Options Corner: Betting On A Near-Term Pullback In D-Wave Quantum

Easily ranking among the hottest sectors in the market, quantum computing has taken the investing ecosystem by storm, boosting shares of D-Wave Quantum QBTS into the stratosphere.

Last month, Alphabet Inc's GOOGGOOGL Google Quantum AI unit announced its latest quantum chip called Willow, which can perform advanced calculations at an exponentially accelerated rate. Such news helped forge the fundamental justification for D-Wave stock.

At the same time, concerns about overvaluation are now impacting the innovative sector. Last week, CNBC's Jim Cramer warned investors against excessive speculation on names like D-Wave.

While Fortune Business Insights predicts the U.S. quantum computing market to reach a valuation of $1.2 billion by 2030, the present multiples against key financial metrics worry the market expert.

Another point of contention against D-Wave and its ilk is that the sector could be benefiting from the fear of missing out, commonly known as "FOMO." However, it's unclear whether this collective sentiment is enough to sustain the quantum rally. As The Arora Report noted, investors who missed out on the big artificial intelligence boom may be aggressively buying quantum computing stocks.

Unfortunately, this response may lead to painful consequences.

Technical and Statistical Arguments Working Against D-Wave

While there's no denying the long-term potential for quantum computing — particularly in the field of AI and data analytics — D-Wave stock may have simply moved too far, too fast. Since the mid-November session last year, the equity has seen an almost six-fold increase in price. At some point, the temptation for the early bulls to lock in some profits may become too great.

Moreover, D-Wave stock attempted to poke its head decisively above the psychologically and technically significant $10 level. However, the bulls have only been marginally successful in this endeavor, with D-Waveconsistently falling back to single-digit territory. As such, the bears may be motivated to take advantage of this situation, potentially targeting the $8 support line.

From a statistical perspective, it's rare to see D-Wave stock post one-week returns of 200% or more over a four-week period. Three such instances occurred between November and December last year and four instances occurred between April and June of 2023. When these performance metrics were first witnessed, D-Wave breached $3 before falling to less than a dollar.

Of course, it's not guaranteed that history will repeat. Still, betting on the same horse that everyone else is may present risks.

Buying a Bear Put Spread for the Aggressive Contrarian

Those who believe that QBTS stock may incur a near-term correction may do more than just sit on the sidelines. Instead, they can buy a bearish options strategy called the bear put spread. This multi-leg transaction involves buying a put option and simultaneously selling a put at a lower strike price for the same expiration date. The idea is to use the credit received from the short put to partially offset the debit paid for the long put.

Bear put spreads are capped-risk, capped-reward trades. The investor cannot lose more than the net debit paid and subsequently cannot receive more than the maximum reward, which is represented by the difference between the strike prices minus the net debit paid. In a bear put, speculators are hoping that the underlying security falls to the short (lower leg) strike price.

Aggressive contrarians may target the 10/8 bear put spread. That’s when they buy the $10 put, and sell the $8 pu) for the options chain expiring Jan. 31. This transaction aims for the $8 support line while providing almost a month to fall there. Currently, the maximum reward for this trade clocks in around 43%.

Less-aggressive speculators can opt to split the difference with a 10/9 bear put spread. However, this approach — while raising the likelihood of success — reduces the max payout to around 33% at time of writing.

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