Using Options in a safe, conservative way to increase your income.
Many investors are familiar with Buffett’s famous holding of Coca-Cola (NYSE: KO). Buffett began buying shares in 1988. At the time, Buffett said he expected to hang on to this “outstanding business” for “a long time.” And over the ensuing years, he continued to build his position in the iconic company.
Today, Coca-Cola is Buffett’s largest holding. As of February 14, the Oracle owned 400 million shares of Coca-Cola, valued at $15.3 billion — a fifth of his equity portfolio .
But what many investors don’t know is the story about when Buffett used options on Coca-Cola.
That’s right. The King of Buy-and-Hold uses options. More importantly, it’s the way Buffett used options in the case of Coca-Cola — which happens to be a safe, conservative way — that too many investors often ignore…
In 1993, Coca-Cola was trading around $39 per share. Buffet, a bargain hunter, believed that was too pricey. But the billionaire investing genius wasn’t content to passively wait for the stock to fall to his preferred price.
The Oracle of Omaha decided to use a simple options strategy that eventually earned him $7.5 million before he bought a single share of Coca-Cola.
After deciding he’d be willing to open a position with Coke at $35 per share, a $4 drop from its current price, Buffett wrote 5 million put options with that $35 strike price.
For those who don’t know, a “put” is an options contract that gives the owner the right, but not the obligation, to sell 100 shares of the underlying stock at a specified price (known as the “strike price”). In exchange for writing the puts, or agreeing to buy the stock if it drops to that price, investors collect premiums.
In Buffett’s case, he received a $1.50 premium for every put option he wrote with a $35 strike price. He wrote enough of these contracts to allow him to collect a cool $7.5 million in the process.
If Coca-Cola was to fall below $35, the buyers of the options Buffett was writing would exercise those options and sell their shares to him. In that case, Buffett would be obligated to buy Coca-Cola at $35 per share, which is exactly what he wanted to do in the first place.
On the other hand, if share prices of Coca-Cola were to rise during the life of the contract, the owners of the options Buffett wrote wouldn’t be able to exercise them and Buffett, of course, wouldn’t be able to buy Coca-Cola at $35. The options would expire and Buffett would simply walk away with his $7.5 million. Not bad.
And that’s exactly what happened. Buffett earned $7.5 million without buying a single additional share of Coca-Cola, proving that it’s possible to multiply your income from well-known, ordinary stocks. And it doesn’t have to be difficult.
That’s why StreetAuthority’s Michael Vodicka created Income Multiplier Weekly. Each week, he shows subscribers of his new premium newsletter how to start increasing their income from well-known stocks like Coca-Cola, Microsoft, Verizon, and others. In fact, Mike has created a special presentation, showing exactly how he’s executing his strategy and how other investors can, too. (You can view his presentation here.)
Simply stated, we believe conservative income strategies like selling puts are one of several instances where many investors just seem to ignore Buffett. And this is a mistake. If you want to be successful in the market, don’t be content to simply marvel at Buffett’s “genius” — be sure to pay attention to what the man actually says and does, and act accordingly.
Good investing,
Brad Briggs
Executive Editor, StreetAuthority
P.S. — I mentioned earlier that Mike’s readers are already profiting from his recommendations. So far, readers have already collected annualized income of 36%… 47%… even 87% from stocks with traditional dividend yields of less than 5%. To learn more about how easy multiplying your income can be, you can watch his special presentation byfollowing this link.
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