Taking a position on volatility

01/22/25
  • WMB recently challenged November’s multi-year high
  • Stock hit highest intraday high since June 2015 on Tuesday
  • Large matching put and call trades in April options

Knowing a stock is experiencing unusual activity is one thing, understanding what that activity may represent is another. As the following example shows, scratching below the surface can change first impressions.

On Tuesday, energy stock Williams Companies (WMB) appeared on multiple LiveAction scans for heavy options activity, with put volume more than 14 times average and call volume running roughly five times average.

A potentially bearish development? Not necessarily. On any given day, put volume is typically lower than call volume, which means a smaller absolute increase in put volume can result in a bigger increase on a relative basis. For example, while WMB’s put volume was much higher relative to its average on Tuesday morning, call volume was still higher on an absolute basis by about 3,000 contracts.

Also, traders who focus only on the one or two options series that are closest to expiration (because that’s where volume is typically concentrated) may overlook important trades. In this case, activity was heaviest in the April expiration, even though seven other options series were set to expire before it:

Chart 1: Williams Companies (WMB) April options, 1/21/25 (weekly). Possible April $55-$65 strangle.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


The key characteristics of this activity were that, with the stock trading around $60, identical (12,400-contract) trades occurred in the April $65 calls (top) and $55 puts (bottom), and volume was much greater than the open interest (OI) in either contract.

Matching trades in an out-of-the-money (OTM) call and an OTM put with the same expiration could represent a strangle, and the fact that volume was greater than OI means it was likely these trades represented a new position rather than the liquidation of an existing one.

A trader who bought this strangle (long both the call and the put) would, at expiration, need WMB to be above the call strike price (plus the cost of the strangle) or below the put strike price (minus the cost of the strangle) to produce any profit. In other words, the long strangle benefits from high and/or rising volatility:

Chart 2: Williams Companies (WMB), 10/1/24–1/21/25 (weekly). Stock testing resistance at Nov. highs.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


A trader who shorted this strangle (selling both the call and the put) would be looking for the opposite—low and/or falling volatility, which would take the form of a stock price somewhere between the two strike prices (at expiration). In that case, both options would expire worthless and the trader would keep all the premium collected from their sale.

Bottom line, Tuesday’s trading wasn’t necessarily a bullish or bearish development. A trader may have established a large position in WMB, but that trader may be more interested in the stock’s volatility than in the direction of its price.

Note: WMB is currently scheduled to release earnings in late February.

Today’s numbers include (all times ET): mortgage applications (7 a.m.), Atlanta Fed Business Inflation Expectations (10 a.m.), Leading Economic Indicators Index (10 a.m.).

Today’s earnings include: Abbott Labs (ABT), Amphenol (APH), Halliburton (HAL), Johnson & Johnson (JNJ), Procter and Gamble (PG), Alcoa (AA), Crown Castle (CCI).

 

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1 Reuters. Oil rallies, settles at multi-month high on US crude draw, Russia sanctions. 1/15/25.
2 MorganStanley.com. Global Outlook: What’s Ahead for Markets in 2025? 11/18/24.

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