Eastern Wall Street--Sell put hedging bottom-fishing strategy Strategy: Underlying stock + selling put options

Strategy: Underlying stock + selling put options
Purpose: Steadily making profits, harvesting both long and short leverage
Maximum loss: Floating loss on underlying stock - premium income
After reading this, you will understand why investment giants like Warren Buffett, Masayoshi Son, and Duan Yongping use the Sell Put strategy to buy at the bottom. Including myself, who also bought NVIDIA at the bottom on August 5th, currently ranking in the top 19% of shareholder returns.

$NVIDIA(NVDA.US)

If you are bullish on a stock but want to buy it at a lower price, instead of setting a low limit order, it's better to sell out-of-the-money put options. This way, on one hand, you can earn premiums, and on the other hand, if the stock price falls to the strike price—the price at which you want to buy—you can still buy the stock as planned. This is the method many investment giants use to buy stocks. Let me give you an example.
For instance, if Apple's stock is currently around $150, but we believe $140 is a more reasonable entry point, we can sell a put option with a strike price of $140 expiring in two weeks, priced at $1.52, earning a premium of $152. At expiration, depending on Apple's stock price, the profit/loss of our position plus the sold put option shows that if the stock price is at or below $140, we will be assigned the put option and acquire 100 shares of Apple at $140. Therefore, if the stock price is lower, we will incur losses. However, the premium from selling the put option can offset some of the losses. If the stock price is above $140, we won't be assigned, so we won't be able to buy the stock at a lower price. If we still want to buy Apple at $140 and earn some premium, we can repeat the process by selling another put option with the same strike price expiring in two weeks. (Duan Yongping sold 7,000 put options for Pinduoduo expiring on January 21, 2022, with a strike price of $50, at $4.9 per option. Since one option represents 100 "shares," the total premium for this investment was $4.9 * 100 * 7,000 = $3.43 million.)

Let's take it a step further and analyze Warren Buffett's real Sell Put strategy to learn from it.

In December 1993, Buffett sold put options for 3 million shares of Coca-Cola at $1.5 per option, with a strike price of $35 expiring at the end of December 1993, when Coca-Cola's stock price was around $40. Later, he felt it wasn't enough and sold another 2 million put options for Coca-Cola. In total, Buffett sold 5 million put options for December 1993 with a strike price of $35 at $1.5 per option, receiving a total premium of $7.5 million ($1.5 × 5 million).
From the profit/loss analysis, we can summarize the following key points:
1. If the options are exercised, we may only need to deposit margin in advance. In other words, we can buy stocks with just a down payment, though this will incur some interest.
2. In terms of strategy risk, if the stock price falls significantly by expiration, we will be forced to buy at the agreed strike price, which is higher than the market price. If the stock price rises significantly, we will miss the opportunity to buy the stock and only earn the premium.
3. We should try to select put options with strike prices about 10% below the limit price, as lower strike prices yield little premium, while higher strike prices carry greater risk of being assigned.

Finally, I want to summarize: Buying options is gambling, and gambling is wrong. I believe buying options will eventually lead to losses because it's not the right approach. Selling options is like lending money, and the premium is like interest. Lending to gamblers isn't ideal, but it's a matter of supply and demand—to earn profits, you must meet others' needs. Second, never ignore fundamentals. My decision to buy NVIDIA at $92 was based on the widely accepted price-to-earnings ratio of around 30, suggesting a fair value near $90. I won't delve into the rationality of P/E ratios and relative valuation methods for the semiconductor industry here.

P.S. Since some friends have asked about covered calls in the comments, I'll cover related strategies in the next issue. Generally, if you want to sell a stock, you might consider selling calls. I sold some weekly covered calls, and some were actually called away. Later, I quickly sold some puts, and luckily, they were put back to me. In the end, no extra money was made, and it's easy to accidentally lose a good company you worked hard to acquire.

Who am I?

With over a decade of trading experience at Shenyin Wanguo on Guangdong Road and Pacific Securities on Huanghe Road in Shanghai, I was a heartbroken top-tier securities professional who switched to overseas markets. I hold a national intermediate economist title and am a shareholder of NVIDIA.

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