Berkshire Hathaway Inc. (BRK.B), The Coca-Cola Company (KO) – Put Selling: Buffett Uses This Simple Strategy to Boost Returns by 10%

Traders can also sell puts as an income strategy. With this approach, they repeatedly sell short-term puts that will expire in less than three months and have a low probability of being exercised. When an option expires worthless, the seller keeps the premium as their profit. Options pricing models can be used to determine the probability of exercise.

Why It Matters To Traders

Selling puts can be a way to build a long-term portfolio of value stocks without overpaying. When the put is sold, you are setting a maximum price limit for your purchase. It is like buying on a limit order except that you are paid to wait for your order to be filled. With this strategy, you will only buy during pullbacks. Buying at a lower price and generating income from options premiums could lead to returns that are 5%-10% higher on positions than you would obtain by always buying at the market price.

Selling puts can also be a very effective income strategy. Most puts expire worthless and the seller profits when that happens. It is possible to generate income of 10% or more with this strategy. Aggressive traders can use full margin to increase those returns by up to five times.

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