With anet worth of $65 billion, Warren Buffett is perhaps the best investor of all time.
What makes him so successful?
But it isnt the only thing he does.
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He also profits by selling naked put options, a key in of derivative.
Thats right, Buffetts company, Berkshire Hathaway, deals in derivatives.
If the trader decides not to sell those 200 shares, you keep the $150.
Does that sound like a good deal?
Youre not the only one who thinks so.
Now, lets say the price of the stock drops to $15.
Naturally, hell put it to you, forcing you to buy 200 shares at $18.
Youll pay him $3,600 for stock currently worth $3,000 ($15 times 200 shares).
Even after the $150 premium you collected for your option sale, youre out $450.
So why take the risk?
Probably not as good as youd like.
It always seems like an uphill battle to build (and keep) a decent amount in savings.
But what if your car breaks down, or you have a sudden medical bill?
Ask one of these companies to help…
Otherwise, if you arent forced to buy it, you just keep that $150.
If the stock price went up before the contracts expired, he would simply keep all of that money.
Also,Buffett does custom dealsthat are not available to the average investor.
You might just keep collecting money without ever buying any stocks at all.
The Catch
Of course, theres a catch.
However, the two types of naked options are very different in terms of risk.
If you own the house, youre covered.
Imagine doing this when you dont own the house.
In that case, youre naked because you dont have the underlying security to cover your promise.
Put options are not so easy to understand.
To understand the difference in terms of risk, consider our XYZ example.
Each brokerage has rules about account approval and which types of trades are allowed.
With a few clicks, you’ve got the option to place and execute your order in seconds.
What Other Options Can You Try?
What if you cant get your account approved for naked option writing?
Its easier to get approval to sell covered calls because its less risky.
Heres a goodprimer on stock options.
Meanwhile, keep in mind two simple concepts:
1.
And yes, youcanlose money even a lot of money with almostanytrading or investing strategy.
Note: Neither The Penny Hoarder nor the writer are investment professionals.
We encourage readers to seek detailed advice from professional advisors before acting on this information.
Your Turn: Have you ever traded stock options?
Have you done covered calls or naked puts?
hey tell us about your experiences.
(Can you sense my millennial sarcasm there?)
You know which ones were talking about: rent, utilities, cell phone bill, insurance, groceries…