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Having just returned from Omaha and the annual Berkshire (NYSE:BRK.A) extravaganza, I have a few observations followed by some relevant options strategies to recommend.

These strategies are based on the concept that the March 2009 lows will hold for at least 1 year and that Mr. Buffett has selected stocks with a margin of safety in his portfolio. As an aside, I was amazed that the overall attendance was up and that my walk through Borsheims, the high end jeweler, was remarkably easy with many visible counters and idle sales people.The free food line was longer than I've ever seen. Draw your own conclusions.

Let me preface these recommendations with the disclosure that our hedge fund has medium to very large positions in all the names that follow as part of a strategy that has little to do with this discussion.

And I paraphrase:

  • We received $4.9 billion on the sale of puts which come due in 15 to 20 years. We would have preferred to sell them now rather than when we did, but we would not get the favorable collateral agreements now and the odds are extremely good that we will make money. We recently lowered the strike price on some S&P puts from 1514 to 994 and shortened the duration from 18 years to 10 years.

On inflation

  • Burlington Northern (BNI) ($71.05) cash secured put sale
  • WB: It’s clear we will have inflation over time. I guarantee that the dollar will buy less 5, 10, 20 years from now. Government policies will cause inflation. Other countries are doing the same – running large deficits – so it’s difficult to say how the dollar will do relative to other currencies. Our government is doing things on a scale we’ve never seen before. Volker was outraged that the FOMC will accept 2% inflation. We’re taking in less money from taxes. Holders of government bonds will be penalized due to shrinkage of the real value of the dollar. Your own earnings power is the best hedge against inflation. Investing in the earnings power of great companies is the next best hedge.

On risky sectors

  • The higher the end in retailing the harder it’s been hit. This will last a long time. The service business will do a bit better because it requires less capital.
  • Will do a lot more in utilities. Iowa is a net exporter of electricity partly because of wind power from Midamerica. We don’t get rich on utilities but we don’t get poor because we get a regulated return. We’re more concerned about unregulated capital intensive businesses.
  • And Mr. Munger commented that the strategy of mimicking the Berkshire portfolio selections was a "very smart idea"

So here is a small portfolio of trade ideas:

  • Sell 10 BNI October 50 puts at $1.30
  • Buy $50000 Tbills yields approx $100 + $1300 put premiums= 1400/50000= 2.8% raw or 5.6% annualized or on margin as follows:
If the stock remains above the exercise price:
  • $25.50 cash secured put sale
  • Sell 15 WFC Jan 2010 12 1/2 puts @ 1.05
  • Buy 18,750 Tbills yield approx $90 + $1575= $1665/$18750= 8.88 % raw * 360/252= 12.68% on margin as follows margin= $5760
If the stock remains above the exercise price:
  • $19.40 cash secured put sale
  • Sell 10 NRG Jan 2010 12 1/2 puts @ 1.00
  • Buy $12500 Tbils yield approx $50 + $1000 option premium = $1050/$12500=8.4% raw or 8.4*360/252= 12% annualized or on margin as follows, margin= $2955
If the stock remains above the exercise price:
  • Coach Industries (NYSE:COH)... buy puts cash
  • 10 COH November 20 puts @ 1.00
  • Cash outlay... $1000 plus commissions
This portfolio targets themes in the Berkshire portfolio and generates cash and is extremely conservative. There is a very small likelihood that Coach will do well AND you will put shares in NRG, WFC,and or BNI.

Disclosure: Our hedge fund has medium to very large positions in all the names above as part of a strategy that has little to do with this discussion.