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No. of Recommendations: 15
OPM is one of Warren Buffett's best kept secrets for all to see. Other People's Money!

Leverage turbocharges investments but it comes at the price of high risk. Evergrande is just the latest example. The problem with debt is that it can cause a catastrophic implosion. Buffett's insight was to find leverage that cannot be easily called back. Insurance premiums and prepaid services are two classic examples. Buffett's conglomerate is unique. Buffett's management style is totally hands off, he buy great companies with great management and he lets them continue doing what they do best with ONE exception, their cash on hand. Instead of each subsidiary managing their own cash, Buffett uses much of this cash to buy even more companies and stocks. How can an ordinary Joe use safe OPM?

In 1977 I went to Las Vegas with $1000 to play with. I learned a lot about gambling, why it was risky for players but safe for the house, the law of large numbers, the same principle behind the insurance industry. Studying option trading I saw the similarity it had with casinos, the buyers playing the part of the gamblers and the sellers playing the part of the house. Casinos and insurance companies set the rules, the buyers just take it or leave it. The same is true when selling options, you set your ask price and buyers can just take it or leave it. It's up to you, the seller, to set the "vigorish," the percentage deducted from a gambler's winnings by the organizers of a game. This is how an ordinary Joe can use safe OPM!

The two keys in gambling are, first to set a reasonable vigorish and second to limit the risk by setting limits on the size of the bets. Both are easily replicated with covered calls. There is a curious positive feedback loop, the more bullish the call buyers are the higher the premiums they are willing to pay. Bullish investors push up stock prices, FOMO!

All that's left to do is to find the needles in the haystack. This is where "85 35 7 2" comes in.

85 Currently my Covered Call Prospects list has 85 companies. This is an ad hoc list of stock that are discussed at TMF and other sources. They are generally bullish but exclude industries I dislike like finance that has credit risk. The list also excludes high priced stocks that my portfolio can't handle. If you have a million dollar portfolio and you want to sell covered calls on ten stocks the average stock price has to be under $1,000 (1,000,000 / 10 / 100).

35 Analyzing the options of such a large cohort is not feasible. The triage process begins by looking at six month price charts. The ideal candidate is a stock gently rising. Falling stocks are discarded as are crazy charts. For any stock not rejected, download the option chain from the CBOE website. This Monday 35 made the cut.

7 Feed the 35 stocks into the Covered Call Selector and pick the top 7 calls. On Monday I had $8,850 to invest in covered calls. My Trade spreadsheet (the prices and premiums were edited as I worked on the trades)

Buy Qty Price Total

APPS 100 66.830 6,683.00
DRIO 600 13.823 8,294.00
LCID 300 22.960 6,888.00
PACB 300 29.400 8,820.00
PLTR 300 28.730 8,619.00
STEM 300 25.970 7,791.00
VLTA 600 12.900 7,740.00

The Selected Calls

Calls Qty. Prem Total Strike Exp Yield

APPS 1 2.150 215.00 67.00 9/24/21 3.22%
DRIO 6 0.900 540.00 15.00 10/15/21 6.51%
LCID 3 1.050 315.00 23.00 9/24/21 4.57%
PACB 3 0.730 219.00 30.00 9/24/21 2.48%
PLTR 3 0.670 201.00 29.00 9/24/21 2.33%
STEM 3 0.880 264.00 26.00 9/24/21 3.39%
VLTA 6 0.800 480.00 14.00 10/15/21 6.20%

2 A lot can happen between selecting the best candidates and the market open. I wound up buying 300 DRIO and 400 VLTA on Monday, selling 3 DRIO $15 10/15/21 on Monday and 4 VLTA $14 10/15/21 on Tuesday.

8 I currently have eight open covered calls and I have a GTC buy back order at half the premium. I will cancel them in a week or so if not executed.

This September has been one of my best covered call months covering my ordinary expenses five fold and allowing me to add 2% to the LTBH part of the portfolio.

Denny Schlesinger
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