An investment bubble—or the perception of one—is an opportunity for disciplined investors to make a large sum of money in a short time.
The Downside of Index-Hugging Beta Lovers
Index-hugging beta lovers will disagree. They would rather preach about long-term investing without acknowledging how often their brethren behave like bad traders when volatility assaults their low-fee exchange-traded funds.
The Secret of Wealthy Investors
Market pundits rarely mention that the portfolios of many very wealthy investors tend to be biased toward individual stocks, and they often flock to the same ones. After all, it’s a fact that many of the world’s greatest companies reliably outperform the indexes.
The Challenge of Risk-Defined Investments
The challenge for investors is finding risk-defined ways to harness stocks with compelling investment themes even when they are priced at obscene multiples to earnings.
Case Study: Super Micro Computer
Consider Super Micro Computer, whose cooling technologies prevent the huge computers that power artificial-intelligence software from overheating. At $851.11, the stock is up almost 200% this year, far outperforming the S&P 500 index’s 6.5% gain.
Potential Weakness Ahead
Yet Super Micro’s shares have recently weakened. A review of the stock’s technical support levels suggest it may soon test 20-day support around $750.50.
The weakness likely reflects the stock’s extraordinary advance—and moves that parabolic often stall or reverse because investors become increasingly unwilling to wager on a more aggressive rally.
Institutional Shifts and Profit Distribution
In addition, many institutional investors are now plowing some AI profits into other sectors that trade at more attractive valuations, which could spark more downward pressure in the AI sector.
Impressive Stock Performance
During the past 52 weeks, Super Micro’s stock has ranged from $87.25 to $1,077.87. The stock is up some 769% over the past 12 months.
Leveraging Put-Option Spread for Aggressive Investors
Consideration for Downward Movement
Aggressive investors can contemplate a put-option spread, where the value increases if Super Micro’s stock takes a dip. One approach is to purchase Super Micro’s March $730 put and simultaneously sell the March $630 put to reap benefits from a significant stock downturn. This spread is currently priced at around $12.30.
Profit Potential
In the scenario where Super Micro’s stock drops to $630 or below upon expiration, the maximum net profit from the put spread could reach approximately $87.70.
Strategic Maneuvering
In case of a stock plunge, the gains from the spread could be utilized to acquire Super Micro’s stock at the reduced valuation or to realign the put trade to anticipate further decline. This strategy is tailored for investors with ample financial capacity and a tolerance for market turbulence.
Capitalizing on Stock Swings
If the stock aligns with the put-spread tactic, it has the potential to translate drastic stock movements into substantial gains.
Addressing AI Investment Enthusiasm
Caution Amidst Market Frenzy
Entertaining a bearish trade doesn’t necessarily imply validating the AI investment fervor as a bubble. Rather, it hints at the possibility that several AI stocks— such as Nvidia, Arm Holdings, and Super Micro Computer— have experienced rapid and excessive surges. The put spread offers a tactical approach to capitalize on short-term market corrections.
Technological Evolution
Acknowledging the pivotal role of technological advancements in shaping modern innovations, there exists a robust foundation for transformative technologies that could propel progress. Nvidia’s recent financial report has stirred excitement among investors regarding the untapped potential in this domain.
AI Revolution
According to Jensen Huang, CEO of Nvidia, AI has hit a pivotal juncture, witnessing a surge in demand across varied sectors and geographies. Nvidia’s impressive 75% profit margins and dominant market share in the data-warehouse sector resonate with investors, portraying a promising outlook.
Embrace volatility and position yourself strategically to leverage market movements for potential gains.
