Andy Tanner: Ultimate Options, Your Secret

Andy Tanner:

Ultimate Options, Your Secret To Cash

Flow

Andy Tanner: Ultimate Options, Your Secret To Cash Flow

Andy: Hello. Andy Tanner here. Welcome to this awesome session. It's going to be fun on options. We're calling this old man options, some secret to get in some cash flow. It's going to be a lot of fun. I congratulate you for being here. I also thank Russell and the other members of the faculty for inviting me and including me. Very honored for that. I consider myself a instructor/student. I enjoy learning just like you. Congratulations for tuning in and showing up. There's a lot of people that end their education when they graduate from high school or college. Some of them even complain about not having enough money or wanting to do better.

The fact that you're here, it is meaningful. I make a habit every presentation I give to acknowledge that fact because I care about it. I relate with people who want to learn more because I'm a student just like you. I love learning more. It's just a wonderful journey. Congratulations for coming. I really mean that. I hope you can feel that. I'm going to talk about options today. That means risk. Everyone I know, including me, this trade option just had losses in the market because not every trade works out. It's very important to understand that what I'm speaking about does have a degree of risk. I wouldn't put it as the riskiest strategy. I wouldn't put it as the most conservative, but it does have risk involved. I thought it would be very important just to protect myself and my company to let you know, "Hey, what we're going to do in here is for grown-ups." There is some risk of loss when we invest in securities.

Then, the other thing that's essential that I communicate really well is that I'm not a person that recommends when strategy over the other or makes recommendations on specific picks. This is for education. The reason I hit this really hard, in the beginning, is there's a chance we'll see where it goes, but there's a chance I might bring up a paper account or simulate account, but look at real securities in that account. Let me communicate for now that this is for example. It's not a recommendation that you try to copy anything. It's just for illustration only. That's much appreciated when people are grown-ups. I understand investing has risk for sure.

What are you going to get out of this program? Well, I have three ideas here. First, I'm only going to focus on one strategy today with options. We'll give an overview of what they are. I love showing beginners who haven't trade a lot of options how these works. If you're a seasoned pro, this will be a wonderful review for you. I hope you can gain some insight, but the strategy I've chosen to highlight in this program is a strategy often used by Warren Buffett very frequently actually. You'll enjoy that so give an example of how he's done it one or two or three. Then, we'll talk about how ordinary folks really have access to doing the exact same strategy really, I mean exactly the same. It'll be fun.

Now, if you missed the keynote, I'll take a moment to introduce myself. They were very nice to let me launch the event. I did a little video on my four-pillar system of investing. If you missed that, I'll give you. I'll be very brief. My name is Andy Tanner. Over the past 20 plus years, I've taught thousands of people how to better learn, how to invest in options at financial education. The biggest thing I've gained from that is the importance of simplicity. I'm a very simple guy. I don't have a lot of talents. People that know me,

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they’ll say I need a lot of talents, but there's one thing that they're kind to say is that I do have a knack for making complex things simple for whatever reason. I guess I have a simple mind. I really have a love for this simple and simplicity. If you've delved in options before they seem complex, well, welcome because we're going to make them simple for you. You'll understand them. That's the thing I know how to do. That's good.

Two books, Stock Market Cash Flow of the Rich Dad series and 401(K)s about our retirement. Very passion about those topics. My story is very simple. I went to school. I didn't get very good grades. I went the school to play basketball mostly. The decision I have made is the point of decision I came to is worker stay as a student. I've decided to stay as a student my whole life. I show up at classes like this all the time and the decision to become a lifelong student has been one of the great blessings in my life. Now, it hasn't just been roses. I've lost money trading before as most guys have if they're honest, will tell you. I've had businesses that have succeeded, but I've had business failures too.

My experience comes from both negative and positive things, but that decision to become a student vesting is when I would make over again because the good has far outweighed the bad and the relationships I've had and the chance to teach and learn. It's just been great. That's just about me. I love to learn. I'm a student like you. Sometimes, I get to teach once in a while. That's a lot of fun. Keep the big picture if you want to get the most out of this class. I will not make this comprehensive. There's always details, details here, details there. The details are important. If you want to learn the details, well, great. You can continue to pursue, but what we'll do is keep the eye on the big picture and also on the progress, this is my education continuum.

I specialize with people that that are in this area right here where maybe they have a 401(K). They don't know much about investing or stocks or options. I help make them aware. Usually, in a 90-minute presentation proficiency is silly to look at or an hour presentation or 45 minutes, but we can be more aware of things. What I do is I move people along this over time. Keep your eye on the big picture and know that while we're looking at Warren Buffett's strategy, you're probably not going to beat him in investing contest after one-hour presentation. There's going to be more to learn for sure.

But with that, in the keynote address I made earlier in the summit, I talked about how we never bash an asset class. Richard Grant Branson did great in business. Donald Trump, whether you like him or hate him, I think he says some interesting things myself, but I do know he knows how to invest. Warren Buffett is one of the great exemplars of investing success. [inaudible 00:06:57], they've all done it in their different asset classes and their different specialties.

In the summit, we talked a lot about paper. We're going to concentrate on this called the derivative market. That's the promise I made you in the keynote. We have web bonds which are loans. We have stocks which are pieces of a company. You get a chunk of the company's share of it, but in the derivative markets, we deal with contracts or another way that to say that is an agreement. That's all those are. Derivative sounds



really, oh, derivative markets, weapons financial, mass destruction. They can be dangerous, but there's just agreements. It's just a handshake that's written down. That's all it is.

