narenmt Mr. Narendar’s investment experience spans over 8 years during several Bull and Bear market cycles. He has personally and actively traded in NIFTY futures and options, shares. All through the years, he was in business; he traded the stock market and has built a great deal of those experiences into his current trading philosophy & trading strategy. One important feature of a successful trader is to understand, what in the real world, it takes to earn a rupee. Should you require the services of an experienced trader who is able to provide invaluable and detailed mentoring services to assist you in developing your trading skills, I would suggest you contact him to discuss whether his mentoring service would suit you. Narendar has been certified by “The Options Institute” (Chicago Board Options Exchange). He has also completed NSE’s Certification in Financial Markets (Options Trading Strategies Module).

Why does Warren Buffett trade in index Options?

1 min read

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

narenmt Mr. Narendar’s investment experience spans over 8 years during several Bull and Bear market cycles. He has personally and actively traded in NIFTY futures and options, shares. All through the years, he was in business; he traded the stock market and has built a great deal of those experiences into his current trading philosophy & trading strategy. One important feature of a successful trader is to understand, what in the real world, it takes to earn a rupee. Should you require the services of an experienced trader who is able to provide invaluable and detailed mentoring services to assist you in developing your trading skills, I would suggest you contact him to discuss whether his mentoring service would suit you. Narendar has been certified by “The Options Institute” (Chicago Board Options Exchange). He has also completed NSE’s Certification in Financial Markets (Options Trading Strategies Module).

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7 Replies to “Why does Warren Buffett trade in index Options?”

  1. My broker always tells me not to sell options, and every time I buy options it goes to zero. After reading your article on options, I plan to sell options, please tell me how to sell options, what strike price one has to chose while selling options, what kind of risk management one has to practice. I sometimes feel options are very confusing and do not move as per nifty movement. For instance, put does not go up even if nifty goes down by 20 to 25 points but call price falls if market stays at same level or goes up by 20 to 25 points.

  2. yes aarthi u r right: if u r away from strike price option value willmove 5-10 points even market moves up 80 points. In option trading u should trade to near strike price so u can get – 10 points difference from nifty : example: Nifty spot 5505 if u trade 5500ce u get -10 points movement compared to nifty. if nifty 20 points moved u r option 10 -12points u can get. if u trade strike price 5400 ce u get same movements as nifty ,

  3. Sir, I wish to about the risk management after writing the ce and pe . If just after the trade nifty take 100 point movement in either side the loss is easily visible. TO protect that and also to earn money ,what strategy be followed. I will be obliged if you illustrate with current price of nifty and ce and pe with risk management.

  4. sir i m finding the best technical tool in EXCEL for treading intraday Nifty Or some Stock Options
    plz help me. guide me

  5. This is in response to Aarthi. Option trading is for professionals, and can cause you a big loss if you are not sure about what you are doing. Victor Neiderhoffer, a professional hedge fund manager, who made millions of dollars by selling naked puts, got bankrupt when the market crashed due to a black swan event. So just a small bit of advise, just be careful with what you are doing if you intend to sell puts.

  6. Addendum to my comment : Be careful if you intend to sell puts, should read : be careful if you intend to sell puts or calls. The better option would be to buy puts (if you think the market will go down) or buy calls if you perceive the market to go up. Both these have limited losses (premium) but unlimited gains.

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