How Warren Buffett Made Billions in the Options Market
Options traders and investors don’t usually fall into the same category.
Most think of options traders, like you and me, as risk-takers looking for big payouts in short time.
On the other hand, an investor is patient and willing to wait years to build their profits.
Warren Buffett is a legend of the latter camp — considered by many as the greatest investor of our time.
So when I tell you that I, a 35-year-old options trader…
Regularly use the same options trading strategy as Warren Buffett…
You’re probably thinking, “how in the world does that work?”
Let me explain…
Warren Buffett Made Big Options Paydays
Warren Buffett is widely known for buying great businesses at good value, and sitting in those investments for decades as they outperform the market.
But not many people are aware of another strategy he’s used to rake in billions over the years: selling put options.
Here’s a famous example…
In spring of 1993, Buffett sold short 50,000 $35 put options on Coca-Cola (NYSE: KO), expiring in December, for about $1.50 each. At the time, KO was trading at about $39 per share.
By doing this, Buffett made $7.5 million in cash up front for selling the puts. It’s his money to keep regardless of the outcome.
As long as KO stayed above the strike price of $35 by the expiration date, he would never have to buy the stock.
If KO did drop below $35, Buffett would then simply buy KO for $35 (his strike price).
There are two important things happening here. One, Buffett is making a smart bet that an established business like KO wasn’t going to fall very far.
And two, if KO did fall, Buffett would have the option of buying that business on the cheap.
These are the main reasons I love selling put options. They pay me up front for being bullish on great companies. And if I’m wrong, my “punishment” is getting to buy those great companies on the cheap.
But that’s far from Buffett’s biggest trade selling put options…
There’s also the time he pocketed nearly $5 billion in a single year.
During 2008, when volatility was near its peak, Buffett sold $4.9 billion worth of put option premium on the broad market indexes, betting that they wouldn’t fall much further. And he was right.
Now I know what you’re thinking. Strategies like this must be only for the ultrarich like Warren Buffett.
Buffett is doing this on a massive scale, with millions and billions at stake. That’s how he’s able to score such massive paydays.
But really, this is a strategy almost anyone can use…
Anyone Can Do What Warren Buffett Did
I do alright for myself, but my portfolio isn’t anywhere near Buffett-sized. And it doesn’t have to be.
For years, I’ve been using this same approach, and applying it on a shorter time frame, to collect what I consider “Instant Cash” over and over again from the market.
Here’s how it works…
When you sell a put option, you take on the risk of owning the stock, in exchange for earning put premium.
So you should only sell put options on stocks you’d want to own anyway. It’s my #1 rule when looking for these opportunities.
And that right there sets the foundation of the strategy Warren Buffett was using.
He didn’t mind owning Coca-Cola, or the broad market indexes.
Since he was extremely bullish on those underlying stocks, if he got a chance to buy them, he would have been happy to do so.
Either way, he’d get to keep his millions and billions in income…
But everyday investors can use this same strategy to collect hundreds, thousands, even tens of thousands depending on the size of your account.
It doesn’t take Warren Buffett-like money to be in the game.
Editor, Quick Hit Profits
Chart of the Day:
Time for Coke to Play Catch-Up
By Mike Merson, Managing Editor, True Options Masters
Since we’re talking about Warren Buffett today, I think it’s worth checking in on the KO chart…
I was surprised to see KO is in the camp of stocks that haven’t recovered their pre-pandemic highs. But thinking on it more, it makes sense.
While grocery stores never shut down even in the depths of the first lockdown, another major business driver that KO lost was restaurant beverage purchases. Fewer people in restaurants meant fewer indulgences at dinnertime.
Still, looking at it on a purely technical basis, I think KO is poised to make a big push higher here.
Note the rising support line stretching all the way back to the pandemic bottom, and the rising resistance line pinching closer together. All while the RSI and MACD momentum indicators are at neutral levels.
There’s not enough evidence to make a call one way or the other. But barring any broad market ugliness, and considering KO’s long-term resilience, I think it’s far more likely we see it break out and set new highs before the year is out.
Managing Editor, True Options Masters