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Call Selling Runs Rampant on Uptrending Nokia

NOK sees an uptick in July call volume

by 12/6/2012 10:06 AM
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Nokia Corporation (ADR) (NYSE:NOK - 3.83) rallied nearly 13% yesterday, after the company announced a new partnership with China Mobile, while also introducing its Lumia 620 phone. As such, approximately 127,000 calls were exchanged during the course of the session, which was more than quadruple the security's average single-session call volume, and 2.4 times the number of puts traded.

However, not all of this call volume was of the bullish variety. Garnering notable attention was the July 6 strike, where close to 13,800 calls crossed the tape -- the majority of them at the bid price, implying they were sold. These out-of-the-money contracts changed hands at a volume-weighted average price (VWAP) of $0.26. Meanwhile, open interest at this strike rose by 7,874 contracts overnight, pointing to the initiation of new positions. By selling these calls to open, traders are betting on the equity to remain below $6 through July expiration -- rendering the options worthless, and allowing them to pocket the average premium received. Wednesday's activity could also be reflective of shareholders writing covered calls in an effort to protect against a pullback in the stock, or to generate income on their NOK shares.

From a broader sentiment scope, optimism appears to be ruling the options pits. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 20-day call/put volume ratio of 1.89 for NOK. In other words, calls bought to open have nearly doubled puts during the last four weeks.

It should also be noted that short interest on the mobile phone issue rose by more than 5% during the past two reporting periods, and now accounts for 9% of NOK's available float. This raises the possibility that some of the recent call-buying activity could be the work of short sellers looking to hedge their pessimistic bets. Either way, it would take almost 11 days to buy back these shorted shares, at the equity's average daily trading volume.

Meanwhile, the prevailing attitude toward NOK among the brokerage bunch is decidedly bearish. Only one analyst has handed out a "strong buy" endorsement, compared to 11 "holds" and nine "sell" or worse suggestions. Even more telling, the security's average 12-month price target sits at $2.68, representing a discount to Wednesday's closing price of $3.88.

This caution toward NOK isn't without merit, considering the stock's year-over-year decline of more than 27%. However, the shares have gained some ground this week, tacking on about 19% since Monday's open. What's more, yesterday's spike pushed the stock into territory not seen since April. Should the equity continue to move higher over the next few months, the aforementioned traders could end up risking assignment on their written calls.


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