When you really boil this down like one guy wanted to do one thing, another guy wants to do another thing, they shook hands. Instead, you're shaking hands. They decide to put on a piece of paper. Call the contract. When an agreement is written down, it becomes an agreement of the contract. That's all the derivative is. It's, to a couple of guys, shaking hands or a couple of businesses shaking hands that are going to agree to something. That's really what often the derivative market consists of, is some an agreement or promise. That's the case at least for our purposes most of the time.

Let's look at a couple of different agreements. A person with an insurance contract. This guy has a house. He's a homeowner. We'll just hop right in. I'll tell you as I go through this, you'll feel more and more at home with it. You'll feel excitement to participate in some contracts that could help you. You'll have an epiphany to say, "Wow, this could be a business for me. "We have a homeowner. We have an insurance company so maybe an agent or we can just call it insurance. This guy scared his house might catch on fire. She would put it on fire. Look, flame's coming out of here. They're supposed to be in the chimney. Look, they're coming out all over.

They make an agreement. This guy says, "Look, I'll make you a promise. I will make you a promise that if your house is to burn down anytime in the next year or maybe it's a yearly contract or whatever, that I'll pay for you." What does this guy's balance sheet look like, this insurance? Well, they got a bunch of money in here in their asset column, liabilities, income, expense. I'll show you what this looks like. He says, "Look, I have a ton of money here in my bank account. If you'll give me a little bit more, I will promise to take care of your house. I have enough money here to make you whole."

This guy will send insurance man here a couple of dollars. He'll send him a few bucks for insurance. This is called the premium, insurance premium. You've heard of that before probably. If you have car insurance, you pay your premium. You have self-insurance. You pay your premiums each month. In that premium, it looks like this. It comes in here like this from the sky. They have no manufacturing costs. They have no raw material costs. They don't have any shipping. They don't have any distribution. Basically, they just said, "Look, we've got money to fix houses if they burn down. If you'll pay me a premium right here, then we'll make you a promise."

Look at this. Promises can generate income. That's something. If you're a smart person, you might say, "Gee, that might be one of the coolest ways to generate income ever." A lot of people have always dreamed of owning a business. They've always dreamed of having a business, but they say, "What product could I have? I don't know how to make XYZ. I don't know what product to come up with. I haven't come up with the pet rock yet. What product could I have?" The idea that you could just simply have a product that is manufactured via a promise is an amazing idea, isn't it?



I will tell you this. If you Vegas, the casinos make the money. That's the clue. Well, if you go to Wall Street, you have banks and insurance companies, and insurance companies are some of the largest companies in the world. Why? Well, they don't have to dig anything out of the ground, do they? They don't have a big factory where they assemble something. They don't have anything to package your ship. They basically just have agreements. That's all it is, is agreements. Of course, they do pretty well.

Let's take a look at some insurance numbers just for fun. I think I have something here. It talks about the 1.1 trillion. That's probably too tiny to see. 1.1 trillion in 2014 in premiums. In other words, when you look at this idea of making money by making promises, it's a pretty big deal. These guys here income wise, when these guys pay the premium, it's 1.1 trillion for a year. That's pretty good money. You only need a small portion of that to keep you happy. It's a very, very interesting business.

Well, let's just draw their business in a simple way. Let's draw a great big piece like this. We'll call that the premium they collect. Premium. Then, you've got maybe some claims. Maybe, it looks like this. I don't know what it looks like. You have people that make a claim in expenses. Claims. They say, "Hey, we had hurricane Irma and Hugo. "They laid ways so people call up and say, "Hey I didn’t have a fire, but I had floods. You've got to pay me my premium." They do that. They pay that out. The deal's a deal. Handshake is a handshake. They pay that out.

Then, all the other money that didn't get paid out in claims, you might look at that as profit. That's probably oversimplified, but that's a heck of a business where you make a bunch of promises to people and all these promises go out to people, all kinds of them. Here's the other people you made promises to. Maybe a certain percentage of them have a fire. They have a problem. Fire over here and fire over here. But as long as the promises that don't have a claim to them outnumber and outweigh the ones that do have a claim, you've got a nice little profitable business. Warren Buffett owns Geico which makes a lot of sense.

Well, people do this all the time in real estate. You have a house here that a money is your asset, liability over here, income, expense. We say, "I promise." What's the promise? I promise that you can stay. I have rental property, stay in my house. For example, we might have a rental property. I'll drive my kids by. We'll just say, "Yeah. This is not a house we live in." Other people live in this, but what they do is they'll pay us a premium, but this time, it's called rent. It's just a different name. Both of these contracts whether it be insurance or rent are made up of time.

That will introduce some jargon later on in your investing trip called time decay, but basically, that's what we sell is time. Most insurance contracts, maybe six months long or a month-to-month in rent. You're selling people time. The asset remains. you're just making money off the past as your time. I guess time really is money when they say time is money. If you are a real estate investor and you have renters, what are you really selling? You're just selling an agreement. You're selling a rental contract. They purchase



it through that contract. The money gets sent to their home. He used to go stay in this guy's house for a while. That's a little bit about contracts.

Well, a lot of folks want to control a price at which they buy. Here's a new agreement. We talked about insurance agreements to protect yourself. We talked about rental agreements so you can have a place to live or provide some other place to live. Let's say here we got Delta. Let's just make this up, Delta Airlines or whatever Airlines. It doesn't matter. Maybe you got ExxonMobil over here for oil. Delta says, "Gee, we're concerned that the price of oil would go up. We're thinking maybe the price is like $60 a barrel." We don't know what it is. We're concerned that if the price goes up to, say, $90 a barrel that our fuel costs will be really bad and people won't want to fly and all this stuff. They're concerned about that.

