Sunday, August 28, 2016

Trade ideas by piggy backing on Buffet's positions.

We all know that when it comes to epic long holders, Warren Buffet comes to mind, after all who doesn't know about his epic positions in American Express, Coca Cola or IBM.
But did you know that Buffet is also a legendary Put seller? Per the BRK annual report in 2008 he sold 5B$ worth of Puts 10-15 years away from expiration on major world indices like the Dow Jones , Nikkei, FTSE and SP500.
Theta decay over the years has made that 5B$ short position now worth around 2.2B$ netting him a profit of around 2.8B$.

Now here's my idea, Berkshire Hathaway consists of a handful of positions in large relatively stable companies that form the bedrock of American capitalism.
Why not piggy back on those positions and use them to our advantage.

Here's a list of Buffet's top 19 positions. link

Company Symbol Holdings Mkt. price Holding value Stake 25 Delta Put Option price 1 week out (or month out if monthly) Strike Monthly/Weekly Annualized Return
Kraft Heinz Co KHC 325,634,818 $88.37 $28,776,348,867 26.76% 0.45 85 M 6%
Wells Fargo & Co WFC 479,704,270 $48.39 $23,212,889,625 9.56% 0.17 47.5 W 19%
The Coca-Cola Co KO 400,000,000 $43.56 $17,424,000,000 9.31% 0.13 43 W 16%
International Business Machines Corp. IBM 81,232,303 $158.71 $12,892,378,809 8.52% 0.37 155 W 12%
American Express Company AXP 151,610,700 $64.92 $9,842,566,644 16.45% 0.3 64 W 24%
Phillips 66 PSX 78,782,000 $78.80 $6,208,021,600 14.80% 0.35 77 W 24%
U.S. Bancorp USB 85,063,167 $43.28 $3,681,533,868 4.95% 0.17 42.5 W 21%
Wal-Mart Stores, Inc. WMT 40,226,402 $71.13 $2,861,303,974 1.31% 0.26 70 W 19%
Moody's Corporation MCO 24,669,778 $106.10 $2,617,463,446 12.81% 0.44 100 M 5%
DaVita HealthCare Partners Inc DVA 38,565,570 $64.02 $2,468,967,791 18.72% 0.35 60 M 7%
Charter Communications, Inc. CHTR 9,337,491 $250.40 $2,338,107,746 3.45% 1.6 242.5 W 34%
Deere & Company DE 21,959,246 $86.99 $1,910,234,810 7.00% 0.37 85 W 23%
Goldman Sachs Group Inc GS 10,959,519 $165.94 $1,818,622,583 2.69% 0.85 162.5 W 27%
Apple Inc. AAPL 15,227,702 $106.97 $1,628,907,283 0.28% 0.28 104 W 14%
General Motors Company GM 50,000,000 $31.53 $1,576,500,000 3.23% 0.1 30.5 W 17%
USG Corporation USG 39,002,016 $28.32 $1,104,537,093 26.70% 0.35 27 M 16%
Verisign, Inc. VRSN 12,952,745 $74.85 $969,512,963 12.04% 0.3 70 M 5%
Bank of New York Mellon Corp BK 20,827,212 $40.72 $848,084,073 1.94% 0.19 40 W 25%


A few points , the annualized return should theoretically be calculated after subtracting premium received, but to add an extra level of conservatism I've included the full risk on the table in the calculation and also for expediency.
Return % = (Option price/Strike) x 100 x n
n= 52 for weeklies and 12 for monthlies.

As you can see for the Put seller who has cash to secure his position, BK and AXP jut out asking to be exploited.
The problem with some of the higher return tickers are many fold. CHTR is a 250$ stock,I certainly dont want that sort of capital outlay, especially if the position gets assigned.
On the hand macro conditions give me pause on PSX for example, I already have a losing oil position and I dont want to add to it.
DE looks lucrative as well, but I am somewhat biased against heavy industry stocks and not to mention the steep 85$ stock price translating to 8500$ of risk.

The sweet spot in terms of capital outlay and risk seems to be the 40-65$ corridor, hence BK and AXP come to the fore, and an option price of around 20-30c seems lucrative at 25 delta.

This of course translates to the possibility of achieving profit at a 25% chance the position ends up in the money, pretty good profit potential.
The above is especially true, since it's backed by Buffet, the stocks are blue chip and relatively stable, you can easily adjust your position after a week and do this like clockwork every week.
Another important factor is liquidity, but as long as we get into the trade around the 25 delta 1 week out and slightly below the 50 day moving average the position should be relatively safe to end up OTM.

C is another stock that offers almost identical risk/reward potential as BK but isnt part of Buffet's portfolio.