Options Corner: Playing Defense As QuantumScape Rally Could Run Out Of Juice

With the burgeoning electric vehicle industry expanding globally, this backdrop offers a twofold benefit for electric vehicle battery technology specialist QuantumScape QS. First, the obvious point: more next-generation vehicles should translate to greater demand for advanced batteries.

Second, energy-efficient powerplants should help mitigate the coming extra strain on grid infrastructures. So, it's not surprising that QS stock occasionally sees big swings higher.

However, the question is whether the positive momentum can be sustained. Last week, QuantumScape stock gained 17.59% between Monday's opening price and Friday's close. Unfortunately, since QuantumScape entered the public market, its security has not demonstrated an ability to maintain forward momentum.

Since the debut of QuantumScape, it has lost more than 43% of its equity value.

Even with last week's big jump northward, unusual activity in the options market revealed brewing skepticism. On Dec. 26, the biggest transaction from a dollar volume perspective was for sold call options; specifically, the $6 call for the options chain expiring Feb. 21, 2025. With institutional investors betting against QS stock, a speculator would need good reason to be optimistically contrarian.

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Historical Trends Favor Skepticism Against QS Stock

As circumstances stand since QuantumScape's public market debut, the empirical data on QS stock doesn't favor a bullish approach. On a weekly performance basis, QuantumScape simply carries a negative bias. Since August 2020, there have been 228 weeks. Of this figure, only 96 weeks saw a positive return. Based on this statistic, there is a 57.9% chance that at the beginning of any given week, the return by the end of it will be negative.

What's more, the stats get worse when approached from a dynamic, conditional basis. As mentioned earlier, QS stock enjoyed a 17.59% spike last week. Since August 2020, there have been 19 weeks when QuantumScape returned 17.59% or greater. But within this tally, there have only been seven instances where, by the end of the fourth subsequent week following the 17.59%-plus return, QS stood in the black.

To flip the narrative around, there's a 63.2% chance (12 instances divided by 19 weeks) that QuantumScape stock, by the fourth subsequent week, will be in negative territory relative to the closing price of Dec. 27. The projected date aligns with the QS options chain expiring Jan. 24, 2025.

Interestingly, among the 12 negative instances, the average loss comes out to 27.2%. Last Friday, QuantumScape stock closed at $5.95. Deducting 27.2% from this price yields a potential downside target of $4.33 by Jan. 24.

Playing the Numbers Game

Despite the skepticism over QS stock, it benefits from a clear support line at the $4.70 level. Because of this reality, there are two approaches available, both involving an options strategy called the bear put spread. This trade involves buying a put option and simultaneously selling a put option at a lower strike price (for the same options chain). The credit received from the short put partially offsets the debit paid for the long put.

For the first approach, the trader respects the bullish support at the $4.70 level. Therefore, a 5.50/5.00 bear put spread (buy the $5.50 put, sell the $5 put) could be an attractive idea.

Statistically, there's a good chance that QuantumScape stock will drop to the short strike price of $5 (if not lower) by Jan. 24. If this target is met, the maximum payout (at time of writing) will be 61.29%.

The second approach is more aggressive. If the trader believes the $4.70 support line will not hold, then the 5.50/4.50 bear put spread may be more enticing. QuantumScape stock will need to drop to $4.50 or below to collect the maximum reward. However, the payout at the moment stands at an alluring 143.9%.

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