What Delta wants is they want a choice. They say, "Look, I would like the choice to be able to buy some barrels of oil from you at today's price at $60 a barrel." I like to do that over the next year, let's just say. We'll put a time on that over a year. Exxon Mobil says, "Well, that sounds good." We see why you want to do that. Tell you what. We'll sell you some oil just for fun. We'll make a promise to sell. This is oversimplified, of course. It's just an example. I could use to anything. To sell oil at $60 a barrel for one year. I'll do that, but they're not going to do that of the goodness of their heart. They can say, "Well, give us some love for this Delta."

Delta's going to pay them something called a premium for that. They'll pay them a small amount of money to lock in that price. Exxon's pretty happy with this because they're going to sell oil anyway. They're making money at $60 a barrel right now. Yeah. Sure. They'd like to make 90, but how does Exxon know that the price doesn't fall back down to 40 or 50? For Exxon, this is money that comes in. This is cash flow. This is a nice money just for doing nothing more than promising to do what they've been doing anyway. They're just locking your price. What they're really doing is giving up some upside potential. They're giving that up to be able to sell it a price they can make money out anyway and to get a little extra for that. ExxonMobil likes that.

Now, the reason Delta likes that is, now, they can look forward in their business. They can create a budget. Their chief financial officer can go in and say, "Look, we've spent a little money, but what it did, it brought stabilization to our prices at which we can buy oil now." We can go out and make forecasts. We can go out and run our business. We can say, "Look, for the next year even if oil goes nuts, we're going to be fine." Really, it's like insurance, isn't it? Delta's saying, "Look, I'll pay you a little premium to make sure my oil reserves don't burn down," because of high prices.

It's very much insurance. They want to control. Risk. This is an important thing, risk, has a relationship to control. It really does. If you have lots and lots of control over something, the risk goes down. Think about that. The more control you have over something, the less risk there is, but I'll tell you. If you lose control of something, risk goes up, doesn't it? Round and round, she goes. Where she stops, you can't control. Nobody knows the risk that's gambling. That's higher.



By purchasing this contract here, this airline's over here has gotten the greater amount of increase their control at which they can buy oil or jet fuel or what are you going to talk about. They've locked it in. Now, they have control over their buying price. These guys have made them a promise to sell at this price. It's interesting. Now, if oil goes down to 40, well, Delta can say, "I choose to buy it 40." I have the choice to buy at 60 or not buy at 60.

Exxon says, "Well, gee, that sucks. They're going to buy 40, but what did they get up front? They got a premium up front." They got cash flow too. Often, these were called future contracts or option contracts. The word option comes from choice. Futures are promised with the promise and an option where one guy has a choice. That's where these came from. This is the choice to buy. That's pretty good. Let's review taking inventory of where we are right now.

An insurance contract is where a guy makes a promise to make you whole if your house burns down. Why does he do that, because someone sends him money? Someone sends him a premium. We got that down. That was pretty easy. A rental contract. This guy says, "I give you a promise that you can stay in my house." This guy says, "Okay. I'll give you some rent for that time for there."

In this third example, this guy says, "All right. I'll make you a promise that I will sell oil to you at $60 a barrel." In order for that promise, he pays him a premium. Let's put some dollars in there. A premium to get that. That should be pretty simple. Pretty simple. If you need to get access to the summit, you want to watch this again. The more you watch it, the more it will click with your premium.

Basically, the big picture message. When I said you get most out of this, if you understood the big picture, is look, here's the big picture. You make a promise y you get paid. Promises insurance contracts. Someone got paid. Rental contracts and we got paid. Option contracts and we got paid. Now, another contract. People will also want to get control overselling. Remember, risk is related to the amount of control you have over something. It's funny. People say, "Oh, options are risky and stuff." The funny thing is people don't realize that a lot of options are purchased not because they're risky, but to control the risk.

Here's an example. We've got farmer Joe over here. Farmer Joe. He makes wheat or he makes wheat. He grows wheat. He makes it. He's an alchemist. Now, excuse me, he grows wheat. I don't know what the price of wheat is. I'm not a commodities guy, but let's just say it's $6 a bushel. It's $6 a bushel. He's got to sell it for $6 a bushel. He absolutely has to sell for $6 bushel because if he doesn't, he goes out of business. Well, that's a lot of risk because he can't control the price of wheat. He's going to go and get his farm ready and spend all that money raised that wheat not knowing whether there's drought or whether there's not or whether the ... It goes, "Look, to make this thing worth my while, I got to get six bucks a bushel."



He goes to ACME wheat crackers here or whoever. He goes to Nabisco. He says, "Look, I'll sell you some wheat. Are you interested in buying wheat?" The guy says, "I buy the wheat all the time." He says, "Will you give me a promise, a promise to buy the wheat from me. Look. You're going to buy it anyway. Is $6 a bushel a fair price? Could we just agree to that right now, a bushel? I'll pay you for that promise. I'll give you a premium for that. I'll give you some money right now. I'm a farmer. I'm a little bit saved up here. I'll give you some of my money right now if you just give me that promise to buy the wheat from me. Please, buy the wheat from me."

He says, "I won't because I really would like to have the choice." This will cost him a higher premium. I'd really like a choice to be able to sell this to you sell. Sell wheat at $6 a bushel to you. They might come to that agreement. Nabisco might say, "Gee, if you actually pay me a little money for what I was going to have to spend anyway at the six bucks, we can make our crackers profit with six bucks. We have no problem paying six. If you'll give me a little love upfront, help our business, give us a little more cash flow, I'll take that any day.

