Make 30% On Your Money With This Nokia Trade

| About: Nokia Corporation (NOK)

Nokia's (NYSE:NOK) more than 100% rise off its July 18, 2012 low has been quite impressive. Perhaps equally impressive is the strong rally in Nokia's bonds. The 2019 and 2039 maturing notes have rallied more than 20% since July. Over the years, I have seen several $1-and-change stocks double while the bonds held firm at levels that indicated severe trouble lies immediately ahead. While Nokia's bonds are not giving the "all clear," equity investors should take some comfort in the recent strength of the bonds. The performance of a company's bonds can give equity investors a high-level snapshot of a company's fundamental strength from a survival standpoint. For now, Nokia seems to be okay.

A stock's price largely (but not entirely) represents a reflection of shareholders' perceptions of future earnings prospects. The right combination of expectations about future cash flows, revenue growth, margins, and earnings per share growth can be explosive for a stock. A derivative of a stock's price, and in some ways the second derivative of shareholders' expectations about the future fundamentals of a company, is a stock's moving average. At the moment, Nokia's stock is fighting to break out above its 200-day simple moving average. Ever since the stock gapped below the 200-day moving average on February 11, 2011, that all-important technical indicator has acted as massive resistance, rejecting the stock on several occasions. If Nokia's stock can win the latest battle with the 200-day moving average and firmly break out above it, it will be an expression of confidence from shareholders about Nokia's turnaround prospects.

But for those investors who aren't quite buying the idea that Nokia's fundamentals will improve by enough to make the stock a solid investment from a risk-reward perspective, there are other options. If you think the company will survive, but that its stock will languish in the low-to-mid single digits for quite a long time to come, you could always buy the bonds. Nokia's 5/15/2019 maturing, 5.375% coupon note (CUSIP: 654902AB1) is currently asking 90.49 cents on the dollar, a 7.246% yield-to-maturity. Its 5/15/2039 maturing, 6.625% coupon note (CUSIP 654902AC9) is currently asking 84.50 cents on the dollar, an 8.049% yield-to-maturity. If Nokia is a company in which you want to invest, and you are content with those types of returns, then investing in the senior unsecured notes is not a bad way to go.

There is another way, however, to make a good amount of money on Nokia. I call it the "Nokia will survive" trade. It is a trade that will likely be quite attractive to investors who want more bang for their buck than the bonds provide but aren't confident enough to purchase the stock at today's level. The trade involves simultaneously selling and buying out-of-the-money put options to create a credit spread. A credit spread is an options strategy that involves selling a higher premium option and buying a lower premium option. Here is an example:

Sell the January 18, 2014 $2 put for $0.33

Buy the January 18, 2014 $1 put for $0.10

By doing this, you collect $0.23 per contract and limit your risk to $1 per contract. If the stock is above $2 on expiration, you will have made 23%. That is an annualized return of 20.23% as long as the stock does not drop by more than 38.84% from its recent close of $3.27. If the stock closes below $1 per share on expiration, you will have realized the maximum loss of $0.77 per contract ($1 minus the $0.23 per contract you collected). If the stock closes between $1 and $2 on expiration, your return or loss will vary depending on where exactly the stock closes. A close of $1.77 or higher will result in a profit (ex-commissions) on the trade. A close below $1.77 will result in a loss (ex-commissions).

There are plenty of other possibilities to realize a great return by putting together credit spreads on Nokia's options. The following table outlines a number of these (all returns are ex-commissions):


Put Option Sold

Put Option Purchased

Credit Spread Per Contract

Total Return

Annualized Return


$2.00 strike for $0.18

$1.00 strike for $0.08





$1.50 strike for $0.16

$0.50 strike for $0.05





$2.00 strike for $0.33

$0.50 strike for $0.05





$2.50 strike for $0.54

$1.50 strike for $0.19





$2.00 strike for $0.51

$1.00 strike for $0.18





$2.50 strike for $0.63

$1.00 strike for $0.18





$3.00 strike for $0.98

$1.00 strike for $0.18





$3.00 strike for $0.98

$2.00 strike for $0.55




In every single scenario outlined above, Nokia's stock could actually fall from its recent close of $3.27, and investors would realize profits of 10% to 43% (9.67% to 30.78% annualized). Bonds are typically thought of as the "It will survive but not prosper" trade. After all, stock prices can languish for years, but as long as the company can avoid a default, bondholders get paid. With credit spreads, however, you, the option trader, can potentially realize huge returns without shareholders ever making a penny. It is not always possible to find option chains that are credit-spread friendly to this extent, but for now, Nokia's options are tempting investors with large potential returns. And from the risk perspective, limiting risk to the difference in the strike prices sold and strike prices purchased can help investors sleep better at night. If you think Nokia is going to survive at least a few more years, a defined-risk, high-reward trade such as one or more of the credit spreads outlined above is certainly worth strongly considering.

On a final note, when trading securities with wide bid-ask spreads, remember to search for hidden liquidity. You may be surprised at the liquidity you can find between the bid-and-ask prices. On the July 20, 2013 $1 puts, for example, the bid-ask spread is $0.02 by $0.08. For the purposes of the table above, I used the ask price (guaranteed fill) in the calculation. You, however, might be able to find liquidity at $0.06 or $0.07. The January 17, 2015 $2.50 puts are another example of a very wide bid-ask spread ($0.63 by $0.95). When selling that strike price, there is no need to accept $0.63. I think there is a strong likelihood of finding liquidity somewhere in the $0.64 to $0.75 region. For the purposes of the table above, however, I used the $0.63 bid (guaranteed fill) in the calculation. Keep in mind that the returns quoted in the table above are the worst case potential returns (assuming all puts expire worthless) based on the bid and ask prices at the time this article was written. If you find hidden liquidity, that will actually enhance the potential returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.