Finnish telecommunications network tech provider Nokia Corporation (NYSE:NOK) is a stock that has, somehow, been bestowed with meme stock status of late. Social media-savvy retail investors have piled into NOK stock at a mind-boggling rate since the beginning of the year.
Similar to other fan favorites such as GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC), Nokia saw a massive parabolic spike at the end of January. Since then, shares have fallen back to earth as retail investors focus their efforts increasingly on penny stocks with small floats.
Indeed, the sheer float size of Nokia made it a head-scratcher for me as a potential short-squeeze stock. That’s neither here nor there.
What has been particularly interesting to me is the excitement that has been brewing for beginner investors getting into options trading. Here’s my take on what investors should consider about options strategies.
NOK Stock Options Trading Frenzy Is Exciting, but Dangerous
Many investors have moved to looking at options strategies to trade NOK stock. I think seeing the “gain/loss porn” on social media sites can entice investors to get into these trades. However, I’ve got the following commentary.
I’m generally a more conservative long-term investor looking at long/short strategies. Options generally don’t appeal to me, except in two scenarios:
- I’d like to hedge out some earnings-specific or short-term risk on an overweight position. In this case, buying puts on an overweight position.
- I want to generate extra income on a stock I think might trade sideways over the near-term, but has great long-term upside potential. In this case, a covered call strategy.
Generally speaking, buying naked puts or calls is an extremely high risk proposition. Yes, it’s true that sometimes you can get it right and book some pretty impressive gains. However, most trades will be zeros. Writers selling the various options do so to make a profit. Like taking insurance at the blackjack table (options are supposed to be used as portfolio insurance), they’re generally losing bets.
That’s not to say sometimes options can be mispriced due to sentiment. However, thinking you’re smarter than the market has bankrupted more than a few individuals.
Now, writing/selling naked (uncovered) puts or calls is even more crazy. That’s because losses can be much larger than 100%. If you buy a call or put and it doesn’t work out, you lose that premium. Exposing oneself to potentially infinite losses is not a prudent investment strategy whatsoever.
Covered Call Strategy Here’s an Interesting One
Now, for investors bullish on NOK stock long-term (and I think there’s reason to be), a covered call strategy might make sense here.
Nokia is a company with some pretty decent valuation metrics. It’s profitable, and is going to benefit greatly from a surge in 5G adoption. The catalysts are real with this company, and it’s actually a fundamentally-sound long-term investment. That makes NOK stock one of the few such “meme stocks” I’d put in this bucket.
Accordingly, if you’re thinking of owning this stock for five years or longer, but want some additional income, covered calls are a great idea.
I do think there’s a decent likelihood this stock will continue to trade within a relatively narrow range for some time. That said, a resurgence of volatility driven by retail investor sentiment certainly isn’t out of the question.
Bottomline on NOK Stock
If you’re in this investment for the long-haul, forget the naked options buying with NOK stock. Don’t worry about the lottery-ticket returns naked options can provide. Cheering for others praying for a bet to work out from the sidelines can be more satisfying long-term.
Capital preservation should be a primary goal for investors. Accordingly, naked options trading is a game for those with either way too much money and a lot of time on their hands, or those with an extreme risk-loving preference.
My worry is that this market mania may create an environment where beginner investors use options incorrectly, get burned, and never want to invest again. Investing conservatively for the long-term can be difficult when you see folks making ridiculous short-term returns trading naked options.
However, when you see a social media post showing a massive options win, I relate this to how most degenerate gamblers will take a photo of a massive chip stack. They’re not going to take a photo of an oft-empty table, or them reloading at the cashiers cage multiple times in same the night after losing all their gains.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.