We would like to start of by stating that only traders with a bearish outlook should consider implementing this strategy. We are only providing you with a plan that enables you to leverage your position significantly if you are bearish on Nokia (NOK). If you are not bearish on this play then it would be best to look for alternative ideas. If you are looking for other ideas you might find this article to be of interest Caterpillar: Significantly Boost Potential Future Gains for free.
Some reasons to be bearish on Nokia
- For the first time ever in 14 years it lost its leadership position both in the smartphone and basic featured phone industry to Samsung.
- Fitch, Moody and S&P have downgraded Nokia to junk or near junk category.
- It stated that many factors negatively impacted its core devices and services segment in the first quarter of 2012. Management states that consequences of these negative factors will spill over into second-quarter results, which will either match those of the first quarter or drop by an additional 3%.
- The demand for both basic and smartphones took a massive hit in the emerging markets such as India, China, Africa and the Middle East.
- Net sales of the devices and services segment in the first quarter were roughly $5.5 billion, down 40% year over year. In the first quarter, it Nokia sold roughly 71 million mobile phones compared with 108 million in the same quarter last year.
- Sales of smart devices were 11.9 million, down 100% year over year.
- The smartphones based on Microsoft's (MSFT) mango platform lacks features such as dual-core processors, and front facing cameras, which could make it less appealing compared with Apple's (AAPL) iPhone 4S and Samsung's Galaxy S2. Lower-cost Android-based smartphones are thriving in China and India as price is a big issue here due to low per capita income. Furthermore, the existence of several low-cost manufacturers such as LG Electronics will result in lower average selling price and lower sales for Nokia.
Bearish strategy for Nokia
Sell the Jan 2013 2.50 calls for 60 cents or better. For each call sold you will receive 60 dollars. We are going to use these proceeds to implement part II of the strategy
Use the proceeds from part I to purchase 2 Oct 2012, 2 puts. They are currently trading in the 0.25-0.26 ranges. For this example we will assume you pay $02.6 per put, this will leave you with a net credit of $8.00 per transaction.
Risks associated with this strategy
If the shares trade above the strike price you sold the calls at, you could be triggered into shorting the stock. In this case you could be triggered into shorting the stock at 2.50. However as you were bearish on the stock to begin with this should not be a big issue. Only put this strategy into action if you are bearish on this stock.
You get to seriously leverage your position with no out-of-pocket cost. If the stock tanks these options could reward you very well.
The first real indication of how Lumina 900 is faring in terms of sales should be available by the end of the second quarter. Thus if you assume the figures are going to be bad the stock should drop down possibly below 1.00 and your puts should rise in value.
So far things are not looking bright. Nokia issued another profit warning and management stated that it is going to implement the following cuts and ideas to help things turnaround. This sounds almost identical to what it stated not too long ago.
- Continue investing in new smartphones to provide customers with a so-called one of kind mobile experience
- Lay off an additional 10,000 workers by 2013
- overhaul the management team
- close plants and consolidate operations and the list goes on
The main question is will it have the time and the money left to implement these changes or will it run out of money.
On the other hand if the numbers for the Lumia 900 are good, then the stock could take off as it's extremely oversold and almost begging for a reason to rally.
A major portion of the historical data used in this article was obtained from zacks.com. Options tables sourced from money.msn.com.
Disclaimer: It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware