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Nokia Corporation (NYSE:NOK) Surge Fails to Spook Bearish Traders

Speculators targeted NOK's January-dated puts

by 11/23/2012 8:47 AM
Stocks quoted in this article:

The shares of Nokia Corporation (ADR) (NYSE:NOK - 3.31) rallied more than 12% on Wednesday, boosted by reports that the company completed its acquisition of Earthmine Inc. Nevertheless, put players descended upon the stock in droves, as roughly 143,000 of these options crossed the tape during the course of the session -- almost nine times the equity's average daily put volume.

Most popular was the out-of-the-money January 2013 3 strike, where nearly 54,800 puts changed hands. Meanwhile, open interest at this strike rose by almost 17,000 contracts overnight, pointing to the initiation of some new bearish bets. According to TradeAlert.com, it appears a block of 9,438 puts was purchased at this strike for $0.26 per contract. In other words, the speculator is counting on the stock to fall south of $2.74 (strike price less the net debit paid) by the time January options expire.

Digging deeper into the data, it also looks as though a block of 20,000 puts was bought at the January 2013 3.50 strike for $0.44 apiece, while an equal number of puts were simultaneously sold at the aforementioned January 3 strike for $0.18 each -- resulting in a net debit of $0.26 per spread. By employing what appears to be bear put spread on NOK, the trader is betting on the stock to fall south of breakeven at $3.24 (long strike minus net debit). His maximum profit is limited to $0.24 -- or the difference between the strike prices, less the net debit -- while his risk is capped at the premium paid to open the spread.

Wednesday's penchant for puts over calls runs counter to NOK's current trend. The equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio stands at 2.00, indicating traders have bought to open two calls for every put during the past two weeks.

Likewise, Schaeffer's put/call open interest ratio (SOIR) for NOK checks in at 0.60, confirming calls nearly double puts among options slated to expire within the next three months. This ratio is docked in the 41st percentile of its annual range, implying that near-term options players are slightly more call-heavy toward the security than usual.

It's also worth noting that short interest on the telecom issue rose by more than 6% during the most recent reporting period, and now accounts for about 9% of NOK's available float. This raises the possibility that some of the recent call volume could be result of hedging activity by short sellers. Either way, it would take more than six days to unwind these bearish bets, at the stock's average daily trading volume.

Meanwhile, nearly all of the analysts covering NOK maintain a pessimistic outlook toward the security. In fact, only one has deemed the stock worthy of a "strong buy" endorsement, compared to 12 tepid "holds" and 10 "sell" or worse recommendations. What's more, the equity's average 12-month price target sits at $2.62, representing a discount to its current perch.

This downbeat attitude toward NOK is not unwarranted, as the shares have surrendered nearly 40% during the past year, and about 31% year-to-date. However, Wednesday's surge pushed the stock north of $3.20 for the first time since Aug. 27 -- the site of a bullish gap related to the Apple Inc. (NASDAQ:AAPL) patent infringement lawsuit victory over Samsung Electronics Co.


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