Huge, unusual options activity in Nokia after Nvidia takes $1 billion stake

A large volume of long-term put options have been traded Nokia Corp (NOT OK) ADR (American Depository Receipts) following Nvidia, Inc.’s $1 billion stake in new NOK shares, announced on October 28. Nokia, which makes 5G cellular equipment, will use the money for AI-related investments.

The puts are unusual because they won’t expire for more than 2 years (814 days) on January 21, 2028 and are out-of-the-money (OTM) at $7 per share. Furthermore, this was more than 90 times the previous number of put options outstanding.

NOK shares are in $7.45 today, having risen 34% from last week’s $5.55 on October 22.

The deal will help Nokia manufacture 6G mobile equipment based on artificial intelligence-related technology. Nvidia is already making a profit on its deal, as its shares were purchased at a price of $6.01 per share. It also gives Nvidia a 2.9% stake in Nokia, according to the Wall Street Journal.

But why do investors trade puts that expire in more than two years?

This trade can be seen in today’s Barchart Unusual Stock Options Activity Report. It shows that over 27,000 NOK put contracts have been traded at the strike price of $7.00 expiring on January 21, 2028. That’s 814 days from now.

Most likely it was started by a short seller of these puts. It was last traded at $1.26, but is now trading at $1.31 at the midpoint.

This means that the investor who sold these puts has a breakeven point of $7.00 – $1.26, or $5.74. That’s even lower than the price Nvidia paid ($6.01) and is 23% below the current price. This would only occur if, at any time over the next 2 years or more until January 21, 2028, NOK falls to $7.00, or just 6% below the current price.

Meanwhile, the investor earns a return of 18.0% (i.e. $1.26/$7.00 = 0.18) for the next 27 months, or about 0.67% per month on average.

Therefore, this is a very attractive way to lock in a lower purchase price for a long-term investor in NOK shares.

Additionally, over time, if NOK stock does not fall to $7, the premium price will drop. This could allow the investor to buy back their short investment at a profit.

It is also possible that some investors are hedging their long-term investment in NOK shares at the current price. That means that if your purchase of NOK at $7.45 today fails, your investment will be covered by a higher put option price as NOK falls below $7.00.

But again, the problem is that the Norwegian krone would have to fall below $5.74 before the investment on sale would start to have any intrinsic value. However, it is quite possible that, due to extrinsic value, it could occur at a higher NOK price.

But this, again, is a bullish sign, as the purchase of these puts is likely a move to cover a long NOK trade, following Nvidia’s participation.

Nokia reported strong third-quarter results on October 23, with net sales up 9% year-on-year on a comparable basis and +12% on a reported year-on-year basis. Additionally, the company now has positive free cash flow (FCF), although the margin is not too impressive: just 8.3%.

Analysts can begin to digest the impact of the Nvidia stake and whether it will accelerate the company’s move toward 6G equipment for telecom providers, as well as its push into AI-related software.

As things stand, the average price target is $6.71 per share for 10 analysts, according to Yahoo! Finance. That’s 10% below the current price.

However, AnaChart.com shows that 6 analysts, with recent price target updates, have an average price target of $9.48, or $2.03 above the current price. That represents a potential gain of +27% from the current price.

As a result, there is a mixed survey result. Investors with a bullish view on NOK stock may be willing to follow today’s put options trading activity and short them to establish a lower purchase price with a good return.

On the date of publication, Mark R. Hake, CFA had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com