Williams Companies (WMB) plunged over 10% yesterday as it announced a "financial repositioning" with Williams Partners (WPZ) . The plan involves WMB increasing its stake in WPZ, dividend changes, asset sales and share sales.
The overall effect is to streamline the structure and reduce leverage. Though the stock sold off aggressively yesterday, I think the plan is a positive development and that the share sale price of $29 could mark either a floor or a fulcrum for profitable trading.
By floor I mean that the $29 area supports the stock and it doesn't trade far below. By fulcrum I mean that if it trades below the $29 offering price, WMB will trade back up towards $29 again and any discount you get could be a good deal.
From a price change perspective, I wanted to test how WMB has responded in the past following large one-day declines. For this query, I specified that WMB have a one-day decline of at least 7.5%. Here's a table with the forward returns after this setup since 2013.
What we observe here is that WMB has tended to have big volatility with not much directional edge. Down initially, then a recovery rally, then down a bigger decline 20 days out.
Typically, I would stand aside with cases like this, where my statistical studies don't suggest a strong possibility of a move in a particular direction, but energy is one of my strong themes and I think we're in the early stages of a multi-year recovery.
If you can consider this as a yield play, I think there's an opportunity to use options to lock in some premium and possibly collect a dividend.
The two plays I like are to use the possibility of a recovery rally in the next 10 days and sell the WMB Jan. 20 $28 puts. If you get put the stock, I'd turn right around and sell the WMB Mar 17 $29 calls against it.
The other idea would be to buy the stock here and sell the WMB Mar 17 $29 calls against it.