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Feb 23, 2006 3:24 am

Hey, was sitting around today talking with some co-workers and discussing billionairs and how they made there money. One of the topics that came was was regarding Buffett and options trading.. specificly having to do with covered calls and puts.. I'm wondering if anyone is familiar with this and or know of any books or other documents that discuss this in greater detail... any help is appreciated as it will help settle a disagreement Thanks.


Feb 23, 2006 8:10 am

I don't believe there are any books about options. Especially complex things like covered call writing.


Oh wait, perhaps a Series 7 study course might have something.

Feb 23, 2006 8:13 am

I did very well on that part of the test. I mean 90% or better ,and I can't for the life of me remember any of it. Any of you experience the same thing. I couldn't write an option to save my life right now.

Feb 23, 2006 8:27 am

It's easy, just turn in an order that says "Sell 1 XYZ Oct 55 Call @ 5" or something like that.


Be sure to replace the "XYZ" with a the stock of your choice, and the "Oct" with a month of your choice, and the "55" with a mulitiple of five closer to the price of the stock you used instead of XYZ.


Do NOT replace the word "Call".


You may want to replace the "5" with another number, but 5 works too.


I wonder what Warren Buffet would do?

Feb 23, 2006 9:50 am

Go to CBOE website and go to education area. Lots of stuff. 

Feb 23, 2006 11:45 am

If your client is not in a hurry and wants to place a limit order to sell a stock, covered calls are a great way to do it.  An example would flow something like this...client wants to sell 1,000 shares of Wal-Mart at $50 or better and is not in any hurry.  You sell 10 Wal-Mart 50 calls with an expiration of 2-3 months, or whatever.  Someone on the other end of the transaction pays you perhaps $1,500-$2,000 (I'm too lazy to look up call prices) for the right to buy your shares at $50 from now until the expiration date.  If in the meantime, WMT goes to $55/share, the other guy buys your 1,000 shares for $50 each.  The $1,500 (or whatever) is yours to keep...much better than just setting a limit price.  If WMT stays below $50 and three months later your options expire, you keep the $1,500 and are free to do whatever with your WMY shares, even selling another three month option and again pocketing cash for your trouble.


That's the abbrieviated version, but suffice it to say, this works best for larger positions (to make the $$$ worth your trouble) and for when you don't have a deadline to sell the shares.  There are several other things to keep in mind, such as the fact that writing a covered call ends your holding period for gains purposes if you have the shares called away, etc., so it pays to do your homework before you use this strategy with clients.  I believe that the CBOE actually offered a free CD to learn options (I used to have it, but left it behind at my last employer), so there are plenty of places to learn the skinny on covered calls.

Feb 23, 2006 12:55 pm
DirectRevolt:

Hey, was sitting around today talking with some co-workers and discussing billionairs and how they made there money. One of the topics that came was was regarding Buffett and options trading.. specificly having to do with covered calls and puts.. I'm wondering if anyone is familiar with this and or know of any books or other documents that discuss this in greater detail... any help is appreciated as it will help settle a disagreement Thanks.



Considering Buffet is a value investor and has lambasted derivatives on multiple occassions, I don't believe that options have anything to do with the wealth he generated. 


Your question is really broad.  What kind of info are you looking for?  If your just looking for a general book on options do an Amazon search, there are dozens available, most of which will cover the basics.

Feb 23, 2006 8:42 pm

I think I asked my question poorly... I understand options themselves.. In fact I got a 100% derivs on the 7. What I'm asking about is the options strategy that was employed. I believe it was something to the effect of writing a covered call while purchasing a put.

-Marc.. sorry for the sloppy post.. worked 14 hours today and I'm exhausted.

Feb 24, 2006 9:30 am

Those are called "Hedge Wrappers".  I doubt that Buffet would employ such a strategy because it severely limits the possible gain in return for eliminating most of the risk.


How could it be that a guy who got 100% on the derivatives part of Series 7 could not grasp that very simple strategy?

Feb 24, 2006 12:21 pm
DirectRevolt:

I think I asked my question poorly... I understand options themselves.. In fact I got a 100% derivs on the 7. What I'm asking about is the options strategy that was employed. I believe it was something to the effect of writing a covered call while purchasing a put.

-Marc.. sorry for the sloppy post.. worked 14 hours today and I'm exhausted.


That strategy is called a collar (potentially a "no cost" collar).  Getting 100% on options, you should know this strategy.  It's designed to lock in gains and protect the position without any cost to the client.

Feb 24, 2006 5:06 pm

You know it's a little rude that I can't ask a simple question without being berated. For the record I had 0 questions on my test relating to collars. I addition I havn't had to use any options knowledge once since I took my test so it's a bit fuzzy at this point. It has nothing to do with not understanding what it is.. and everything to do with the fact that I couldn't remember what it was called for my life. Thanks though.


-Marc

Feb 24, 2006 5:15 pm

Better toughen up that whining tone, life is a bitch and then you die.