This guy now says, "Yeah." Now, if it goes from six down to four, now he can still sell. He controls the selling price. He can still sell at six. This gets complicated. As you guys know, I hate complexity. The way to get over that is just through repetition and remembering. Look, here's wheat guy. What's he doing? He says, "Look, I promise you. I'm going to buy wheat anyway. We've been paying six bucks anyway. I promised to buy the wheat from you, Mr. Farmer Jones. I'm going to buy it from you. I'm going to buy from you, Farmer Jones. I'll buy it at $6 a bushel."

This guy now has the choice. He says, "Great. I can sell it or not. I have the choice." What's another word for choice? That starts with an O. Option. That's why they call them option contracts. I have the choice to what? He's going to buy it. I can sell it to you if I want to or not at $6 a bushel. Now, if it goes from six down to four, this guy made a promise to buy a six. He probably doesn't want to. He's like, "Gal, you know what? I'd rather buy it for four out there in the market," but the guy says, "Look, I sent you this premium. I sent you this money. You agreed to buy it from me. We agreed at a $6 price. I expect you to honor that commitment."

The guy shrugged his shoulders, says, "Yeah. I guess you're right. We've made money at six before. You give me some love up front. I made the commitment. I'll keep it." This is the essence of options. We have two kinds of options. Puts and calls. Now, some people want to do this with a stock. Let's look at both. There's two types of options contracts. There's puts. There's calls. That's it. Puts and calls. Let's start with the calls. Someone might say I want the choice to buy something. Let's put it over here. This guy has I want the choice to buy. I want you to make me a promise. Maybe this guy owns the stock to sell.

There's a match made in heaven right there. Maybe the stock's at a $100. He says, "I want to be able to buy it at 100. I'll give you maybe $5 right now for that choice for two



months," something like that. Over the next two months, I can buy it at 100. This guy might have bought it down here at 50 anyway. He might be looking to sell it anyway. If the stock goes up to say 120, this guy's going to be pretty happy over here. He's going to be really happy. Why? That's a really bad smile. Maybe he can use his money and go get some teeth put in there, but 120, well, he gets to buy it at 100.

This guy says, "Gee, I'd much rather would have sold it at 120, but he did give me $5 to promise to do that." That's called a call contract. We have puts and calls. A put is just the opposite. A put contract is where this guy says, "Look, I like the choice to sell it to you. I like the choice to sell." This guy says, "All right, I'll make a promise to buy." If it's confusing, don't worry about it. That's a put contract. Just understand this. Here's the big picture. The guy that makes the promise to buy something gets the money.

The guy that makes the promise, the money always flows that way every single time. That's a basic understanding of option contracts. It's not comprehensive. There's a lot of things to learn like expiration dates and strike prices and all kinds of jargon that we could do another day, but essentially, a person that is promising to buy something and get paid by people that might want the choice to sell it. That's a big deal. Let's take a look at how this might work and why this might be interesting to someone like Warren Buffett.

There's an article here. The first thing you got to realize is, this is recent, that Buffett loses a bidding war. That's not true. They actually interviewed Warren Buffett and said, "Oh, you weren't able to pick up these taxes. Utility wants it." The reason he says, "I didn't lose the bidding war, he says, "Look, I made him an offer. They declined it. I didn't lose anything. I have no losses here. I didn't lose any money." I said, "Look, I am a fundamental analyst." When I look at stock fundamental, when I look at stock I decide the price. See this? I don't know how to spell decide. Decide, decision. I decide the price. I decide the price. I don't let anyone tell me any different.

That's really how Buffett goes about it. He says, "Look, I don't care what the competitors say that that thing's worth. I don't even care what the utility company self-thinks they're worth. Look, I made an offer. I did a fundamental analysis. I said this is what. It's worth to me. Take it or leave it." He really wasn't in a bidding war necessarily. He didn't lose. He said, "Look, I didn't lose anything. I decided what I'd pay. I didn't want to pay as much as the other guy." If the other guy wants to get caught up in that, he has a different valuation than me, more power to him, but I'm not going to overpay. I'm a value investor. I'm not going to overpay.

I think that's the mentality that is in the Benjamin Graham book, the intelligent investor. That's the mentality that they have. How has Buffett used this to his advantage, this mentality and also the options market to do some fun things? Well, here's an article that's interesting from the Nasdaq. This is from Nasdaq.com. It says here's a secret trick Buffett uses to multiply his income. It has three or four examples of this right here. The one I'm going to talk about here is Coca-Cola because I think it's one of the great illustrations of this strategy. This article doesn't give a comprehensive version of this



story, but I know the story very well. I will give a little bit more detail than the article does, but we'll work off the article for just a minute. Let's pull this over here and put this up here and have my whiteboard already. That's going to be fantastic.

Buffett really loves Coke. He loves to drink it. He loves to buy it. In the mid-1980s, he always like to pick up stuff. He loves great bands and great companies. He felt it was undervalued. That's fundamental analysis that I talked about as the first pillar if you saw the keynote I did. He said, "Look, when I look at that, I think it's undervalued." He really like this. He started buying it. He started buying it. Well, five years later, the shares doubled in value. The question is are they still a good value. Are they still a good value? I picked them up really cheap probably in the teens. Now, they're in the 30s. Do I want to buy more, but I don't want to overpay.

