Williams Companies (NYSE:WMB) ratio calendar spread

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Natural gas transporter Williams Companies Inc. (NYSE: WMB ) did not announce any news on Monday as the shares are moving in-line with the broad-market gains, and options action on the tape suggests at least one investor expects greater swings in the stock throughout the longer-term.

WMB has dropped two cents to $20 so far on the day. The company has not announced any news since its earnings figures on May 5 (WMB announced earnings of 36 cents per share and missed estimates by one cent). The market expects its next earnings report around Aug. 5.

At 11:04 a.m. EST, a block of 4,500 August 20 calls changed hands for $1.49 per contract (right at the bid price at the time of the trade). Simultaneously, a block of 3,223 January 2011 21-strike calls crossed the tape for $2.08 per contract, which was one cent lower than the ask price when the volume hit the tape. This options action suggests the investor sold the August 20 calls and bought the January 21 calls in a ratio calendar spread (the total debit on this spread was $116). This calendar spread buyer banks on near-term volatility to decline and will make money if the stock is trading higher than $23 at January 2011 options expiration. If volatility climbs during the long-term, this calendar spread becomes profitable.

Take a look at the profit/loss graph below, which I built using my virtual trading account . You can open your own account for free by clicking here - there you can gain access to essential trading tools to assess and manage risk.

Implied volatility of the August 20 calls and January 21 calls is roughly 38% compared to the stock's 30-day historical volatility of 50%.



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.



This article appears in: Investing , Options

Referenced Stocks: WMB

Jud Pyle

Jud Pyle

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