The Secret Trick Buffett Uses To Multiply His Income

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Warren Buffett is one of the greatest investors of all time. His net worth jumped to $65 billion in 2014, ranking him as one of the very richest people in the world.

His average annual return of 20% in the past 55 years doesn't just put him ahead of all peers... it means he doesn't even have any peers.

Buffett loves a great deal. This was on full display in the financial crisis of 2008, when he lent Goldman Sachs $5 billion at the height of the panic. He landed amazing terms on the deal as the financial sector scrambled for cash, securing options to purchase 43.5 million shares of Goldman at or below $125 before October 2013. All told, Buffett netted a gain of of $2 billion in addition to lucrative dividend payments.

Not long after, in 2009, Buffett and his holding company, Berkshire Hathaway, went "all in on America's future" with a $34 billion investment in rail shipper Burlington Northern Santa Fe. Once again Buffett bought at the exact right time after prices had swung lower and shareholders were nervous. The value of Berkshire's investment in BNSF has since more than doubled.

The list of Buffett's big wins goes on and on.

It's obvious Buffett knows a thing or two about a great deal. The man doesn't like to lose money.

But great deals don't come along often. In fact, they're downright hard to find. That's why Buffett employs one of my favorite strategies to not only help find the next great deal, but also generate substantial amounts of income while waiting.

I'm talking about selling options. Yes, Warren Buffett is a known options seller. Let's take a quick look at three little-known examples of when Buffett used options to help further cement his reputation as one of the greatest investors of all time.

BNSF Puts In 2008

When Buffett was in the process of buying BNSF in 2008, he was also executing a low-risk option-selling strategy to boost his income and give him a shot at buying more shares on a dip.

On October 6, Buffett sold more than 750,000 puts on BNSF. Two days later, Buffett sold another 1.19 million puts.

Both transactions accomplished the same two goals. If shares took a nosedive before the options expired in December, Buffett would get a chance to buy more shares at a big discount.

But if BNSF kept rallying, Buffett would simply get paid... for basically doing nothing.

In this case, that's what happened. BNSF continued moving higher, the options expired worthless, and Buffett pocketed instant income of $13 million without buying a single share and tying up his valuable capital.

Equity Index Puts Between 2004 And 2008

Buffett also executed a big options selling strategy between 2004 and 2008.

During this time, Buffett began selling long-term puts on four leading stock indices in the U.S., U.K., Europe and Japan.

Buffett did this for three reasons:

1.) He was bullish on the long-term prospects for U.S. and global markets.

2.) He wanted to generate more income.

3.) He wanted a chance to buy low if prices fell.

In the short run, Buffett and Berkshire generated a staggering amount of income from these trades: $4.2 billion.

The option-selling strategy also freed up a large chunk of Buffett's capital by not having to purchase shares of these global indices or other blue-chip stocks.

In the long run, if these global indices crash lower, Buffet has no exposure to the down move. He will be required to buy shares only if these major indices have a large correction in the next five years or more. And if that happens, Buffett would have been buying anyway.

Buffett was simply making a bet on one of his strongest core beliefs: Stocks spend a lot more time going up than going down. And he chose to do it using options because he wanted to generate huge amounts of income, free up his capital and then redirect those funds into other opportunities.

But perhaps the options trade Buffett is most famous for is Coke.

Coke Puts In 1993

In the mid 1980s Buffett recognized Coke as one of the world's great brands and companies. And it was undervalued. Buffett began buying shares of Coke in 1988. Less than five years later in 1993, the value of those shares had more than doubled.

Those were great results. But it also presented a challenge to Buffett: He wanted to buy more shares, but he didn't want to overpay. Once again, Buffett relied on his favorite options strategy to help him lasso another great trade.

With Coke trading around $39, Buffett proceeded to sell options. This would generate a large amount of income for his account as well as give him a chance to buy shares if they fell lower -- in this case, below $35.

As it turns out, Coke continued charging higher, and once again, Buffet pocketed $7.5 million in income when the options he sold expired worthless.

Buffett Uses Options… And You Should Too...

Warren Buffett doesn't take investing or making money lightly. His interest in selling options is purely profit-driven. He recognizes the incredible benefits of selling options.

When Buffett sells an option, he is aiming to achieve one of two desirable outcomes.

1.) Generate income: Selling an option produces income that is immediately deposited into the option seller's brokerage account.

2.) Chance to buy shares on a pullback: If shares fall below a certain level, the option seller will have a chance to buy shares at a big discount to recent prices.

Many investors may be surprised to hear how Buffett has used options to help him execute some of his greatest trades. But Buffett has executed option-selling strategies on many occasions to help him boost his income and give him an opportunity to buy shares on a pullback.

That's the power of conservative options strategies like the ones Buffett uses -- and like the ones I use each week in my premium newsletter service, Income Multiplier .

For the past several days my publisher has been offering a special introductory deal for readers who want to try selling options themselves. By visiting this link and signing up to my premium service, you'll get a bevy of special reports that will tell you everything you need to know about the conservative options strategies we use to generate $975... $1,170... even $1,500 in income in a matter of days -- no matter what the market is doing. If you sign up today, we'll even give you $100 off the masthead price -- but the deal ends at midnight. Click here to grab your savings right now .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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