That's why I'm laughing at these idiots that write in the paper. Buffett loses bidding war. Buffett never loses a bidding war. He's worth a $100 billion or whatever. I think he [inaudible 00:31:43] like 60 and giving 40 away or something like that. He didn’t lose. He just simply wasn't willing to pay that much. He draws a line in the sand. He says, "I will not overpay. I am a value investor. I'm not going to speculate on more growth or whatever. I'm just going to say what's the company worth."

This is what he did. Here's Coca-Cola trading at $39. You know what? Let's put that up a little higher here so have room. He says, "Look, I do my fundamental analysis. I don't think it's worth 35 or 39." He says, "My magic price when I do my fundamental analysis, the shares have doubled, the price has gone up, but they've increased sales. They've increased revenues. Their brand has gotten more solid in 13 years." He says, "I pay 35 for it. That's what I'd pay. That's my line in the sand. I'm not going to pay anymore."

Maybe there's some people that are scared that it would drop. Maybe there's a hedge fund that owns a bunch of 39. They're scared to go to 20 or 30 or 10. Let's put Warren Buffett over here. Let's say Warren Buffett's over here. He says, "I'm willing to buy at 35. In fact, if it was 35 today, I'd buy it anyway. It's not 35. It's 39, but if it wasn't 35, I would buy it this very moment. This very second, I would do it."

Keep that in mind. He's willing to risk $35 on the stock. He's not willing to risk 39. It's just too high. He says, "Look, I will make you a promise." This is where Buffett not caring about prices going down is a really big deal because, look, if this price worth 20 or 10 or five, it wouldn't matter Buffett. Look, he's willing to pay 35 and be happy with it. That's a really important mentality to have. When you go out and shop for something, value is in the eye of the beholder. What's a new pair of jeans worth to you? Maybe it's $200. Maybe you think that's a deal. Maybe someone else doesn't think it's a deal.

I have an NCAA men's championship watch from 1993 as a matter of fact when we played in that tournament. I could sell on eBay for a couple hundred bucks or something, but I wouldn't give it up for a $ million because the team I played on and the relationships, it just means too much to me. It's the value in the beholder. Buffett says, "Look, I really don't care what anyone else thinks it's worth. If the market thinks it's 39, I



disagree. I'd pay 35. If the market thinks it's 20, I'd disagree. I'd still pay 35. He says, "I promise to buy this at $35. I'll buy it."

Someone else, maybe it's a fund or a bank or an institution. It has a whole bunch of this. Let's put them in red. This is Buffett over here in green. We better label them so we don't get them confused. This is Buffett. I don’t know if Buffett's with two Ts. I think it is. Maybe, this is an institution. When they say, "Look, I would like the choice." This guy has a promise. He wants the choice. He wants the choice to be able to get rid of this in case it goes down. He's a trend investor. He sees this thing trickling down. He said, "Hey, I want to guarantee that then I can get out at 35 in case it goes down." Why? He has a different analysis of Coke than Buffett does. It happens all the time. He says, "Look, I have the choice to sell at 35. It goes down there."

Let's look at the stock chart here. Let's look at what could happen. The stock could go up. The stock could stay the same. The stock could go down below 35 or below. Those are the three things that could happen. If the stock stays above 35, if it just stays anywhere above up here, this guy's not going to want to sell at 35 if it's worth 39. This option would expire worthless. I'll catch up with you in a bit. What happens right here is this guy's going to pay Buffett a premium. That's our big picture.

Remember, the guy that makes the promise receives the money. He says, "How many shares would you like to do this with Warren Buffett?" Warren Buffett says, "I would like to do this with five million shares." We'll just put five million shares right here. I'd like to pick up five million shares of Coke at 35 right here. This guy says, "All right, I'll give you $1.50 a share on that deal. I'll give you a $1.50 for the time."

Think about that. That $7.5 million is going in Warren Buffett's pocket for doing what he was going to do anyway if it hit 35. Figure that. Now, this is why the article said, "This is how he adds extra income to what he does. He's going to receive $7.5 million to do what he was going to do anyway to take the same risk he was going to take anyway." This happens every single day the markets open on a scale that most people have no clue about. There's people in 401(K)s that think they're investing like Warren Buffett. It kills me. They say, "Oh, yeah. I just buy and hold forever." What Warren Buffett does couldn't be further from a 401(K) because if it was the same thing, everyone at 401(K) would have $40 billion to $100 billion to ...

Look, Warren Buffett, number one, does not diversify. He's a focused investor. Warren Buffett does not buy companies without doing a fundamental analysis on them. People that put money in 401(K)s generally have no clue what they own. They have no idea. Some, money managers. Some does it. They diversify. They buy all kinds of stuff hoping winners outnumber losers. Warren Buffett is a focused investor. He finds great companies and wants to buy. Then, he buys them, but often one of the great ways he'll use to buy them is he will say, "Hey, I promise to buy it by making that promise. I'll pick up an extra dollar 50."



Now, a couple of things can happen right here. A couple of things can happen The stock could go up. The stock go down, goes sideways. Let's say it goes up. If the stock goes up to 40 or 50, Warren Buffett doesn't want it. It's not losing the bidding war. He just wasn't willing to pay that much. Let's say it goes up here to 42. Well, what will Warren Buffett get? He gets 7.5 million for watching the stock go up even though he never owned it.

Let me say it again. He collects 7.5 million simply by promising to buy it low. Well, it didn't go low. He keeps the 7.5 million. That would make anyone happy. Let me say it again. He gets paid $7.5 million for stock that he never laid a finger on. He never even owned it. He just happened to promise to buy it maybe. It went up. He's not going to have to do anything. You don't have to buy anything. Of course, this guy's not going to sell at 45 if it went up to 40 or 50.

