Warren Buffett is a U.S. investor, businessman, and philanthropist. He is far and away one of the most unbeaten investor in history, the biggest shareholder and C.E.O. of Berkshire Hathaway, and is currently ranked by Forbes as one of the richest individual in the world. There is no suspicion that the “Oracle of Omaha” is one of the most decipherable and trusted names in the investment arena.
Buffett argues that highly complex financial instruments such as derivatives are time bombs and “financial weapons of mass destruction” that could harm not only their buyers and sellers, but the whole economic system. But, it may come as a surprise to most of you that Warren Buffett uses the index option selling strategy to generate consistent return on his investment and protect his shares in case of big fall in market. In fact, his company Berkshire Hathaway has disclosed publicly every single quarter that they write index options for income. Here’s what they say:
“Berkshire Hathaway has written equity index put option contracts on four major equity indexes including three indexes outside of the United States.”
Don’t you believe that if the richest man in the earth is writing options, you should be doing the exact same thing? Option writing in index (i.e., nifty) helps one to generate consistent return on his investment. Never ever trade naked put or call always hedge your trade as markets are seldom predictable. Try trading market-neutral trades rather than directional trades. The key to a truly market-neutral trading strategy is to keep your positions as far away from the market’s current price as possible – which is only capable using options.
Remember, the idea behind the option writer strategy is to position so that one makes money no matter which direction the market moves. Well, sometimes the market drastic moves in one direction can result in huge loss if no proper adjustment or risk management is undertaken. Of course, if the indexes ever start getting too close to strike prices, there are a number of risk management techniques one can use to protect trades done. This could include buying option protection in the market and/or exiting the trade early at a smaller profit. Either way, risk management is the key to long term success in trading.
Narendar Rathod, Options strategist, assuredgain.com