Williams Cos. was Tuesday's IBD Stock of the Day and just broke out above resistance and a buy point of 29.94 in a cup-with-handle base.
WMB stock sits above all the key moving averages.
Investors who think the stock will continue to rally and don't want to risk significant capital can use long call options rather than buy 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 (the strike price) up until a certain date (the expiration date).
One of the benefits of call options is that they provide leverage (this can be both a good and a bad thing).
Exposure At Fraction Of The Cost
Assuming an investor wanted to buy 100 shares of WMB stock, he or she would have to invest around $3,400 at the current share price.
Instead, the 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 investors were to buy one WMB 30-strike call option expiring on Aug. 19, they would only need to invest around $240 rather than $3,400.
The break-even price for this call option is equal to the strike price plus the premium paid, which would make the break-even price 32.40.
The most the trade can lose is the premium paid of $240, which would occur if Williams stock finished below 30 on Aug. 19.
Unlimited Upside With Call Option
However, if WMB stock shoots higher, the upside is unlimited.
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
Savvy traders can further reduce the risk by selling an out-of-the-money call, turning the trade into a bull call spread.
For example, selling the Aug. 19, 35 call would reduce the trade cost by around $50 but would also limit the upside above 35.
Williams is set to announce earnings around the end of February, so this trade would have earnings risk if held to expiration.
WMB stock is ranked No. 11 in its industry group and has a Composite Rating of 97, an EPS Rating of 87 and a Relative Strength Rating of 93.
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
