The Buffett-Style Options Strategy: Get Paid While You Wait

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Tobias discussed The Buffett-Style Options Strategy: Get Paid While You Wait. Here’s an excerpt from the episode:

[Tobias] So in a sense, you’re doing what Berkshire has done. You’re underwriting the Google deal. You may not get the stock put to you.

If the stock trades up, you’ll just collect the $500. If the stock does get put to you, you’re getting terms that are similar to or better than those that Berkshire have achieved. So I think that really does illustrate the power of using value options, using a sensible option strategy combined with some good fundamental analysis to deliver either a good risk adjusted return on an internal rate of return basis or to have the stock put to you at a better value than you can currently get in the market.

[Tim] Agreed. Agreed, Toby. Yeah, I think that that makes a tonne of sense.

And one of the criticisms sometimes people will say about selling cash secured put options, Toby, and I think there’s credibility in it, is that, well, what if the stock goes on a huge run? Well, if you think the stock’s going to double, okay, you should definitely own the stock outright as well and not do like a covered call and not just do a covered cash secured put. Now, if you’re so bullish on the stock, I’d imagine that if it drops, you’d probably want to buy more, right?

So then maybe it makes sense to use the cash secured put as a tool to dollar cost average into it. And then if it stays above, you’re still making money. Conversely, what people that make that same argument will say, they’ll say, oh, well, when you actually get exercised on a put, it’s a stock that’s losing and you could end up taking a big loss.

Of course, that can happen on some of these, but that happens when you own the stock too, right? Because we’re only doing this on stocks that we’d want to own anyways. You and I aren’t immune to it either, Toby.

I wish that we were, but we’ve had stocks that have lost, right? So it’s going to happen, but you’re actually on the same amount of shares, you’re going to lose less because you’re building that level of protection in there. One of those pillars of protection we always talk about.