VALUE: After Hours (S08 E18): Using Options To Build Margin Of Safety Into Investments

During their recent episode, Taylor, Carlisle, and Tim Travis discussed Using Options To Build Margin Of Safety Into Investments. Here’s an excerpt from the episode:

[Tim] Then they’ve taken a big hit, so volatility is pretty high. You’re able to sell puts way, way out of the money, so creating a much, much, much larger margin of safety to what you already see is a pretty big margin of safety. So you’re kind of benefiting two ways.

You have the mispriced stock, and then you have the option that’s just really based on the mathematical principles of how far the stock’s dropped and what amount of time and the perceptions of short-term movements with options. And I think it gives the advantage to someone that’s patient, that’s willing to own the underlying. And that’s one of the things that we do at Value Options Letter is that we break down the mathematics for subscribers so that they can see, okay, we’re targeting 13% on this trade.

Worst case, you’re going to manufacture an entry price 25% below the current price. This is why this stock looks attractive. These are the fundamentals behind it.

And then those subscribers also get input on when good exiting opportunities would be, so it’s easier to track the options.

[Jake] Summarising what you’re saying there, then basically if people are using math to value something and they’re using the inputs of volatility as one of the primary drivers, that can become disconnected from the fundamentals of the business, which allows you to take a different view on the security then.

[Tim] Precisely. I would agree. I think you summarised it much more eloquently than I did.

[Jake] Well, I had time to think while you were talking.

[Tobias] Can you give us a worked example? I know you’ve done that previously, but we can work through. You gave us Blue Hour last time.

I think Blue Hour’s kind of interesting because it’s in the news, lots of headline risk, lots of people feel strongly about it one way or another.

[Jake] People selling their sports franchises.

[Tim] It is a good example because when you’re talking about OWL, the asset management company that has the vast majority of their assets under management are permanent capital. And so there’s a certain stability to the fees that they’re bringing in. And they have a variety of different verticals where they’re raising assets, whether it’s real estate, whether they’re in the data centre type stuff that’s being built.

They also have the private capital. They have the publicly traded private capital, which is different. So they’re in the headlines for all the wrong reasons.

But the reality is the business isn’t that risky at all. It’s an asset management business. So I don’t think that, I mean, it’s an investment grade credit for a reason.

They generate a tonne of free cash flow. They’re paying a really big dividend. But that’s one of those where because the stocks dropped a lot, the options are really volatile on the put side and the call side.

So you could sell puts at really high returns, way out of the money. You could sell calls, really high returns, way out of the money while also collecting the dividend, which is like nine and a half percent or something like that. It’s very high.

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.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

VALUE: After Hours (S08 E18): Using Options To Build Margin Of Safety Into Investments

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