Buffett and Thorp’s Secret Options Strategies

Best options traders

Edward Thorp

While it‘s hard to make a ranking, it is possible that our top choice for the most successful options traders would be Edward Thorp. Known for revolutionizing gambling with his card-counting techniques (if you’re a blackjack fan, youre probably familiar with his strategy), Thorp also mastered the options trading market, achieving an astounding 20% annual return over 30 years. This feat places him among the most successful option traders in the world, if not the best option trader in the world.

Thorps secret to consistent profits in options trading is in his mathematical skills and understanding of probabilities. Thorp mentioned that the application of similar analytical rigor to the financial markets helped him identify mispriced assets where the odds were in his favor. He utilized the Kelly criterion to balance the trade-off between risk and return, ensuring that his investments were always optimized for the best possible outcome without overexposing himself to risk.

His approach to betting—whether at the blackjack table or on Wall Street—was always informed by hard data and mathematical models. This methodical approach set him apart from other traders and investors who often rely on gut feelings or market trends. Thorps discipline in sticking to his quantitative strategies, regardless of market conditions, underpins his success and longevity in the highly volatile arena of options trading.

For readers looking to understand what it takes to be among the most successful options traders in the world, Thorp‘s career often relied on the power of mathematics, rigorous analysis, and strategic risk management. His story emphasizes that, with the right approach, it’s possible to beat the market and consistently achieve remarkable returns over time.

Warren Buffett

While most people generally associate Warren Buffett with traditional investments in stocks and real estate, few are aware that he is also among the most successful options traders. Yes, the Oracle of Omaha applies strategies in the options market that many wouldnt expect from a man of his investment philosophy. A prime example of this is his use of cash-secured puts to lower the cost of stock purchases.

If you‘re eyeing a stock at a favorable price, the usual strategy would involve analyzing trends and setting a limit order based on your findings. However, Buffett’s approach often relies on cash-secured puts. This technique basically requires selling put options (such as those that you may find on our options screener) at a desired bottom price and collecting premiums upfront. If the option gets exercised, the acquisition cost for the stock then becomes the strike price minus the option premium.

Let us give you an example of how Warren Buffetts used options to earn a profit in the past with Coca-Cola back in 1993. In this deal, Buffett, having been a significant shareholder since 1988, sold 5 million put options at a strike price reflecting his target purchase price, netting him $7.5 million in premiums. The stock never dipped to trigger a purchase, and the strategy allowed him to profit from the premiums.

He did something similar in 2008, during the financial crisis. While most investors were facing massive losses, Buffetts use of cash-secured puts gave him a premium income of $4.9 billion.

Synthetic Indices

Synthetic indices are a type of financial instrument that simulates real market conditions but without being influenced by actual economic events. They are often used by traders to practice strategies and trade on price movements without the unpredictability of real-world market factors. These indices are ideal for testing trading techniques due to their 24/7 availability and stable volatility patterns, providing consistency that can be attractive to both novice and seasoned traders.