Warren Buffett is famously conservative with derivatives—so why should options traders pay attention to him?
Buffett only touches options occasionally, but when he does, he is extremely profitable, employing a robust blend of careful calculation and strict methodology. Buffett has more than shown to retail investors that it’s possible to use options as a powerful tool. The man has successfully traded with strategic cash-secured put writing and long-dated index puts for billions of dollars. No one would put that kind of money on the line if there wasn’t a profit to be had!
The key to Buffett’s success with using options has been that he has used options strategically (not frequently, but meaningfully). There’s a big reason why he has famously called derivatives “financial weapons of mass destruction.” Our goal today is to provide you with 5 actionable lessons that you can apply from Buffett’s investing mindset and real-world moves.
These lessons aren’t just theory—they’ve been worth billions.
1. Only Trade Options When You Understand the Underlying Business
Buffett’s investments are deeply researched—he only touches options tied to companies he’d own outright. Buffett doesn’t trade options willy-nilly. He does a deep dive into the companies that choose to trade options on.
He will study their competitive positioning in the markets and take a look at their long-term financial prospects. Another aspect of these companies that he looks into is their “economic moat,” which is a phrase that Buffett coined to explain the competitive advantage that these companies have for a long period of time, which keeps them continually profitable even in the midst of their industry rivals.
- Lesson: Don’t speculate blindly. Use options to express a thesis you already believe in fundamentally. Options should not be used as a gambling tool to take a chance on unknown tickers. The option contracts you eventually choose to trade should be an extension of your existing market beliefs and the research you have done.
- Application: Avoid short-dated “lotto plays” on stocks you don’t understand. This is the epitome of using options as a form of gambling. A lot of the meme stocks only have value due to the hype they get on social media and not due to the company’s underlying fundamentals. Meme stocks result in a lot of people losing their investment and very few making it out ahead.
Example
During the 2008 Financial Crisis, Buffett strongly believed in the resiliency of the US economy even though the economic forecast looked grim. He used options trading to his advantage during this period, selling long-date put options on the S&P 500 with an expiration date set for 15-20 days out. Buffett’s long-dated put positions during the 2008 crisis were tied to broad indexes he believed in long-term, plus he saw the volatility that was occurring in the financial markets as an opportunity for boosting premiums.
2. Use Options to Get Paid While You Wait
Another one of Buffett’s famous moves is selling cash-secured puts on companies or indexes that the buyer would like to own, but the twist is that these are also companies that he wouldn’t mind owning long-term at the chosen strike price. Buffett has sold puts to enter positions at better prices. By selling the put options, Buffet not only collects a premium, but he also gives the buyer the right to sell the underlying stock to Buffet at the strike price and within the given timeframe.
- Lesson: Selling cash-secured puts is a great way to buy stocks you love—at a discount and with income. The way that Buffet operates with this strategy is unlike retail traders who are continually chasing rallies. He structures these trades where he can collect premiums from the sale while he is waiting around for the ideal entry point.
- Application: The first steps for emulating this renowned Buffett move are to choose companies or names that have solid fundamentals (no meme stocks) and then write cash-secured puts on these names. You collect a premium for the sale, and you can acquire a great company at a discount if you get assigned. You’re basically using CSPs to build a value-investing style entry strategy.
Example
Again, Buffett was able to use another smart financial move during the 2008 crisis to be profitable in those turbulent times. He ended up selling cash-secured puts on the S&P 500, and he was able to rake in a lot of big premiums, especially when the markets were experiencing peak volatility. The ingenuity of Buffett’s move was in the fact that he got paid up front for selling CSPs and then was able to own stocks outright for companies he didn’t mind owning if the contract went to assignment.
3. Patience and Long Time Horizons Are an Edge
Many of the strategies that Buffett has been known to use are designed to reward his patience and have much longer time horizons (5-10 years) than a lot of the trades that are conducted by traders with less experience, skill, or knowledge. The key to his success with longer expirations is that Buffett sees them more as a tailwind that will give him momentum and not a ticking time bomb that has to be managed correctly before it blows up in his face.
