VALUE: After Hours (S08 E18): Cash-Secured Puts Explained: How Buffett Used Options To Lower His Entry Price

During their recent episode, Taylor, Carlisle, and Tim Travis discussed Cash-Secured Puts Explained: How Buffett Used Options To Lower His Entry Price. Here’s an excerpt from the episode:

[Tobias] There are two things that I like about it. One is that you can choose your entry and exit price for stocks. You’re not necessarily guaranteed to get that entry or exit price, but that’s the other side of the equation that you can make sure you’re getting a sufficient return on.

When they’re cash-secured, if you want to go long a stock, you sell a put, which I know is a little bit inside out the way that people think about it. You buy a put for protection, for downside protection. You sell a put, so you’re underwriting the stock if it falls below that particular strike.

The nice thing is, and there’s an example of Buffett doing it with Coca-Cola in the early 1990s after it established its position. It’s trading at $39. He buys a at $35 and he gets $1.50 per contract. If he gets the stock put to him, it’s $33.50 against the $39 stock price. In that instance, I guess he thought that $33.50 was a good price to take the stock because the premium that he got was only enough to give him about a 6% annualised return, which is pretty thin for the cash that he had to put up. You may not have done it cash-secured, but you would recommend doing it cash-secured.

You got to put the money into your account and the premium gives you a little discount. Basically, that’s your return for the period of time you have it there.

[Tim] Correct. Correct. Exactly.

It’s an attractive way to layer into a stock. Everyone wants to buy stocks at cheaper prices. It’s hard to do that mechanically.

Sometimes people will dollar-cost average. They’ll have certain limit prices that they’re willing to buy the stock at. But when you’re selling puts, you’re manufacturing that in a way where if that stock doesn’t drop to your level, you’re still able to profit.

Because sometimes you’ll be buying, let’s say, Google or Meta or something like that, and the stock runs away from you where you can’t buy that full position that maybe you wanted. Maybe it had already run up. You get in, you establish a foothold in the stock, but you haven’t built the full one.

You’re just a little cautious on it. You’re expecting it to drop at some point, but you might not get that chance. When you sell puts, you’re able to create a heads-you-win, tails-you-win situation as long as you’re willing to own the stock.

That’s the key difference.

[Tobias] It’s not necessarily heads-you-win, tails-you-win. You’ve got to make sure that you win on both sides before you put the trade on.

[Tim] You win in the sense that you want to buy the stock cheaper. It’s a stock you want to own, so you’re able to manufacture that cheaper entry price into it, but 100%. It ultimately comes down to, is the stock that you’re buying good?

You still have similar loss dynamics if a stock goes to zero on you, of course.

[Tobias] It’s true on the other side, too. If you own the stock and you want to sell, it’s just the reverse process. You sell the call.

You’re not necessarily getting hit, but you generate income in the event that you don’t trade all the way up.

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.

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

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VALUE: After Hours (S08 E18): Cash-Secured Puts Explained: How Buffett Used Options To Lower His Entry Price

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