Let's say it stays the same, 39. Well, he's not going to use this choice to sell at 35. What happens? Warren Buffett keeps the 7.5 million. Well, that's going to make him happy again. Put another [inaudible 00:39:15] on him there. Let's say it goes down below 35, you know, 34 or 33. Well, he still keeps the 7.5 million, plus he'll buy the shares as promised at 35. Why, because he was going to do that anyway. The reason you buy at 35 is Buffett say, "Look. It's worth 35." Now, if the market calls at 34 or 33, I believe eventually they'll figure it out and figure out that it's worth more.

He really doesn't care about dips after he buys because he's buying the value. He's saying, "Look. It's worth 35 bucks. I don't care what the market says its worth with supply and demand. I know what this company is worth. I know what I'm willing to pay for it. If the market closed for 10 years, I wouldn't care because that's what it's worth. I'm just really good at valuing companies." If he bought it at 35 a week ago and it went down, he wouldn't care. The fact it's gone down to 34, 33, he'll still pay 35 for it. He would have done it last week, but what else does he get? He gets $7.5 million plus, he gets 5 million shares of the stock that he wanted anyway which would probably make him really happy because it went down. He actually got the asset that he wanted.

In this case, it went up. The Coke continued higher in this case. He just did this scenario. He just kept the 7.5 million, but what people don't realize is Warren Buffett collects money on stocks that he doesn't even own. He collects money by making promises on stocks he'd buy if they got cheap. He has made billions of dollars this way, not millions, billions of dollars this way.

Let's just take a look at another one for fun. There's all kinds of them up here. Here's one on BNSF. This is a train. This is a company that says trains. I think it's a railroad or something like that. Here's the same thing. He says, "Look, he's buying BNSF." He says, "I'm going to do this low-cost strategy." He sold 750,000 puts on BNSF. Then, two days later, he sold another 1.9 million. That's about 2 million puts right here. Basically, he said, "Look, I promise. I promise to buy." This is a lot of shares, man, to buy. This is more



than 2 million shares if you like 200 million shares because there's a lot of shares in the contract.

But it says, "I promise to buy a bunch of BNSF stock here. Promise to do it if it goes down at a certain price." The premium they gave him for that promise was $13 million without buying a single share to tie up his capital. He's also expired worthless. One of the way Buffett buys companies is they'll be here. They'll dip down in his value zone. Let's say that here's the value zone where Buffett looks at a company and maybe their price is up here. Here's their stock chart looking like this.

Well, what he'll do is he says, "Look, if this stock ever got to this price, it would be within my value zone. It would be undervalued." In other words, if I can ever pick up the company this price, I'd do it because there's way value with that price. He'll simply make promises say, "Look, if the stock dips into my value zone, I'm willing to buy it. I'm willing to buy it because he eventually believes it'll be up here anyway." It's undervalued.

He'll simply make these promises. He'll get paid millions and even billions of dollars to do what he would have done anyway. Look, if Coca-Cola ... Buffett owns it right now, but if Coca-Cola went down 20% in price, man, they're way valuable in his eyes. He'd pick up as much as he could. Same thing. He did this on puts. He does this on the S&P index on the broad index right here. In the short run, Buffett and Berkshire generally staggered my income from these types of trades for $4.2 billion. He does this a lot. He'll do them for long periods of time like five years or more because Buffett loves to buy value.

I've done the same thing. Hopefully, you're enjoying this right here. Let's just do the trade one more time. Here's Buffett. Buffett will simply see something a price. He say, "Look. I promise. I promise to buy at X price, at XYZ price. I promise to buy at that price." This person over here says, "I would like the choice to sell at this price."

Buffett, they pay him a premium money right there. What does this balance sheet look? Well, it looks like this. He says, "I've got a bunch of money in my asset column right here." I have money to buy your stock from you. If you will give me an income, if you'll give me this premium, then I'll make that promise to you. He brings in income all the time by promising to buy new things to turn cash into stock.

Why? People say, "Why would people pay him to do that?" Well, maybe the stock is at $100. This guy is fearful. He's fearful because he's a trader. He's trader. He says, "My gosh, what if it goes down to 80? What if it goes down to 70?" I would like to be able to sell, let's say 90? Buffett says, "I'm not panicking at 90. If I can pick it up at 90, I know it'll be back up here later. I'll take your premium." He makes the money where that goes up, down, or sideways. That money goes all the time. It works. Let's look at an example.

I'll give myself a little plug if it's okay. Hopefully, no one cares about that. Often, people like our style. They like how we teach on the whiteboard. What I do once a week is I have a mentor club. I have some fun programs at my company, Cashflow Academy. This



is what we do. We just teach people different strategies like this one. This my four pillars program that teaches a lot of what I went over in the keynote in the wealth summit. Then, this is my mentor Club. What my mentor Club is it's a group of us where I bring in mentors and people to teach me.

We actually do this stuff every week. People get to watch. For example, we always use the simulate account for people. We ask that you get a simulated account and that you don't practice in a real one. That just is good risk management. Let's say you think the Federal Reserve is going to print money. Maybe you look at the price of silver going down here. Let's just look at silver and maybe you say this. You say, "Gee, Janet Yellen says that she's tightening monetary policy." Let's look at a bigger chart of silver. I'd rather look at the big picture here. She's tightening monetary policy. I think silver might dip.

