Saturday, April 2, 2011

Opportunity with Nokia (NOK)

As you may have heard, Nokia (Ticker: NOK) is teaming up with Microsoft to deliver phones running Windows Phone 7 OS.  Since that announcement, the stock has been punished and is sitting at around $8.50 these days.  The future for Nokia looks very uncertain, and I believe as a result of this, there is quite an anomaly with one of its call options.

As you know, the farther out an option expires, the more expensive it is.  It's logical...because if you have a later expiry date, the chances are greater that your position will make money.  However, what I found with Nokia's call options with a strike price of $5.00 was essentially the opposite.  As you can see in the table below, options that are set to expire in July of 2011 have a higher asking price than ones set to expire in January 2013!  The bid prices, however, are as you would expect (i.e. more expensive as your get farther away).  In any case, what’s happening is that the time value of the options is pretty near to zero!  The strike price is $5.00 + cost of option of $3.55 = $8.55, which is just $0.05 higher than the current share price.  I have never seen an option so far out being sold so cheaply.  If I were to buy the Jan 2013 option now, as long as the stock moves up above $8.50 sometime between now and January 2013, I can make some money.  This is very, very curious!

Table 1: NOK Call Options with $5.00 Strike Price
Call OptionsStrike Price at 5.00
ExpiresSymbolLastChgBidAskVolOpen Int
Apr 11NOK110416C000050002.980.003.303.500122
Jul 11NOK110716C000050004.100.003.303.600204
Oct 11NOK111022C000050003.950.003.303.6005
Jan 12NOK120121C000050003.600.003.353.55503,212
Jan 13NOK130119C000050003.50Down 0.103.403.55104,811