- Lesson: Options don’t have to be short-term gambles. The problem with a lot of short-term options is that they are subject to the negative effects of theta decay and are subject to price swings that can destroy a lot of the value that the trader has built up in the investment. LEAPS and longer-dated positions reduce noise that comes from price swings and theta decay, plus they better align with conviction-based moves.
- Application: So long as you’ve done your research and are confident in the direction of a certain stock, it is best to buy more time because your belief will be vindicated in the long term. Favoring longer expiries when conviction is strong can help you avoid trying to time short-term swings, which have a greater likelihood of not being correct.
A good tactical tip to see if Buffett’s theory on longer time horizons holds water would be to compare LEAPS vs. weeklies and their impact on theta decay (LEAPS are long-term equity anticipation securities). You’ll see that LEAPS hold their value a lot longer, and they give the trader the satisfaction of seeing their convictions on the stock to play out over the long term. In many cases, traders who are feeling bullish on stocks will see those rise in value, given enough time.
4. Avoid Leverage for the Sake of It
Options offer traders the chance to use borrowed money to speculate on price movements, but the leverage that options provide can work against the trader if their conviction is incorrect. They might end up owing more money than they can realistically cover.
Warren Buffett is steadfast in his belief in using borrowed money to speculate: don’t do it. He sees them as reckless bets and not a strategic risk that is well-constructed. While he does concede that leverage can amply return in the short term, he stands by leverage being a significant risk that can have catastrophic consequences and underlines a lack of understanding about trading and investments on the trader’s part.
- Lesson: Buffett takes on a much more prudent and patient approach to investing. Buffett’s main focus is on looking into the company’s fundamentals and long-term prospects, centering trades around a longer time horizon and a strong conviction of direction. The lesson learned from Buffett here is to not over-leverage in options just because it offers cheap access to big returns. He would say that just because you can buy 20 contracts doesn’t mean that you should.
- Application: If you don’t have the capital to make big plays without leverage, it would be beneficial to keep your trades small to begin with and build them as time goes on and you build your balance. Keep your position sizes to only about 1-2% of your total capital balance until enough time passes where you can begin to make larger bets. By keeping position sizing small, you don’t risk more than you can afford to lose.
Buffett would stand by the principle of only using defined-risk strategies when your capital flow is limited. It’s good to not use leverage for speculating on options, especially when you’re new and have limited money to work with. On top of using a max-risk-per-trade framework, new traders should also fall back on using strategies like a vertical spread and avoid moves like naked calls or puts.
5. Focus on Asymmetric Risk/Reward Setups
Another of the well-known practices of Warren Buffett is using setups where the downside is limited, but there is a considerable upside that could reward the trader well for the risk. These are known as “asymmetric risk/reward setups.” They can provide a capped risk, but an upside that has a lot of promise for the investor.
- Lesson: 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. Using options, traders can enjoy the flexibility to design their trades around a payoff that carries that desired asymmetry.
- Application: If you’re wondering about which trading strategies offer the best in terms of limited downside and higher potential upside, we’ve got you covered—think vertical spreads, backspreads, or diagonals with defined risk. These moves work well for traders with limited capital who need to keep their strategy tight and are likely to secure a profit.
Example Strategy Tie-In
Warren Buffett would likely advise a retail trader to buy a call spread on undervalued stocks where there is likely going to be an earnings event or another catalyst that should shake up the stock prices. With this strategy in place, traders don’t need to fear a stock rally because their stock will appreciate in value, and there is only a small amount of capital that is at serious risk.
What Buffett’s Portfolio Really Teaches Us About Options
It’s possible to trade options like the billionaires, but do so using a much smaller capital balance. Options trading is far from being Warren Buffett’s bread and butter, but he has shown during the times he has traded options that it can be done with patience and clarity, all with a focus on long-term performance and choosing to invest only in companies with solid fundamentals.
Apply These Buffett-Inspired Lessons to Your Next Options Trade
- Know the business before touching its options.
- Sell puts to generate income while targeting entries.
- Use time to your advantage—not as your enemy.
- Respect risk and avoid leverage traps.
- Always seek asymmetric returns with defined-risk trades.
While Warren Buffett may not be known as an options trader, the few times he used them—and the way he approaches risk—offer timeless wisdom for anyone trading derivatives today.
