I’ve told people for years and years that Warren Buffett’s portfolio and Berkshire Hathaway company publicly discloses that they are naked put option sellers. More specifically they sell index put options, the exact same strategy we use here at Option Alpha.

Why Is This So Shocking?

Honestly I always get a weird response when I tell people this. Why is it so shocking to think that one of the best investors of all time my use the same strategy that I prefer. Well, I guess I’m using his strategy and not the other way around right? I’ll give credit where credit is due.

But the truth is that he’s done it if years and will continue to do so…you need to start doing this right now too.

Do What Billionaires Do!

I’ve always believe that if I want to become a better trader, I have to invest like millionaires and billionaires. What better way to do that then to read the public filings of their companies! Sure it may take some time to get through but I set aside time each month to read these public filings.

Don’t you think that if the richest man in the world is selling index put options, you should be doing the exact same thing? I do.

Read The Proof Yourself…

To prove that Warren Buffett and Berkshire Hathaway use the same option strategy, we have provided direct quotes from the 2010 annual report per the SEC filings. I urge you to check me on these and see what they say for yourself! Download the 181 Page 10-K filing here.

Page 19

Our risks of losses under equity index put option contracts are based on declines in equity prices of stocks comprising certain major stock indexes worldwide. Although the contracts currently in-force do not begin to expire until 2018, we could be subject to significant future settlement payments at expiration if equity index prices are below the strike prices specified in the contracts.

Page 44

In 2010 and 2009, gains on equity index put option contracts were $172 million and $2.7 billion, respectively. Under many of the contracts, no settlements will occur until the contract expiration dates, many years from now.

Page 79

The equity index put option contracts are European style options written on four major equity indexes. Future payments, if any, under these contracts will be required if the underlying index value is below the strike price at the contract expiration dates which occur between June 2018 and January 2026. We received the premiums on these contracts in full at the contract inception dates and therefore we have no counterparty credit risk.

As of December 31st 2010, Warren held the following portfolio of 25 stocks…

By Kirk Du Plessis