Long Strangle Player Targets Williams Companies

WMB – Williams Companies, Inc. – A large-volume long strangle initiated natural gas producer, Williams Companies, suggests one options strategist is expecting the price of the underlying stock to shift significantly head of expiration in January 2011. Williams’ shares are down 4.00% to arrive at $18.34 as of 11:45 am ET. The stock has been volatile throughout the morning, falling as much as 5.025% to an intraday low of $18.14 at the start of the session, and later recovering the majority of earlier losses to touch an intraday high of $18.74, before sliding back down to the current price of $18.34. Shares of the third-largest U.S. pipeline operator by market value slipped after the firm cut its profit forecasts for the next three years, citing lower-than-expected prices for natural gas and petroleum goods. The strangle-strategy selected by the options player suggests he is positioning for increased volatility in WMB shares as well as inflated options implied volatility. The investor picked up 10,000 calls at the January 2011 $20 strike for premium of $0.90 each, and purchased 10,000 puts at the January 2011 $17.5 strike for premium of $1.10 apiece. Net premium paid to establish the long strangle amounts to $2.00 per contract. Thus, the trader is prepared to make money if Williams’ shares rally above the upper breakeven price of $22.00, or should shares trade below the breakeven point to the downside at $15.50, by expiration day in January 2011. We note the investor may also walk away with profits if he is able to sell-to-close the strangle for more than $2.00 per contract at some point before the contracts expire next year.

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.

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