Use Nokia Options to Position for Upside, Morgan Stanley Says

Investors should trade Nokia Oyj (NOK1V) options because shares may gain in the fourth quarter as the company plans to switch operating systems and a joint venture it’s in may end, according to Morgan Stanley.

Praveen Singh, London-based equity derivatives strategist at the bank, and analyst Patrick Standaert recommended buying Nokia December 5-euro calls while selling September 5-euro calls because the Espoo, Finland-based company’s shares may rise in the fourth quarter as it shifts to Microsoft Corp. (MSFT) ’s Windows Phone 7 for its main high-end platform, and because of a possible end to its 50-50 joint venture with Siemens AG, Nokia Siemens Networks.

“Nokia is a company in transition facing major headwinds,” Singh and Standaert wrote in a note today. “Positive news flow on Windows Phone product development and NSN exit could lead to upside in the stock.”

The Windows Phone 7 operating system will replace Nokia’s own Symbian line, which is losing out to Apple Inc. (AAPL) ’s iPhone and Google Inc. (GOOG) ’s Android handsets. Nokia, the world’s biggest maker of mobile phones by volume, is also looking at “multiple options” for Nokia Siemens Networks, spokesman James Etheridge said. NSN, the second-biggest maker of wireless communications equipment by market share, had an operating loss of 686 million euros ($975 million) on revenue of 12.7 billion euros in 2010.

Nokia tumbled 43 percent this year, compared with a 12 percent decline for the Helsinki Stock Exchange General Index. Morgan Stanley rates the company “underweight” and cut its price estimate to 3.70 euros.

Implied volatility, the key gauge of option prices, for Nokia’s at-the-money options expiring in three months reached a two-year high of 47.77 on June 28. Term structure, a gauge of what different options maturities cost based on their implied volatility, is inverted before the company releases earnings on July 21, the note said.

Calls give the right to buy 100 shares of a security for a certain amount, the strike price, by a set date. Puts convey the right to sell.

Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will rise or fall.

To contact the reporter on this story: Cecile Vannucci in New York at cvannucci1@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.

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