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Originally Posted by lewdog
This is great. Makes total sense reading this. Thank you so much.
I think Buffet's choice to sell a put on a stock you want to purchase anyway could be greatly used without having a ton of risk. Lowers your net cost of the shares as well if the purchase goes through from what I can tell? The rest of the options you mention seem pretty risky. Was reading about short selling where you in a sense borrow shares and later have to buy them back. Read some horror stories on investors losing their shirts on that!
Thanks Pete.
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Short selling stock can make you money just like buying stock. I have nothing against short selling. The rule is "Bulls make money and Bears make money but Sheep get slaughters". In a down market or if you know of a stock that is going to tank, short it, by all means.
But doing it via options is a pain because time is against you. If you just short it outright you only have to worry about a margin call but should be out long before then.
But yes, when you short a stock you are literally borrowing it from someone with the agreement to give it back at some point in the future. A lot of people had made a lot of money shorting stocks. Some do it exclusively.
Buffet does lower his cost if his options get exercised. Figure he writes 1000 Puts at a strike of $47 on a stock that is trading at $50. Say he gets $1 a contract. So if the stock drops below $47 and he has to buy, he has the gross profit of $1 a share to cushion any loss. So really he doesn't even take a loss until the stock hits $46. Anything between $46-$47 he actually walks away ahead even though the stock is below the strike price he wrote against.
A lot of big stock buyers use this strategy but it's just as effective for the little guy. As long as you are willing to live with the stock below where you bought it. Buffet is a long term player so if he gets stuck with a stock at $44 that he paid $47 for, it doesn't bother him.