Spread looks for free ride on Williams

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One investor wants to take a free ride on pipeline company Williams.

optionMONSTER's Heat Seeker monitoring program detected the purchase of some 25,000 November 35 calls for $0.59. A matching number of January 36 calls was sold at the same time for $0.69. Volume exceeded open interest in each strike, indicating that this is new activity.

The trader collected $0.10 in opening what's known as a diagonal spread. This strategy entails buying and selling options at different expiration months to take advantage of higher premiums in the longer-dated contracts.

He or she now has the right to buy WMB for $35 through November and will then be on the hook to sell shares for $36 two months later. So the trader was essentially paid to open the strategy and stands to make more money from a rally.

The risk is that WMB stays below $35 through November expiration and then rallies. The trader would then be left with short calls but could still buy back the January contracts to exit the position.

WMB is flat at $31.63 this afternoon but is up more than 8 percent in the last six months. Today's call spread pushed total option volume in the name to 4 times greater than average, with calls outnumbering puts by more than 100 to 1.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


This article appears in: Investing , Options

Referenced Stocks: WMB

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