Options Corner: Quantum Computing Runs On Hype But The Data Flashes Caution

While Nvidia Corp's NVDA Jensen Huang has been somewhat of a controversial figure in the quantum computing space, his comments earlier this week sparked enthusiasm for the sector. One of the top beneficiaries was Quantum Computing Inc QUBT, which specializes in the development of integrated photonic quantum machines. Still, with QUBT stock enjoying a tremendous run, technical and statistical concerns exist regarding sustainability.

On Wednesday, Huang remarked that quantum computers are on the cusp of being able to solve complex, real-world problems that classical computers cannot address. In particular, the Nvidia CEO highlighted how quantum computers process information in fundamentally new ways relative to traditional computers, paving the way for their road to practical applications.

It's a sharp pivot from Huang's comments about the innovation in January this year, when he suggested that quantum computers' practical utility was about 15 to 30 years away. At the time, the commentary sank securities in the ecosystem, with QUBT stock among the worst-hit names. In fairness, Huang in March stated that he was wrong to jump the gun on the rather pessimistic take on the sector.

Nevertheless, the head executive's original cautiousness may have a point. Although quantum computers are undoubtedly innovative and revolutionary, their ultimate utility is limited to specific applications. Essentially, classical computers speak in a binary code but quantum computers speak in probabilities, utilizing complex rules and dynamics from quantum physics.

As such, they're groundbreaking for solving problems that are probabilistic or quantum in nature. However, the issue is that quantum bits (qubits) that undergird the machines are highly sensitive, requiring extreme conditions — such as near absolute zero temperatures — to operate.

In other words, there's a lot of justified optimism baked into QUBT stock — along with potentially a lot of hype.

The Winning Streak For QUBT Stock May Be A Bit Too Hot

Part of the problem regarding buying QUBT stock based on Huang's continued about-face on the underlying sector is that, by the time retail investors are reading the comments, the optimism has already been priced in. Unless there is another positive catalyst around the corner, bidding up QUBT — which is historically volatile — presents risks.

From the perspective of technical analysis, the security appears to be forming a double-top formation. In late December through early January, the bulls attempted to fuel the remarkable rally that transpired several weeks prior. Unfortunately for them, the market corrected severely, with Huang's initial skepticism not helping matters. QUBT stock is back again at those levels but it's not clear where the next catalyst is. Subsequently, traders may be tempted to back out.

It must be said that technical analysis is a visual representation of market behavior. As such, the interpretive value is largely heuristic. But from an empirical standpoint, QUBT stock also appears to be on shaky ground.

Assuming that the security closes around the $16.50 level today, QUBT will have printed eight non-consecutive up weeks over the last 10 weeks. Since Quantum Computing's debut as a namesake industry participant — the company was formerly known as Innovative Beverage Group Holdings, Inc. — this remarkable pattern has only materialized four times. In all but one case, the following week's price action resulted in downside, with a median loss of 7.53%.

That's not the scary part. No, the real horror begins in the second week. Should the bears maintain control, the median loss at that point would be 21.85%.

Granted, the above data stems from probabilities and projections based on past data — data which is admittedly from a super-small sample size. However, there is a danger in assuming that the balance of bullishness can be pushed to the extreme without consequence.

Case in point is Netflix Inc NFLX. As great as the company is, NFLX was on a statistically rare nine-week consecutive win streak. The streaming giant's dominance was enough for its equity to defy gravity and it fell, almost exactly as predicted.

An Aggressive Bear Put Spread For The Data-Driven Trader

Based strictly on the numbers, it's likely — though to be clear, not guaranteed — that the near-term bearish approach may find success. For those who want to take a shot, the 15/14 bear put spread expiring July 3 may be enticing.

The above transaction involves buying the $15 put and simultaneously selling the $14 put, for a net debit paid of $45. Should QUBT stock fall through the short strike price ($14) at expiration, the maximum reward is $55, a payout of over 122%.

Primarily, what makes this trade attractive is the statistical response to eight up weeks within a 10-week period. More often than not, irrespective of the company's fundamentals, traders have a history of bailing out. This bear spread allows the contrarian statistician to potentially extract profits from the downdraft.

Also, the aforementioned pattern reflects a shift in magnitude in terms of sentiment regime. As a baseline, the chance that a long position in QUBT stock will be profitable over any given week is only 39.83%. With the previously mentioned sequence, the long-side odds are only 25%.

Without casting any aspersions on Quantum Computing as a business, the numbers simply don't favor bullishness in the near term. It's nothing personal…it's just statistics.

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.

Read Next: