Buffett-Style Options: The Put Option Strategy That Built Berkshire’s Biggest Deal

Investors have long associated Warren Buffett with buying great businesses and holding them for decades. Less discussed, however, is Buffett’s long history of using conservative options strategies around businesses he already wanted to own.

During the first Value Options Letter podcast, Tobias Carlisle and Tim Travis explored how Buffett used cash-secured puts and other options strategies not as speculation, but as a disciplined extension of value investing.

“The key premise is value investing,” said Travis. “We’re focused on identifying securities trading at large discounts to intrinsic value, where we have that adequate margin of safety.”

Rather than chasing volatility or short-term market movements, the framework discussed throughout the episode centered on generating income while waiting to buy undervalued businesses at attractive prices.

Travis explained that after identifying companies trading below intrinsic value, “what we do is we intertwine conservative income generating strategies with options.”

One of the clearest examples discussed was Buffett’s historical Coca-Cola trade. At the time, Buffett already wanted to own more Coke shares, but instead of immediately purchasing additional stock, Berkshire Hathaway sold long-dated put options at prices Buffett was comfortable paying. By doing so, Berkshire collected millions in premium upfront while agreeing to buy additional shares only if the stock declined.

“For him, I think he looked at it as heads I win, tails I win,” said Travis. “That’s what we want to create.”

Carlisle also highlighted Buffett’s Burlington Northern Santa Fe transactions prior to Berkshire’s full acquisition of the railroad. Buffett sold millions of put options tied to the company, collecting substantial premiums while positioning Berkshire to potentially acquire additional shares at lower prices.

The broader philosophy underpinning these trades reflects Buffett’s insurance background. Rather than viewing options as speculative instruments, Travis framed the strategy as a form of underwriting acceptable risk.

“Think of yourself as an underwriter of risk, risks you’re willing to take,” he said.

That distinction matters in today’s market environment, where options activity is often associated with leverage, momentum trading, and short-term speculation. The approach discussed throughout the podcast instead emphasized owning businesses investors would already be willing to buy outright.

“The two things to think about when you’re putting these positions on is it’s a stock that you would go long the equity anyway,” Carlisle explained, “and you’re happy to buy the equity at the strike price that you agree to pay.”

The discussion ultimately framed conservative options strategies not as a replacement for value investing, but as a potential implementation layer around disciplined fundamental analysis. For long-term investors willing to think like underwriters rather than traders, Buffett’s historical use of puts offers a very different perspective on what options can actually represent.

Disclosure: This article contains an affiliate link. I may earn a commission if you subscribe through it.

Interested in Buffett-style options strategies alongside long-term value investing?

Value Options Letter focuses on conservative options strategies around undervalued businesses, including cash-secured puts, covered calls, and disciplined “getting paid to wait” opportunities inspired by Warren Buffett’s approach to risk and valuation.

Value Options Letter is a research publication and not personalized investment advice.

TRANSCRIPT

[Tobias] Hi, I’m Tobias Carlisle. Welcome to the first Value Options Letter podcast with my co-host Tim Travis. How are you, Tim?

[Tim] I’m doing well, Toby. How are you?

[Tobias] Very well, thanks. So, we’re launching a new service. The strategy is Value Options.

It’s probably not something that a lot of people are familiar with. So, describe Value Options to us. How is it different from an options strategy?

How is it different from a traditional value strategy?

[Tim] Absolutely. Well, excited to be here and talk about this. And so, the key premise is value investing.

So, that’s your and my bread and butter. And so, we’re focused on identifying securities trading at large discounts to intrinsic value, where we have that adequate margin of safety. So, quintessential Warren Buffett, Benjamin Graham type principles there.

So, that’s where we’re starting. So, the only stocks in our universe are stocks that meet that definition. They could be growth stocks that are also offering very good value.

We’re not looking for net nets or stocks just trading below book value, for instance, like kind of the old school value. We’re looking for stocks that are trading at a discount to their intrinsic value. And so, then once we’ve identified those, what we do is we intertwine conservative income generating strategies with options.

So, examples would be covered calls. So, you own the stock, you sell a call above that stock price at a level where you’re comfortable selling it at. So, then you get all of the upside from the current stock price up to where you’ve sold that call.

And if it goes above, you’re selling at a price you’re willing to sell anyways. If the stock is flat or down or just doesn’t reach that strike level, you’ve added a nice little premium to your investment. So, it’s a conservative income generating tool.

If the market’s flat, the market’s down, these types of strategies can really protect you. Another strategy is cash secured puts, where basically you’re saying, look, if this stock that we want to own anyways, if it sells below this strike price, we’re willing to own it. We’re willing to own it at that strike price.

And for you being willing to own it, you’re collecting a premium. And once again, heads or tails, two things can happen. If the stock’s above that strike price at expiration, you collected your premium, maybe it’s four or 5%.

Maybe it’s 10%. It just depends. And it depends also on the duration of the option.

If the stock expires below that strike price, you end up owning that stock at a large discount to where you could have bought it if you were willing to buy it today. So, these are principles, Toby, that have been used by a lot of value investors, a lot of hedge fund managers, but they’re not talked about correctly in most market literature or subscription services that I’ve seen at least.

[Tobias] Tim, tell me how you came up with the idea for the strategy.

[Tim] Well, it’s an interesting story. So, in the early 2000s, between 2004 to 2007, I was working for a very small brokerage company. And what they were doing was they were selling iron condors on indices like the S&P.

And basically, the premise was as long as the market stayed within a certain range, the trade was profitable. And during that period prior to the financial crisis, there wasn’t a lot of volatility during those years. And so, the strategy was very, very successful.

And this little small brokerage that nobody would know, it grew to about $370 to $390 million of assets. And that’s early 2000s. That’s a lot of money.

And this was just a really small firm located in Orange County, California that nobody’s heard of. And basically, the way that they did it was they sold options. There’s some statistical advantages to selling options.

The clients, which were subscribers, they subscribe to a subscription service to get the trade ideas. They loved it. They loved it because they saw what they were doing.

They were learning new things. They could make 5% in 60 days or 45 days or something like that. But they felt like it was within their risk profile for a portion of their portfolio.

And there was good education on there. But Toby, I was a big advocate then of Buffett and the value investment principles. And so, even though I was just out of college, that’s what I was reading.

And so, I was just 22, 23, 24 working at this firm. And it was a great job. I was working with Australian clients actually at the night desk, 2 to 11 PM, helping people with this.

And the more I was reading about value investing and just market history, the more concerned I got about the strategy. Because it’s like, okay, well, I get that most of these are going to go well, but markets, market behaviour gets crazy. And so, the reality is that when the market goes too far up or too far down with that strategy, you’re taking permanent losses of capital, which as you and I know, Buffett’s rule number one is don’t lose money.

Rule number two is don’t forget rule number one. So, it’s like, okay, well, I get the statistical advantages of selling options, but I don’t like that you’re just, if you’re wrong on your timing or direction, you’re just taking a permanent loss and then you’re impairing your capital. And so, as arrogant as I was, this is my personality to some extent.

I don’t think I’m too obnoxious with it, God willing. But me being 22, 23 years old, I emailed the CEO and the CFO of both the subscription service and the brokerage. And I called a meeting and I told them I had some concerns, but it wasn’t just that.

It wasn’t just being a pain in the rear. I offered solutions. And so, I walked them through the statistics on it and how it was obvious that this was going to blow up.

It was going to blow up. It was just a matter of time. And they were making a tonne of money.

They were making a lot of money on commissions, the subscription service, all this stuff. It was a very different model back then, different days too. And I told them, I told them exactly the philosophy behind value options letter is, look, if instead of doing futures options on indices and spreads where you’re taking permanent loss of capital, if your worst case scenario is owning a stock at a price you’re willing to own it at or selling it at a price you’re willing to sell at, you still get all the benefits of the options and what the client’s like, but it’s a better product. It’s a better long-term strategy. It’s more sustainable.

And the reality was that the profit margins were so high that it was hard for them to give that up, of course. I understand as a business owner and stuff like that. So, they didn’t go it, but then the financial crisis hit and the strategy blew up, both getting hit on the top side and the downside.

And it was bad for clients, the firm. I don’t even know if they’re still exist, honestly, but it was bad for everybody. And so, 20 years later, Toby, I’ve tried building this.

I’ve tried building this concept. I’ve paid two different web developers. I’ve probably invested about $60,000 and I started this like 12 years ago.

And it just never came out right. It didn’t have the right feel to it. It wasn’t what I wanted, and it frustrated me that I wasn’t.

I was able to do other things where I could implement similar concepts, but I wasn’t able to do this for do-it-yourself investors like this. But a little while ago, I had just injured myself playing pickleball. I tore my calf pretty bad.

And I play a lot of pickleball and that’s where a lot of my friends are. And I was feeling kind of down and frustrated just because I couldn’t be as active as I normally am. And I just was like, you know what?

I’m just going to build it. I’m going to build this site and see what comes of it because it’s something I believe in. I didn’t want to have that regret.

And so, here we are, Toby, and it’s built and the site is wonderful. It’s a fantastic value for subscribers. They’re going to learn a lot.

I think they’re going to be very successful. I’m very confident in that. These are strategies that I do myself and that I do for my family and that I believe in very much.

So, excited to see what the future is.

