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Option Trader Bets On a Breather for Nokia Corporation (NOK)

Breaking down an anti-volatility options play on NOK

by 1/28/2013 10:39 AM
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Since skimming the $1.63 level in mid-July, the shares of Nokia Corporation (ADR) (NYSE:NOK - 4.18) have more than doubled atop their 10-week and 20-week moving averages. However, it looks like one options speculator may be betting on a breather for NOK, and is employing both puts and calls to gamble on short-term stagnation.

Earlier in the session, symmetrical blocks of 5,000 contracts changed hands at the March 4 put and March 4.50 call. All of the contracts crossed at the bid price (the puts for $0.27, the calls for $0.22), suggesting they were sold. Plus, volume has exceeded open interest at the put strike, and implied volatility on the call is trending higher -- both signs of newly opened positions.

By selling the options to open, the trader constructed a short strangle for a net credit of $0.49 per pair of contracts. This represents the maximum potential reward on the trade, and can be pocketed as long as NOK remains between the strikes through expiration, keeping both the puts and calls out of the money. However, as long as NOK stays between $3.51 (put strike minus net credit) and $4.99 (call strike plus net credit) through March expiration, the speculator will be profitable. Should NOK perforate either breakeven rail, the investor's losses will begin to accumulate.

From a broader sentiment standpoint, we find that most of Wall Street is wary of NOK. Despite outperforming the S&P 500 Index (SPX) by 54 percentage points during the past three months, NOK boasts just three "buy" or better ratings from analysts, compared to 10 tepid "holds" and 10 "sell" or worse suggestions. Plus, short interest represents more than three days' worth of pent-up buying demand, at NOK's average pace of trading.

In the same vein, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.07 indicates that puts outnumber calls among options with a shelf-life of three months or less. What's more, this ratio stands higher than 91% of comparable readings taken over the past year, implying that near-term options players have rarely been more put-skewed.

Should the shares of NOK resume their upward momentum, a round of upgrades, a short-squeeze situation, or an unwinding of pessimism in the options pits could add contrarian fuel to the equity's fire.


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