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Will Ashworth

Williams-Sonoma’s Unusual Options Activity Provides Bullish Investors With an Excellent Income Opportunity

Happy Friday, everyone! We've managed to get through the first five-day workweek of 2025. 

As I write this, the U.S. jobs report is minutes away. They’ll likely be out by the time I finish this article. Of course, as they always do, the markets will move up or down accordingly.

I always find the first full week of the new year difficult because the holidays get you out of your routine. While routines can be a sign you’re in a rut, they also help humans function. I digress.

I can't remember when I last wrote about an options strategy I've been developing recently. However, Williams-Sonoma (WSM) stock and its unusual options activity from Wednesday's trading got me thinking about it again.

I hope your team wins this weekend's NFL wildcard games. I’ll be cheering for the Commanders. 

Have an excellent weekend!

I Continue to Love Williams-Sonoma’s Business

I’ve always been a big fan of Williams-Sonoma because of CEO Laura Alber. In September 2023, I recommended WSM stock despite hitting a 52-week high. 

 “Given Williams-Sonoma is a very successful omnichannel retailer with a top-notch CEO in Laura Alber, it’s unlikely that the investment firm would make a play for WSM. However, the significant investment by its affiliated fund assures investors that it remains an excellent long-term investment,” I wrote. 

It’s up 210% in the 16 months since. 

Enough of my backslapping. 

The point is that I believe WSM is an excellent buy-and-hold investment despite the gains stretching its valuation. However, there will be times in the future when it delivers a quarter or two that don’t meet analyst expectations. When that happens, its shares will correct, providing buy-on-dip opportunities. 

Wednesday’s unusually active option is one such opportunity. It’s not perfect, but it’s worth considering if you’re a Williams-Sonoma bull, as I am.

The WSM Option Details

There was no trading Thursday due to the day of mourning for former President Jimmy Carter. On Wednesday, there were 1,403 unusually active options (695 calls and 708 puts), so it was a reasonably balanced day between the two. 

This is just a reminder that my definition of unusual options activity might differ. I exclude any that expire in less than seven days and have a Vol/OI ratio below 1.24. 

As I said earlier, Williams-Sonoma had one unusually active option on Wednesday. It’s below. 

The Feb. 21 $185 put had a volume of 1,253, nearly 11 times its open interest. The volume Wednesday for all WSM options was only 2,520, so the $185 put accounted for 50%. That’s not insignificant. 

Even more compelling is that 1,250 of the 1,253 contracts changed hands in one trade. 

  

So, we know that a big fish was interested in WSM. Was it bullish or bearish?

Bullish or Bearish?

Based on WSM's $194.59 closing price on Wednesday, the strike price was 4.9% below that. There are two ways to interpret this. First, the party in question was buying downside protection after Williams-Sonoma stock had gone on a 97% run over the past 12 months. 

The second possibility is that they were looking for income. If they sold the $185 put at $5.90—assuming WSM keeps moving higher and the buyer doesn’t force them to buy the shares—they would generate an annualized return of 24.9%.

I’ll take that every day and twice on Sundays.  

Of course, as we sometimes forget, every trade has two sides. If one party is bullish and looking for income, the other party is bearish or, at the very least, concerned that the stock’s momentum has run its course.  

Let’s assume the bullish proposition and explore my evolving strategy and WSM stock.

The Collar to Play

I asked Perplexity the following:

“What option strategy is a ‘collar?’’”

It said this is when you already own the stock, combining a covered call with a protective put. It involves selling a call with a strike price above the current share price and buying a put below the share price. 

Go to Barchart’s Protection Strategies page, which shows six call strike prices with a Feb. 21 expiration.

In this situation, the highest strike price is prudent because you don’t want to sell your existing WSM shares.

In this situation, you generate $1.00 in premium income from the covered call and spend $5.50 for the protective put for a net debit of $4.50. So, your maximum profit would be $30.91 [$230 call strike price - $194.69 share price - $4.50 net debit], while your maximum loss would be $14.09 [$185 put strike price - $194.59 share price - $4.50 net debit].

With a profit probability, it’s an excellent bet. 

Now, let’s look at my buy-and-hold income strategy. 

It’s Not a Straddle

A short straddle is when you sell a call and put with the same strike price and expiration date. My strategy isn’t that. 

I want to do three things in my buy-and-hold income strategy: 1) generate income, provide an opportunity to buy more shares at a lower price, and provide a potential exit strategy on the upside. 

Here’s how it would work. I’m basing my prices on Friday trading as I write this.

1) Buy 100 shares of WSM at $195.46. 

2) Sell 1 $155 put (approximately 20% below current share price) expiring on Feb. 21 with a $0.55 bid price, and

3) Sell 1 $290 call (approximately 50% above the current share price) expiring on May 16 with a $1.05 bid price. 

The total income generated is $1.60 for an annualized return of 6.8%. It isn’t much, but it’s better than nothing.

The whole point of this strategy is to get paid to create better entry points for adding to your positions while also providing automated profit-taking potential.

I got this idea by looking for ways to improve the buy-and-hold and dollar-cost-averaging investment strategies. 

It’s still a work in progress.     

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