Well, I'll just show you what I think about this. In fact, let's go out to ... It's got even longer. .Let's go out to 10 years or 20 years or something. Let's go out to, I don't know, like 20 years, maybe monthly. Let's just look at the big picture of a silver here. Silver used to be riding high. It's down here pretty low. Let's just look at an example and please understand my disclaimer. I'm not recommending you do this because you need to know how to get out of these. There's risk involved in all this, but this is just for educational purposes.

Let's say I look at the Fed. Let's say I look at the fiscal policy of the government Congress. I look at monetary here. I see a couple things here. On the Congress balance sheet, I see $20 trillion in debt. I see 100 trillion in unfunded liabilities like health care that they promised seniors. I see a big bubble of 79 million baby boomers coming into 2018 here pretty quick. We're going to have to pay all this which is going to cost ... We've gotten $800 billion deficit already. We got 3.2 in taxes. We bring in. We got 4.0 trillion in spending going out. That number's going to get higher. How do I know that?

Well, the baby boomer's going to retire. I can see it here on the fundamentals. Some people saw the movie, the Big Short. They say, "Boy, that's a time bomb. Look at all these mortgage-backed securities that they're going to adjust. They're not going to be able to pay for these. This is a time bomb." People walk out of the movie Big Short say, "Boy, I wish I could see a time bomb like that." Well, there you go. There's your time bomb. You're not going to draw your way out of this problem. You're not going to get a GDP that fixes this.

Then, I look at the Fed's balance sheet. On the Fed's balance sheet, they bought up all of these bonds and all of these mortgage-backed securities. It's bloated. They have got about $4.5 trillion of stuff they bought on their balance sheet. The problem is to do that, they've put all of this money into the world, all these US dollars in the world. Janet says, "We want to sell these and suck this money back in." It's not in the world anymore.

We want to put this money on our balance sheet where no one can have it. That's called controlling the money supply. They want to suck this. Starting in October, they're going



to pull $10 billion out of the economy, out of the banks by selling them these bonds or maybe some of these more toxic assets they bought or whatever they're going to do with it.

What that means is that should show a bump in the dollar. The dollar should go up in value. Precious metals should go down. That's how it should work if I'm right. I could be dead wrong. I don't know, but the dollar should go up in value and the precious metal should go down. The problem is though is I think the Fed is going to try to do this. I think it's going to be a short-term investment. I don't think they can get rid of all 4.5 trillion of these assets. They started with 900 billion 10 years ago.

It's gone from 900 billion to 4.5 trillion. I think they're going to have to deal with this. I think the Treasury is still going to issue bonds. I think that the Fed is going to have to eventually reverse this process and begin to print more money and buy more of those bonds on their asset sheet. I think that's the way it's going to go. Why? I see that coming. I see this coming.

I'm no Warren Buffett by any stretch of the imagination, but I might say to myself, and this is just for teaching, this is hypothetical, I might say to myself, "You know what? When the Fed starts printing money, people value precious metals." If this thing dives down a little bit, I wouldn't mind picking up silver at 15 bucks or at $16 because I think silver long-term may go up over the long term. Heck, it might even only go up to here. It might only go up to 20 like it did last year.

If I can pick up silver at 16, I might say I'd buy silver anyway right now because I think it might drip a little bit. I got a little support right here, but it might drip down a little bit, but, ultimately, I might be happy to buy silver based on what I see fundamentally. Maybe I look at my analysis here. I say, "Well, how much are options on silver?" Let's go out to just even a couple of weeks. Well, let's go out a month. What is it? The 27. That's close, about a month, a little less than a month.

I look at this at 16. I say, "All right. Well, what can I get at $16?" It's 15.83 now. It's 16 bucks. Let's get a calculator out. I'll show you how this would work. If I wanted to sell a put right here. I can click on this and puts in a ticket that says sell 10 of these. Then, I click again and say confirm and send. That's how quick I can do it. Right here, they would send me $360 if I was willing to buy a thousand shares of this at 16 bucks, okay, $16 put.

Let's draw that so it's a little easier. By the way, this is what we do in our mentor club every week. We get in here. We look at real stocks. We say, "How can we execute these strategies in real time?" Let's just have fun with this and move this over here. I'll keep that right here with my options chain open. I'll say, "Okay." Here's me and here are you or whoever there. Here's Joe investor in the market that owns some of this ETF. This is not real silver. By the way, this silver is I want to make a delineation here.

I have precious metals that I hold for insurance. I do this for cash flow. I really do encourage people learn the difference between an ETF because that's fake silver. I'm



buying fake silver. I often use it this way though to convert it into silver because I usually don't get paid for buying real silver. If I can get paid to buy fake silver and convert that into silver anytime I want, well, that can be a nice benefit, but I really encourage people understanding there's between holding a real precious metal and a derivative which an ETF is a derivative with the precious metal.

Here's me. I say, "Look, I wanted to buy this at 16 today. I would write a check today by the $16, this ETF." I said, "Look, I promise. I give you my word. I got money in my account. I can do this. I promise to buy some SLV at $16 anytime between now and what I say, October 20th," which is less than a month away. We'll call it three weeks away or whatever it is. We'll call it three weeks away, three four weeks away. On October 20th. Then, this expires.

This guy has to send me. I'll shave the spread on this and get 37 out of it. Let's say 37 cents for this. Well, think about that for a minute. Think about that return. Well, before we think about the return, let's look at what this guy says. He says he now has the choice. I promise a choice. [inaudible 00:54:44] choice. I promise to buy this SLV. He has the choice to sell it to him if he wants. Sell SLV at $16 any time between now, today and November 20th, October 20th if I ask him to.

