The $4.9 Billion Strategy He Doesn’t Talk About
Warren Buffett famously called derivatives “financial weapons of mass destruction.” Then he turned around and collected $4.9 billion in option premiums. Hypocritical? Not exactly. The Oracle of Omaha uses options very differently than most traders, and understanding his approach could reshape how you think about the entire market.
This guide breaks down Buffett’s real options activity, the specific strategies he uses, and what retail traders can actually learn from his playbook.
- Does Warren Buffett really trade options?
- The put-selling strategy behind his biggest derivatives wins
- His famous Coca-Cola and 2008 financial crisis trades
- Why he calls derivatives dangerous but still uses them
- Key lessons retail traders can apply today
Ready to see how the world’s most famous value investor plays the options game? Let’s find out.
Does Warren Buffett Really Trade Options?
Yes. And not in small amounts.
Warren Buffett describes derivatives as time bombs or weapons of mass destruction. Yet he trades them in a very big way, a $5 billion way, specifically with short premium strategies.
The Oracle of Omaha isn’t secretly day-trading weekly calls. His approach is methodical, long-term, and always tied to his core value investing philosophy. In Berkshire Hathaway’s 2007 annual report, the company acknowledged that it had 94 derivative contracts, which over the year generated $7.7 billion in premiums.
What Most People Miss
Most people see too much of the long-term investor, buy and hold type of aspect of Warren Buffett, but it is not the full picture. The media loves the “buy great companies and hold forever” narrative. It sells. But it’s incomplete.
Everyone ignores the 50,000 short put options he sold on KO or the 3-month short puts he sold before acquiring Burlington Northern Santa Fe. These trades reveal a sophisticated options seller hiding behind the folksy Omaha image.
Key Point: Buffett uses options strategically, not frequently. He’s not speculating on short-term price swings. He’s generating income and positioning himself to buy great businesses at better prices.
The Put-Selling Strategy Behind His Wins
Buffett’s go-to options play? Selling put options. It’s elegant, it aligns with value investing principles, and when done correctly, it’s a heads-I-win, tails-I-still-win setup.
How It Works
This strategy involves selling an option where you promise to buy a stock at a specific strike price below its current value sometime in the future. This immediately gives you money from the sale of the option.
Here’s the beauty of it:
- Stock stays above strike price: Option expires worthless. You keep the premium as pure profit.
- Stock falls below strike price: You buy shares at a discount, plus you still keep the premium, lowering your cost basis further.
Buffett loves to find assets that he thinks are undervalued and agrees to own them at even lower prices. In the interim, he collects option premium today, which, should the asset go lower in price, also helps reduce his cost basis.
Why This Strategy Fits Buffett’s Philosophy
| Traditional Buying | Buffett’s Put-Selling |
| Wait for price to drop | Get paid while waiting |
| No income while waiting | Collect premium immediately |
| Buy at market price | Buy at discount + premium |
This isn’t gambling. It’s getting paid to potentially buy stocks you already want to own.
The Famous Coca-Cola and 2008 Trades
Two trades showcase Buffett’s options mastery better than any others: Coca-Cola in 1993 and his massive index puts during the 2008 financial crisis.
The Coca-Cola Play (1993)
Buffett already loved Coca-Cola. By 1993, it was his largest position. But he wanted more shares at a better price.
In April 1993, Buffett sold 50,000 put options (equivalent of 5 million shares) for $1.50 worth of premiums per option. This comes up to a total of $7.5 million in premiums collected.
The strike price? $35. The stock was trading around $39.
From 1993 to 1994, Coca-Cola’s stock price fluctuated between $40 and $45 and never fell below $35. This meant that Warren Buffett failed to buy Coca-Cola stock at his desired price. However, the cash-secured put still made him a net profit of $7.5 million in option premiums.
He didn’t get the shares. He still walked away with $7.5 million.
The 2008 Financial Crisis Bet
This is where it gets wild.
As described in his 2007 and 2008 shareholder letters, Buffett sold long-term put options on major stock indices, including the S&P 500, FTSE 100, Euro Stoxx 50, and Nikkei 225. These contracts, with expiration dates ranging from 2019 to 2028, allowed Berkshire Hathaway to collect a massive $4.5 billion in premiums upfront.
When the market crashed 50%, his positions showed $10 billion in paper losses. Most traders would have been wiped out.
