How to Get Paid Selling Market “Insurance”
Warren Buffett is perhaps the greatest investor of all time.
His company, Berkshire Hathaway, has one of the best-performing stocks in the history of the world.
Berkshire shares have returned more than 2,000,000% since the company went public in 1964. That’s enough to turn every $1 invested into $20,000.
If you’ve read books or articles on Buffett, then you know the conventional wisdom is that Buffett makes his fortune by buying great companies trading at great prices… and then holding them for years. A strategy called value investing.
That’s one of my favourite strategies – plus it’s a safe and proven way to build real, sustainable wealth.
➤ I did a three-part masterclass series on how to select individual stocks in August 2021 with seasoned stock picking investor Nic Oldert. The masterclass series is available online.
But that’s not what I want to talk about now.
What I want to talk about is this: what a lot of people don’t know is that Buffett didn’t make billions just through value investing – he also used other strategies to generate immediate income while waiting for his long-term investments selections to come to fruition.
- He used this strategy in 1993 to make $7.5 million in upfront cash in one day.
- And Berkshire Hathaway’s 2008 annual report showed Buffett used it again to collect over $4.9 billion in premium payments.
Regular investors often misunderstand this strategy… but it can be very profitable.
In the Wealth Builder Masterclass I did a while back I shared what this strategy is and, more importantly, how to use it to generate immediate income.
Most people don’t use these strategies.
They think they’re too tricky.
Or that they are slightly more complicated.
But if you can handle buying your trackers online, you can do this.
It’s All About Selling Market Insurance
To truly build long-lasting wealth, you need to generate multiple reliable streams of capital growth and income.
That’s what Buffett did by selling put options from time to time.
➤ This is Part 3 of a 3-part series on options – you can read Part 1 (an introduction) and Part 2 (using options as leverage) if you want more background.
A put option gives the holder of the contract the right to sell the stock at a certain price on a certain date. Buying a put is the same as buying disaster insurance.
When you sell a put, you are selling this insurance (and selling insurance is one of the most profitable businesses in the world).
When you sell options two things happen:
- You earn a premium for selling the “insurance” – in other words, the buyer of the put pays money to you that is yours to keep.
- As the seller of the option you are obliged to buy the underlying shares from the holder of the options at the “strike price” that was specified when the option was written (or sold).
As savvy Wealth builders we don’t want to insure just any old company, we only sell puts on the highest quality companies. This is because we want to be happy to buy the shares at the strike price if they are “put” to us.
For example…
Let’s say a quality stock is trading at $100 a share. We want the stock in our portfolio but we think that it’s slightly overpriced. We’d be happy to buy it at $90.
We sell put options at a strike price of $90. They expire in six months. To make it easy, let’s say the premium is $5 per option. If we sell 100 options, we earn $500.
If the price drops to $90 we have to buy the shares, but that’s fine because we wanted them anyway and we decided $90 was fair. And here’s the beauty – if the shares don’t come down to $90 we have made $500.
Of course, you do need to have $9,000 available in case you’re “put upon” to buy 100 shares from the option holders. And you should only do this on quality shares that you want to have in your portfolio.
Your core stocks should be companies with stable earnings and steady cash flows. These are great stocks to “insure” when you have some cash and you’re not sure where to deploy it.
Even the greatest stocks are sometimes overpriced and have price drops.
The cause could be some temporary bad news… or regulatory problems… or just a downturn in the overall market.
No matter, they’re still great companies you want to own – even more so if you can get them at a cheaper price.
You can generate immediate income from quality
shares while waiting for their prices to fall to levels
you’re comfortable to buy them – pretty cool!
Buffett used this same strategy in April 1993 when he sold puts on Coca-Cola (KO). At the time, KO traded at $39. Buffett thought a fair price would be $35.
KO eventually dropped to $35… and Buffett got “put” upon. He had received $7.5 million upfront in premium income – that helped to buy more of a stock he already loved anyway.
KO has had two stock splits since then – in today’s terms Buffet got the KO stocks for $8.75 per share. They have recently traded as high as $65 per share. So not only did he earn a premium, he has since enjoyed a 750% price appreciation… and loads of dividends.
➤ He did the same thing with Burlington Northern Santa Fe in 2008, generating $4.9 billion in premiums over the life of that trade.
Starting Your Own Insurance Operation
Many investors consider options to be risky – and the way most people use them (buying speculative calls) is a sure-fire way to lose money quickly.
But as I showed you above, options can be a safe, conservative strategy to make extra money in the markets.
Now I understand that options may be new to you which is why I held a very comprehensive training on what they are and how to use them – and you can get your hands on the masterclass now.
Click here to get the recording and the notes of theWealth Builders Options Masterclass.
Keep learning and expanding your wealth building capacity and competence. This is how you make your freedom inevitable.
Big love
Ann