There you have it. Now, silver is a $16. That's a $15 and 84 cents right now. Let's say it could go up, it could go down, it could go sideways. If it was going to go down, I was going to buy it anyway because I think it's going to be up long-term with the printing and the money and the whole bit. This is going to add my long-term holdings. If it goes up, nothing will happen. It'll expire on October 20th. I'll keep the 37 cents. If it stays the same, I'll keep the 37 cents. If it stays the same at 15.84. If it goes down, let's say, it goes down to 14 bucks, yeah, I have to pay 16 for it, but I just wanted to do that today anyway because, why, I think it'll probably go down. I think it'll go up again.

It's the same thing as Buffett He's like, look, I think silvers were $16. That's what I'm going to pay for it. I think it's undervalued at 16. Even the market takes it lower. I don't care. If it goes down, I will buy. I'll keep my 37 cents. I'll buy at 16 which is what I wanted to do anyway because I see value in it. That's fine, but let's just run a calculator and look at what this looks like annualized. Let's take a picture of this. Let's see if I can do this. This might be cool. Hang on. Let's just take a picture of this like that.

Then, I can get rid of it, and I can make it smaller. Let's see here. Open the clipboard right up. There we are, guys. Bam. Let's make this smaller. Can I do that? Yes, I can. That's the deal right there. That's what the trade looks like. Now, I'll show you what my balance sheet looks like. I have some cash in here. Let's say I got 16,000 bucks in here. I want to turn it to silver. I was going to do it anyway. That's fine.

This is what I look like now. Let's say I got 16,000 in there. Okay. Fine. We have more than 16, but let's just say that's what we have for this trade. I can have one or two things happen next month. Either, I still have $16,000 in cash or I have $16,000 in silver or I have 16,000 shares of silver because I'm doing 10 contracts. There's a contract. Actually,



it's only a 1000 shares. Excuse me. A thousand shares of silver. That's 16 bucks a piece. That would give me 1000 shares at 16,000.

I agree to buy it at 16. A 1000 shares times $16,000. I need to ask myself. Look, I really don't care what the price of silver is, but I like to have 1000 pieces of silver. What I like to acquire 1000 pieces of silver or ETF that I might sell and then convert to silver or whatever. What I like to have that with the monetary policy. I think it's tightening out. I think in the long term, I think it'll flip. It's like Buffett says when other people are fearful, you get greedy. When people are greedy, you're fearful. If I see the dollar starting to rise a little bit and silver starting to fall, boy, do I think that's a permanent wave?

Think about this, ladies and gentlemen. Do you really think the long-term prospects for the dollar is for it to strengthen? Has it strengthened in the last 10 years, 20 years, 30 years, 40 years, 50 years? Since Richard Nixon took the dollar off the gold standard, has the dollar gotten weaker or stronger over time? If the dollar begins to strengthen approximately and precious metals begin to dip, is that the long-term trade? Is the long-term trade for precious metals to dwindle and for the dollar to get stronger?

That's where you got to decide on your fundamental analysis where you are. For me, I might just want another 1000 pieces of silver in that environment. I might just think, "You know what? I think I'd be a good value right there." They'll pay me to pick that up 36. That was $360 to do this. Either way, I get the 360 either way.

Let's take a look at that right here just for fun. Let's get the calculator out here. $360 divided by $16,000 okay so that looks correct is about 2% in a month and in less than four weeks. It's actually less than a month. If I annualize that, that's not a bad return for a year. Does your $16,000 in a bank account get 27% percent a year? Probably not. What's my risk?

My risk is that I buy silver, that I buy 1000 chairs of SLV and that it goes down. Well, I don't think silver will ever be zero. I don't think it's going to go bankrupt. I think we're always going to have a price on oil and gold and silver at least in my lifetime. I think the chances of silver being free in my lifetime are low. Now, a company might go bankrupt. If this is [inaudible 01:00:23], you might want to think twice because it can go to zero, but silver, even the ETF ...I don't know. There's always risks, but that's my main risk is that this would go down.

Well, that's a risk that I was willing to take anyway if I'm buying silver. Why not get paid 27% annualized to buy what you are going to buy anyway? I think that's why they have the title this article, The Secret Trick Buffett Uses To Multiply His Income because I'm going to get paid up down or sideways. I get that 27%. The only thing that can happen is either, A, if it goes up or sideways, I keep my 16,000 and I'm making 27% annualized on it or I wind up with silver. The silver goes down for a while. Hopefully, it goes back up, but I don't lose the 1000 shares no matter what. I still have the asset.



Anyway, there's lots of examples, lots of fun stuff we can do. We're a little short on time, but I hope you enjoyed this little bit on using options. It's a fun. It's a really fun presentation to give. I hope you enjoyed it. Awesome stuff. Give my website one last little plugs. It looks like I'm out of time, but I have two primary classes I teach. I have some that I only invite certain students into, but the ones I will give to the general public is for my four pillars of investing with fundamentals, tentacles, options, and cash flow and risk.

Then, my mentor club is when we just practice it once a week. I invite you to observe those sessions. They're about an hour a week when we get in here and look at fun stuff like this. Amazing that a guy can just click that button like that confirm and send and put 360 bucks in his account. My risk is that I buy silver at $16 next month which is something I may or may not want to do anyway. Fun stuff, great strategy on selling puts for income. I'm Andy Tanner. I'm out. Have a great summit, everybody.


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Andy Tanner: Ultimate Options, Your Secret