Oil and gas continue to hold up well in this stock market correction. Williams Companies is nearly at 52-week highs while the market indexes are at lows. Yesterday, WMB stock saw large volume in the 39 strike call options for June expiration. This could indicate a large trader placing a bullish bet on the stock.
Options Provide Leverage
WMB stock is above all key moving averages and looks ready for another shot at overcoming resistance at 37.
Investors who think WMB stock will continue to rally and don't want to risk significant capital can use long call options. It's much cheaper than buying the stock outright.
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a certain stock at a certain price (strike price) up until a certain date (expiration date).
One of the benefits of call options is that they provide leverage (this can be both a good and a bad thing).
Assuming an investor wants to buy 100 shares of WMB stock, they would have to invest around $3,600 at the current price.
Instead, an investor could gain a similar exposure using a fraction of the capital by buying a call option.
One call option gives the investor exposure to 100 shares.
If an investor buys one WMB 39 call option expiring on June 17, they would only need to invest around $20 rather than $3,600.
Profit And Loss For A Long Call On WMB Stock
The break-even price for this call option on WMB stock is equal to the strike price plus the premium paid. For this trade, that makes a break-even price of 39.20. So, the trader needs a significant rally from the current price around 35.95 for this WMB stock option to get profitable.
The most the trade can lose is the premium paid of $20. That occurs if WMB stock finishes below 39 on June 17.
However, if WMB stock shoots higher, the upside is unlimited.
Using options can be a great way to gain exposure to a stock without risking as much capital as buying the stock outright.
Williams is set to announce earnings around the start of August, so this trade should not have any earnings risk.
According to the IBD Stock Checkup, WMB stock is ranked No. 17 in its group and has a Composite Rating of 94, an EPS Rating of 93 and a Relative Strength Rating of 96. Its group, Oil & Gas-Integrated, is ranked No. 6 out of IBD's 197 Industry Groups.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