But here’s the twist: These were European-style put options, meaning that the buyer cannot execute the deal until the day the contract expires. Buffett couldn’t be forced out early. He just had to wait.
Although the marked-to-market losses of these options reached $10 billion during 2008-2009, as the stock market gradually recovered, Warren Buffett’s put options survived a very difficult period and eventually collected the $4.9 billion option premium.
Pro Tip: Buffett’s edge wasn’t just strategy. It was structure. Long-dated, European-style options gave him time to be right.
Why He Calls Derivatives Dangerous (But Still Uses Them)
Here’s the apparent contradiction that confuses everyone.
“In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal,” wrote Buffett in Berkshire Hathaway’s 2002 annual letter.
So why does he use them?
Context Matters
That statement has been cited often, but Russell Rhoads, director of program development for the CBOE’s Options Institute, maintains it was taken out of context. He was discussing the acquisition of General Re that Berkshire Hathaway had entered into. They had inherited a book of over-the-counter derivatives, and he was expressing his frustration with trying to figure out what they were worth.
Buffett wasn’t condemning all derivatives. He was warning about:
- Complex, opaque contracts that are impossible to value
- Counterparty risk, where you can’t trust the other side to pay
- Excessive leverage that can blow up entire institutions
Buffett’s Derivatives Are Different
His options trades share these characteristics:
- Simple structures he fully understands
- Long time horizons that work in his favor
- Massive cash reserves to back every position
- Stocks or indices he’d happily own if assigned
One reason Warren Buffett can confidently sell put options is because Berkshire Hathaway maintains large cash reserves. This financial strength allows him to meet any obligations without the risk of liquidity problems.
The lesson? Derivatives aren’t inherently evil. Misusing them is.
Key Lessons Retail Traders Can Apply
You don’t have Berkshire’s $100+ billion cash pile. But you can still learn from Buffett’s approach.
Lesson 1: Sell Options on Stocks You Want to Own
What Buffett does is he sells puts going out as far as a year to collect as much premium as possible and reduce his cost basis. This obligates him to own the stock at a lower price and gives him premium today.
- Application: Only sell puts on companies you’ve researched and would genuinely want in your portfolio at the strike price.
Lesson 2: Cash-Secured, Not Naked
Berkshire Hathaway was able to write $37 billion worth of put options without having to put up $37 billion in collateral. You don’t have that luxury.
- Application: Always have the cash to cover the assignment. If you sell a $50 put, have $5,000 ready.
Lesson 3: Time Is Your Friend
Buffett’s index puts had expirations 15 to 20 years out. He wasn’t playing for next week.
- Application: Sell options with enough time for your thesis to play out. Longer expirations mean more premium and less stress.
Lesson 4: Volatility Creates Opportunity
When volatility increases, option premiums rise, allowing you to earn higher upfront payments when selling put options.
- Application: Market panics are the best time to sell puts on quality companies. Fear inflates premiums.
Lesson 5: Structure Beats Speculation
| Speculative Trading | Buffett’s Approach |
| Short-term bets | Long-term positioning |
| High leverage | Full cash backing |
| Random stocks | Deeply researched companies |
| Hoping for quick wins | Building income streams |
Buffett would stand by the principle of only using defined-risk strategies when your capital flow is limited.
Look for option strategies where you risk $1 to potentially make $3 or more, the essence of a high-reward, low-risk trade where the upside potential is a lot greater than the downside.
Trade Smarter by Thinking Like Buffett
Warren Buffett proves that options aren’t just for speculators. Used strategically, they’re tools for income, better entries, and risk management. The key is discipline: only trade what you understand, back positions with cash, and think in years, not days.
Key Takeaways:
- Buffett actively trades options, primarily through selling puts
- His Coca-Cola trade netted $7.5 million without ever buying shares
- During 2008, he collected $4.9 billion in premiums on long-dated index puts
- He calls derivatives “dangerous” when they’re complex, leveraged, or poorly understood
- Retail traders can adapt his approach by selling cash-secured puts on quality stocks
- Volatility is your friend when you’re a seller, not a buyer
- Time horizon and cash reserves are what separate smart options use from gambling
Options don’t have to be weapons of mass destruction. In the right hands, with the right structure, they’re precision tools for building wealth. Start small, stay cash-secured, and focus on companies you’d be proud to own. That’s the Buffett way.