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Bears Plunder Nokia Call Options

Posted on the 01 June 2011 by Phil's Stock World @philstockworld

Today’s tickers: NOK, DG, ESV & OREX

NOK - Nokia Corp. – When Nokia yesterday announced that it was no longer meaningful to offer a forecast into its murky future, investors abandoned the stock driving it into new lower territory. We noticed frenzied options activity as investors reaped what premium they could from fast-falling call options. The dire nature of Nokia’s warning has left option traders with little doubt that its shares will flounder further in coming weeks. Bearish option traders wrote off at-the-money $7.00 call options expiring in just three weeks’ time for just 20 cents each. The question facing option bears seems to be not whether the shares will rebound but how far they will sink in the days ahead. On Wednesday the picture weakened with shares sliding by a further 7% to $6.50 while it appears that call options are once again being sold, but this time at lower strikes. Investors appeared to turn their attention to the $6.00 strike where volume of 3,000 built by mid-morning. Open interest of a mere 300 lots confirms that new positions are being taken. We saw at least 1,000 contracts clear the prevailing 59-cent bid on our screens. Sellers also decimated the premium available on July $7.00 strike calls with some 9,000 contract being traded Wednesday where premiums have halved to just 18-cents on the day. Investors seem convinced that Nokia’s fortunes look dire.

DG - Dollar General Corp. – The discount retailer missed Wall Street’s expectation for earnings when it reported its first quarter data of 48 cents. The Street was hoping for 50 cents. The seller of all-fine-things-for-less-than-$10 said it took losses on certain slow-to-clear items and said that shoppers were constrained by rising gas prices. It nevertheless stood by its full year estimate and continues to revise store layouts and entice more shoppers with an improved line-up. Its share price slumped by around 7% on the miss and recently traded at $32.70 having yesterday traded at an all-time peak of $34.75. One option investor appears prepared to take delivery of $30-million of its shares by July based on today’s option trading patterns and seems to be taking advantage of the slide in Dollar General’s post earnings misfortunes. The investor sold 10,000 put options at the July $30 strike for a 30-cent premium. By writing the put options the investor is underwriting the purchase of 100,000 shares at the fixed price of $30 each by expiration of the contract. Shares last traded below that strike price on March 21. The seller today takes in a total premium of $300,000 on the trade and presumably believes that the shares either won’t fall by this much or that if they do, they’re a bargain and he’d be happy to take ownership.

ESV - Ensco Plc – Britain’s offshore contract driller saw its share price gain despite an otherwise poor performance across the stock market. Crude oil prices were lower but at above $100 per barrel remain partially responsible for a slowdown in manufacturing that precipitated today’s selling. Yesterday the company received overwhelming shareholder support for its acquisition of Pride International leaving the combined company the world’s second largest offshore drilling company. Shares rose following a broker upgrade to “buy” and traded at $54.43 in New York. One option trader, possibly an investor long of the stock, sold a strangle combination that bets the share price will remain bound within a range spanning $48-$55 through options expiration in July. The investor sold put options at the $48 strike and call options at the $55 strike for an overall premium take of $2.37. Shares have traded lower since reaching $57.07 on May 19 and this investor appears happy to get short above $55 in the coming weeks or else is banking on the post-acquisition euphoria to dissipate shortly.

OREX - Orexigen Therapeutics – Fast-acting traders pounced on news that the developer of Conclave obesity drug developer would hold a regulatory update on June 3 as a positive sign. Bullish traders appeared to trade bullish call options for bearish puts expiring after the event. The share price jumped by 15% as investors quickly discounted positive news in the knowledge that Orexigen has been meeting with the FDA to assess the cardio-vascular risks associated with Conclave. Shares slipped from the session peak at $3.45 to $3.32 while bullish option traders assumed only good news could come as a result of the webcast on Friday. Investors sold put options at the $3.50 strike raking in a premium of 40 cents in order to buy calls at the same strike prices at just 16 cents. Bullish expectations if played out according to plan would see shares continue to rise fattening call premiums and trimming the size of put values.

Andrew Wilkinson
Senior Market Analyst
[email protected]

Caitlin Duffy
Equity Options Analyst


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