From takeover prospects to downgraded debt to a speculative 4x return, Nokia (NOK) sentiment is across the board. The large question that remains, however, is How Do Investors Trade It?
Here are two simple plays that you probably have not heard of.
The Trade
With all of the risk surrounding Nokia, I prefer an options trade. In case you were not aware, Nokia's debt was just rated "junk" by Moody's, the last of the three credit rating agencies to rate the firm's debt as junk.
Also, the company just announced that it would trim 10,000 jobs and shake-up its management.
The major risks aside, I believe that there is quite a bit of upside to Nokia, and here are two ways to trade it, depending on your time horizon.
1. July 2012 Expiration
Investors can purchase the July 2012 expiration 2-3 vertical. The idea is to go long the $2 strike and short the $3 strike for a debit of $.49.
The reason that I particularly like this trade is that the debit is a $.02 under Nokia's close from Friday June 15. In fact, I imagine that active traders could get a price of $.47 per contract using a limit order, so long as Nokia does not post a major gap up or down in price. This is a very good price for the upside.
July 2012 Expiration | ||||
Long Strike | Short Strike | Difference | Profit Potential | |
Price | 0.59 | 0.10 | 0.49 | 0.51 |
Delta | 0.82 | 0.28 | 0.54 | - |
Also, I very much like the delta of the $2 strike. A delta of .82 means that for every $1 that Nokia increases, the price of this option will increase $.82. Thus, the price increase for the long option is drastically higher than the price increase for our short strike.
2. January 2013 Expiration
A major positive to playing next year's January expiration is that the market has time to digest Nokia's job cuts, and the company has time to ramp up sales of its new phones using Microsoft's (MSFT) new Windows 8 operating system. As an aside, I am bullish on Microsoft.
The market has been hammering Nokia because of its flailing phone products. However, leaving its Symbian operating system for the new, sexy Windows 8 will likely be a huge boost.
This trade works roughly the same way, going long the $2 strike and shorting the $3 strike.
January 2013 Expiration | ||||
Long Strike | Short Strike | Difference | Profit Potential | |
Price | 0.84 | 0.41 | 0.43 | 0.57 |
Delta | 0.72 | 0.47 | 0.25 | - |
Time Horizon
Personally I prefer the July expiration trade because of the high delta spread, meaning that if Nokia increases only a little, the position will increase a fair amount. The risk lies in the fact that Nokia may not be trading above the entry price at option expiration on the close of Friday July 20.
The positive to the January 2013 trade is that the position gives Nokia more time to return to profitability and to outperform analysts' very, very low expectations. The main reason that I do not like the January trade is because the delta spread is only .25, meaning that the position will not be as profitable in the short-term. With a delta this low, the position could tie up capital for months before entering a strong profit zone.
Reasons that Nokia Could Jump
While Nokia was recently overtaken by Samsung (SSNLF.PK) as the world's largest shipper of handsets, ending a 14-year streak, there are still reasons to be optimistic.
- Apple (AAPL) pays Nokia between .75% and 1.5% of each iPad, iPhone, and iPod sale, according to a settled lawsuit. To put it in perspective, Nokia could earn between $800 million and $1.6 billion in the Q3 2012. Despite this negative news for Apple, I have found an incredible trade for Apple shares.
- As aforementioned, Nokia is teaming with Microsoft to use the new Windows 8 operating system. More important, Nokia will release a new tablet by year's end, and it will feature the software.
- Nokia earns half of a billion dollars just from just royalties. Royalty payments are perhaps one of the reasons that Google (GOOG) purchased Motorola this past May.
Placing the Trade
Options prices on Nokia are swinging wildly with very high implied volatilities (93.19% for the July options) because Nokia is facing extreme uncertainty. The rapid price descent of Nokia presents an incredible opportunity to go long for contrarian investors.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NOK over the next 72 hours.
