a triple-top. 

The weekly chart looked even more promising. But not anymore. I’m a career technician, but I’ll be the first to tell you that a chart cannot stand up to a market reaction to earnings. Not in this environment. 

How Collaring SMCI Could Have Helped 

Again, this article is meant to be instructive. Because while it is too late now to hedge SMCI, there are always temptations to “fly solo” on high-flying, cult-like stocks. So perhaps studying this one will help traders to be on the lookout for similar risk-management opportunities going forward. 

Here’s one example of a collar that existed as of Tuesday near the close. 

The particulars don’t matter as much as the intent. In this case, even going out to December, and securing a $65 to $55 range during that time, cost under $1 a share. That delivered a scenario in which 12% upside and 5% downside was the tradeoff. 

The key here is that this took away panic and other emotional scenarios. $55 a share as a low? And more than 3 months to let it try to recover? Not bad for a small price paid for the protection, especially going into earnings.

SMCI is an ideal learning experience, whether you own the stock or not. This is a market in which those expecting risk to “not happen to them” are, as they say, whistling past the financial graveyard.