How to Navigate the Quantum Computing Boom? Employing a Call Spread Short Strategy

By the end of 2024, quantum computing stocks soared to incredible heights.

Recently, quantum computing stocks have captured the spotlight among investors.

Analysts have pointed out that this impressive surge reflects the market’s confidence in quantum computing as a transformative force across industries. Currently, quantum computing is on a fast growth trajectory. Experts anticipate its potential to solve complex problems and enhance computational power will further expand as the technology matures.

Key industries such as pharmaceuticals (drug discovery), finance (financial modeling), and logistics (supply chain optimization) are expected to be early adopters of quantum technology.

However, it's important to note the security risks associated with quantum computing, particularly in cryptography. As quantum computing develops, creating quantum-resistant algorithms to safeguard data becomes increasingly urgent.

Which Quantum Computing Stocks Lead the Market?

U.S. Stocks Investment Network, founded by former NYSE analyst Ken, analyzed five quantum computing companies' fundamentals. Their findings suggest that $Quantum Computing Inc. (QUBT)$ and $D-Wave Systems Inc. (QBTS)$ carry higher risks. However, $IONQ Inc. (IONQ)$ and $Rigetti Computing (RGTI)$ offer more attractive return potential.

Rigetti Computing: The NVIDIA of Quantum Computing

Renowned for developing quantum processors and cloud services, Rigetti built the Forest Cloud Platform, striving to make quantum computing more accessible and practical. By the year's end, Rigetti’s stock skyrocketed, gaining nearly 1600% year-to-date.

However, Seeking Alpha analyst Joseph Parrish noted that despite Rigetti’s potential, investors must exercise patience to see these results materialize:
"Rigetti shows promise in making quantum technology more accessible. However, I believe this possibility won't be realized until the end of the decade, and the company faces significant risks in securing funding along the way."

QBTS also stands out, simplifying complex optimization problems in logistics and finance through its quantum annealing technology and Leap QCaaS platform, with its stock up over 1100% this year.

IonQ: A Leader in Quantum Computing

IonQ develops hardware and software solutions designed to make quantum computing feasible for real-world applications. Its core trapped-ion quantum technology excels at solving complex computational problems. In December 2024 alone, IonQ's stock rose 52%, a relatively modest increase compared to its peers. Year-to-date, it climbed nearly 300%.

"IonQ is in a strong financial position, with no debt and $360 million in cash, reducing the risks of equity dilution or bankruptcy. While the company faces operational losses, its fundamentals are the most compelling among publicly traded quantum stocks. I believe IonQ has superior technology and a stronger development roadmap. Unlike other companies in the field, IonQ already provides quantum computing services to customers via most major cloud providers."

Quantum Computing Inc.

QUBT focuses on making quantum technology more affordable and practical. Its Dirac system, a portable, low-power quantum computing device operating at room temperature, finds applications in AI, cybersecurity, and remote sensing. This year, QUBT’s stock soared over 2000%!

Introduction to the Call Spread Short Strategy

A call spread is an options strategy involving the purchase and sale of call options with different strike prices but the same expiration date. The short version of this strategy profits from a decline or stabilization in the underlying asset’s price.

1. Sell an at-the-money call option: Earn a higher premium by selling a call option with a lower strike price.

2. Buy an out-of-the-money call option: Hedge risk by purchasing a call option with a higher strike price at a lower premium.

This combination profits if the underlying price stays flat or declines, while capping potential losses.

Strategy Example: Shorting RGTI's Rally

Let’s take RGTI as an example. Suppose its stock is currently trading at $16. We anticipate a pullback or stabilization due to potential over-speculation. Below is a specific call spread short strategy:

• Sell a RGTI Jan 31, 2025, $20 strike call option, collecting a premium of $179.

  Buy a RGTI Jan 31, 2025, $27 strike call option, paying a premium of $95.

  Net credit from this strategy:
  179−95=84 USD (per contract)179 - 95 = 84 \, \text{USD (per contract)}179−95=84USD (per contract)

Profit and Loss Analysis

• Maximum Profit: $84
  If RGTI closes below $20 at expiration, both legs expire worthless, and the investor retains the net premium.

• Maximum Loss:
  Strike price spread - net premium = 700−84=616 USD700 - 84 = 616 \, \text{USD}700−84=616USD (if RGTI closes above $27).

• Break-even Point:
  Strike price of $20 + (net premium/contract size) = 20+0.84=20.84 USD20 + 0.84 = 20.84 \, \text{USD}20+0.84=20.84USD.

Strategy Advantages

• Limited Risk: Maximum loss is capped at the difference between the strike prices minus the net premium.

• Lower Cost: Compared to selling a naked call, the hedged leg significantly reduces margin requirements.

• Defined Returns: Investors can achieve stable returns if the stock price remains below the break-even point, especially during pullbacks or flat trading conditions.

When to Use

This strategy is suitable when the underlying stock has recently experienced significant gains, suggesting a potential pullback or consolidation. For high-volatility stocks like RGTI, a call spread short strategy allows investors to capitalize on market corrections while effectively managing risk.

Conclusion

The quantum computing boom offers exciting opportunities but comes with inherent risks. By employing the call spread short strategy, investors can profit from potential corrections in quantum computing stocks while maintaining control over their risk exposure.