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Rupert Hargreaves
Rupert Hargreaves
Articles (889)  | Author's Website |

Warren Buffett the Options Trader

Remembering the time Warren Buffett traded Coke options

July 24, 2019 | About:

When it comes to long-term investing, there's one undisputed champion, and that's Warren Buffett (Trades, Portfolio). Buffett is, without a doubt, the world's best-known long-term investor, and has made tens of billions of dollars for himself and Berkshire Hathaway (BKR.A)(NYSE:BRK.B) shareholders over the past five decades by investing with a long-term outlook.

However, during his time at the helm of Berkshire, Buffett has also made several short-term trades. These include deals such as his silver trade in the 1990s, where he acquired around $1 billion of silver as he believed supply could not match demand.

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He's also traded oil and corporate bonds. After the dot-com bubble burst in the late '90s and early 2000s, Buffett dived into the corporate bond market and spent billions on bonds, which he thought were a good deal at the time (this included Amazon). He made billions for Berkshire shareholders on this trade.

Buffett has also used the options market to make short-term profits, which might come as a surprise to Buffett watchers considering his comments on derivatives over the years.

Buffett sells puts

According to the transcript of Berkshire's 1994 annual meeting of shareholders, Buffett was busy selling puts on Coca-Cola (KO) stock in 1993, as a way of generating extra income for the conglomerate. Buffett told his audience that he'd sold options for around 5 million shares of Coke for a premium of "around $7.5 million."

He went on to explain:

"We have not done that very often, and we're unlikely to do very much of it. For one thing, there are position limits on puts, which don't apply to us, but they apply to the brokers for which we do them. And those position limits were not clear before that. But we could probably write puts on that same amount by doing it through a bunch of different brokers. It's not something we're really very likely to do. I was happy to do it, and in that particular case, we made $7.5 million."

It seems Buffett was happy with this trade and appeared open to doing it again if he could achieve the kind of volume that would make a difference to Berkshire's bottom line:

"But we're better off, probably — if we like something well enough to write a put on it, we're probably better off buying the security itself, and particularly since we can't do it in the kind of quantities that really would make it meaningful to Berkshire. There are securities I would not mind writing puts for 10 million shares or something, but I — that probably — it's probably allowable for us to do it. It's not allowed — we'd probably have to do it through multiple brokers to get the job done."

The Oracle of Omaha summarized these comments by saying:

"On balance, I don't think it's as useful a way to spend my time as just looking for securities to buy outright."

These comments provide yet another fascinating insight into the way Buffett thinks and trades. Options trading is generally best left to the experts, but Buffett seemed to be happy to take advantage of the opportunity to make money on a company he knows well without taking on too much risk.

This is yet more evidence that Buffett is not only an investor; he's a trader as well, who's willing to take advantage of market dislocations and trade in and out of assets to make a quick profit. Based on all of the examples we have, it seems he's been relatively good at this, but I wouldn't be surprised if on one or two occasions at least, a trade has not workout out. As Berkshire does not have to disclose these deals, we will never know.

Disclosure: The author owns no share mentioned.

Read more here: 

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


Rating: 5.0/5 (5 votes)

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Comments

Ryan Harding
Ryan Harding - 1 month ago    Report SPAM

Writing (equivalent to Selling-short) short-duration cash-covered puts (from a few days to maybe 8 weeks to expiry) can be a great way to enter a position where you know the entry price you're willing to pay.

If the shares don't expire below the strike, they probably won't be exercised and you get to keep the premium, earning often 18-30% annualised against the cash you would have to spend if put to (1-2% over a few weeks), and if the price falls below, you're likely to be put to either at expiry or before, and get to buy the shares at an effective price of the strike price less the premiums received. I'm sure Buffett would have been happy to take delivery of another 5 million shares of KO at the strike price less the premium.

irrational_exuberance
Irrational_exuberance - 4 weeks ago    Report SPAM

The main reason that Buffett sold the KO puts was because he wanted to own the stock but it was priced slightly above what he wanted to pay and he couldn't establish a meaningful position in the stock without driving up the price. So he sold the puts as essentially a limit order the pays an extra premium and hoped that the options settled below the strike. He wanted to be assigned the stock.

himanshuarya9162
Himanshuarya9162 - 3 weeks ago    Report SPAM

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