Option Activity Alert: NOK, RIMM, AEP

NOK – Nokia Corp. – Investors in the Finnish cellphone-maker who have watched its share price halve from its optimistic February peak were thrown a lifeline on Monday after Google said it would buy a Motorola division. The purchase of its Mobility unit was quickly pounced on by Nokia bulls after a spokesman for the company said “we use Windows too!” Shares in Nokia recovered by 12% on Monday to trade at $6.00 after Nokia said that the Google decision vindicated its decision to stick with Windows technology. The move, said Nokia, could serve up a “massive catalyst” for the entire Windows Phone ecosystem. Option traders jumped at the chance of a reevaluation for the industry in light of the recent slump especially in Nokia’s fortunes, where executives earlier stopped making forecasts in light of ever-tougher competition from Apple and Blackberry. Investors predicted that Nokia might gain as much as 50% over the coming two months and paid an average of 10 cents for rights to buy shares by October. Calls at the $9.00 strike started the day with less than a one-in-10 chance of landing in the money by expiration but still investors keep snapping them up – volume so far stands at 16,642 lots.

RIMM – Research in Motion – Blackberry-maker RIMM also tagged along for the ride on Monday after National Bank Financial analyst Kris Thompson suggested that Google’s Motorola purchase crystallized the issue of patents. Google’s defense of its Android strategy by widening the net of its outstanding number of patents might focus investors on a floor for Research in Motion. The company earlier acquired thousands of wireless patents from now bankrupt Nortel Networks, which could be valued at $10 billion and compare to a market value of $13 billion at its current $25.70 share price. Option buyers looking at the Google deal as an industry catalyst reached higher up the ladder for RIMM, whose shares have been capped below $30.23 since June 24. Dealers looked to the September expiration $31 strike where 2,600 call options granting buying rights were purchased for an average 57 cents compared to almost 1,200 lots sold during the session. Undeterred by the day’s bullish news some bears still needed convincing and with last week’s $21.60 intact put buyers paid an average of 31 cents for 1,800 puts conveying the right to sell.

AEP – American Electric Power – The power company had a shocking week – share-price wise at least. Its swift slump to $33.09 set a fresh 52-week low as investors’ fears capitulated and began pricing in a doomsday scenario. Its shares have since recovered to $37.00 on Monday as buyers returned while one option trader has been active. The dealer appears to be rolling over what could be a collar strategy on the stock shifting from this week’s expiring August contract out to November’s expiry. The investor appears to be long of puts and short of calls in a strategy that would protect against a downside slump below $33.00 by expiration. The investor presumably has an established long position in the underlying shares and by using a short call position can determine an exit price on a further rally for the stock. The August $38 strike was formerly that point, although in rolling forward to November the investor has softened to the $37 strike presumably as the market has become more challenged.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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