Chasing Value: Favorite trades -- Williams Companies

I couldn't have done this without playing contrarian to the negativity in the market using options. Over the past six years, we started to undervalue risk, until it got to extreme levels. Recently I believe our fear pushed us to do the opposite.

Here is the trade that I have been replicating as I acquired stocks. When I bought WMB at $13 dollars a share, I reviewed the put options and found that I could "sell to open" WMB $12.50 November puts and receive $1.40 per share. This meant that I would be required to buy WMB for a break-even cost of $11.10 if it was $12.49 or less in November.

If I was happy to buy WMB for $13 per share, than I would be even more delighted to buy it for almost two dollars less. So I did the naked puts in equal amounts to the shares I bought. In this scenario, if it was $12.50 or more and expired, then I reduced my WMB acquisition price to $11.60.

In the end I "bought to close" the position for $0.65, when WMB was trading higher and put the buying power in another option where there was more to gain because of even greater misplaced fear. Williams closed at $15.61 yesterday.

A word of caution, options trading is not for everyone, and most brokers will be highly restrictive about who is qualified and allowed to place such trades.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of WMB and trade options from time to time.