[Tobias] You and I met a little bit over a decade ago. You described this strategy to me then. It made complete sense to me when you described it.

I could see the attraction to a value guy. And one of the things that the strategy that I particularly like is the bull put or the cash secured put. And it’s a little bit hard for folks, perhaps, to grasp just theoretically.

So, I think one of the best things to do is just to walk through some examples. And let’s just do two historical ones that Buffett put on. One of my favourites was in Coca-Cola when he was accumulating Coke.

So, it was 1988. He’d been buying Coke since 1998. He might have put this on in the early 90s.

And the stock was trading around $35. The strike was at $35. He sold 50,000 put contracts.

So, that’s a little bit hard to imagine. When people think about this stuff, if you think about a put, most people are thinking about this. A put is something that you buy to protect a position, because if it goes down, it gives you the right but not the obligation to sell at the strike price, which is the price that you’ve agreed.

And so, if you’re buying the put, you’re on the other side of that trade. You’re sort of acting like an underwriter or a handicapper. But the attraction to a value guy is if the stock’s trading in the market at $35, say, and this is the Buffett example, he was able to sell it.

Two years out, he sold 50,000 shares worth of the put, and he collected $7.5 million in premium. So, can you just describe for folks what happens there, what the impact of that trade is, and then what the outcome of that trade was?

[Tim] Yeah, absolutely. So, when you sell that put, you’re going to collect a premium up front. And look, this isn’t a get-rich-quick scheme.

You’re reserving cash for that. So, these are cash-secured puts. So, basically, the math is, if you’re exercised, each option is 100 shares.

So, basically, the cash reserved is the amount that you’d have to pay if you end up buying the stock. So, you’re collecting a premium, and in the denominator is that total cash exposure, the put exposure. But basically, you collect that premium and you wait.

And if the stock rallies, that put might go down in value. So, these are liquid options. So, you could buy them back more quickly.

And often, we’ll make 75% of our profit in, let’s say, 30% of the time. And then what we’ll do is we’ll say, okay, why not just buy back that put and then free up the cash and then do something else? But in your example, in Buffett’s example, you know him.

He’s saying, I want to own Coca-Cola forever. And if I can get it at this price, I’ll buy as much as I possibly can. He probably would have bought the whole company if he could have, right?

And so, for him, I think he looked at it as heads I win, tails I win. And that’s what we want to create with this strategy, Toby. So, he generated an attractive premium on selling the If those expire worthless, he just made a great return for shareholders of Berkshire Hathaway.

If he gets exercised, he just bought a huge chunk of Coca-Cola at very opportunistic prices. And that’s what we want to create. It’s a heads I win, tails I win type forecast.

[Tobias] Yeah. So, you’re locking in a lower price. Effectively, you’re agreeing to buy at a lower price than is currently trading in the market.

And in that Coca-Cola example, it was 50,000 options contracts over 5 million shares. He collected $7.5 million in premium. So, he’s getting about $1.50 per option contract, which is, sorry, $1.50 per share. So, he was effectively agreeing to pay when the stock’s at $35, he’s agreeing to pay $33.50. In that particular instance, the stock didn’t trade down. So, he just collected the premium without having to, without being exercised. But he did it also with Burlington Northern, which was a railway that a lot of folks may not know about.

So, Berkshire Hathaway acquired Burlington Northern, but before he acquired Burlington Northern, he had a stake and he wanted to buy some more. And so, he paid between $80 and $110 for what he says is irreplaceable infrastructure. And then he sold 5.4 million or more puts on BNI, which was the old ticker. And he kept on going. He sold 1.3 million more puts at $7 a contract with an $80 strike at expiring in December. So, that was November 6th, expiring December.

So, he collected another $9 million. So, can you just talk about the math behind that?

[Tim] Well, in that specific example, it just depends on the premium that you’re collecting divided by the total exposure. So, on that one, it might be a little trickier, but let’s say if you sell a $50 put that expires in six months, and the stock’s at 55, and you collect, let’s say, $5 per share of premium. Basically, the math is this.

It’s $5 divided by 50, which is the strike price, minus the $5 premium you collected. So, your breakeven stock price is 45. So, it’s 5 divided by 45 is the math.

And then it just depends on how long it is. So, if it’s a year, you’re getting a little over 10%, 10%, 11%, 12% in a year. If it’s a year out, if it’s six months out, you’re getting over 20% annualised.

And so, we see options of all sorts of size and all sorts of types of returns. It kind of depends on implied volatility and all that sort of thing. But it’s not surprising to me that Buffett would do a strategy like that, because his dorcher was built on insurance, right?

So, it’s collecting premiums for acceptable levels of risk. And folks, if Coca-Cola went down and just got beaten up by Pepsi or whatever, or if the FDA ruled it illegal or something like that, Buffett still could have lost money. There’s risk in anything.

But in his head, he was willing to own the stock anyways. So, it’s heads I win, tails I own the stock that I’d buy now at a much cheaper price. Same thing with Burlington, Northern Santa Fe.

And so, that’s what you want to do. Think of yourself as an underwriter of risk, risks you’re willing to take. And the math can be complicated for folks.

So, one thing that I like about our concept and our project, Toby, is that we make it very easy to understand for folks.

[Tobias] Yeah. So, the two things to think about when you’re putting these positions on is it’s a stock that you would go long the equity anyway, and you’re happy to buy the equity at the strike price that you agree to pay. And so, that’s a universe of stocks.

It’s much smaller than the full universe of stocks. That’s your little subset that you’re prepared to buy. And then in that little subset, you look for these opportunistic option positions as they become available, where they generate enough of a return, and you can calculate a total return on these positions and an internal rate of return, which is what the number annualizes out to.

And if that reaches an acceptable level, if that reaches your threshold, then that tells you that that’s a good, that’s an interesting position for you to put on. And that’s quite complex for folks to manage. It’s a difficult thing to keep track of names that you want to buy or the names that are suitable for a strategy like this.

And then additionally, to find, because there are lots of options contracts available at any one time, lots of different expiry dates. And so, it can be hard to keep track of those that are generating enough total return and those that are generating enough internal rate of return. And I had said to you that this was, that would be something that I would love to do.

It’s just, it’s time-consuming doing that search function. And so, that’s something that you have suggested as a great idea for a service. So, let’s talk a little bit about what the value options letter is.

[Tim] Right. Yeah, absolutely. So, the value options letter is a subscription service where investment research created by Tobias and myself is put out where there’s undervalued stocks and strategies looking at the best ways to take advantage of those undervalued stocks.

So, the first part is these are stocks that we’ve underwritten, that we think that are undervalued and that we think offer attractive opportunities, both over the long-term and the medium-term horizon. And then it’s how do we want to approach this? So, does it make the most sense to buy the stock outright?

Does it make sense to do a covered call? Does it make sense to do a cash secure put? And so, basically, we put actual option trades out there that you can see and you can place with your own brokerage.

We’re not investment advisors in this capacity. It’s investment research. But it’s a fantastic tool for do-it-yourself investors that, one, don’t have the time to identify truly undervalued securities.

And then, two, that might not know necessarily how to use the options or they don’t have time to know which ones to buy or when to get out of them. And so, what the value options letter does is it provides all of this in a very easy-to-understand format with tonnes of education. That’s one of the reasons why I was so excited to partner up with you, Toby, is that both you and I have a big emphasis on educating people and educating investors.

And that’s the key. This is something that we believe can help people. But it’s important to understand the pros and cons.

This isn’t something where you expect every option to expire and you to make the full profit up front. It’s something where if you get exercised, now you end up owning the stock. So, if you sell a put, let’s say Buffett got exercised on his Coca-Cola, for instance, he ends up owning the stock.

But maybe there was a price that Buffett would be willing to sell Coca-Cola at in that example. What you can do is you can start selling calls above your cost basis and generate more and more income on your position. And that’s another thing that this service does is it tracks it.

So, it tracks the trade recommendations, it tracks the ones that get exercised, and then it makes follow-up suggestions on selling covered calls and things like that. So, it’s a dynamic research service. Both Toby and I combined, we have over 50 years of actual investment experience.

We’re getting older. You’ve got some greys. I have no hair, but it works.

We get to the same effect. So, I couldn’t be more excited about it, Toby.

[Tobias] Yeah, I think it’s going to be fun to build this out in public. We’re launching with what we have and we’re going to be talking to subscribers and folks who are interested in the service. We’re going to keep on building this out for a long time.

We’ve also partnered to write a book, books called Value Options. It’ll be available around about the time that this podcast is published. So, check out the book.

All of the content of the book is all of the worked examples that are available for free on the site too. It’s just if you want an easy way to sort of read it, it’ll take you a couple of hours to read this book. It’s written pretty simply and it covers all of the strategies that Tim offers and I’m excited to get going.

[Tim] Yeah, absolutely, Toby. I can’t wait and excited to see what the future looks like.

[Tobias] So, visit valueoptionsletter.com, folks, if you want to check it out or drop a note to Tim or I. What’s your email, Tim? Tim at valueoptionsletter.com?

[Tim] Correct.

[Tobias] Yep. And I’m Tobias at valueoptionsletter.com. Thanks, folks.

Looking forward to seeing everybody on the site. Thank you.

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Buffett-Style Options: The Put Option Strategy That Built Berkshire’s Biggest Deal

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