Page 169

Chapter Four Some people mistakenly think that Warren Buffett is against the use of these contracts because he has referred to certain kinds of them as “financial weapons of mass destruction.” And, for the uneducated, they probably are. But Buffett actually makes billions and billions from selling them himself. Because there is so little control with paper assets, they carry more risk. So investors will pay lots of money to hedge. In fact, we can use the money we receive for selling put options to buy puts to use as a hedge to control our risk, and still receive a positive cash flow. That would look like this: INCOME STATEMENT Income $13,292.50

Expenses Cash Flow $685

$12,607.50

BALANCE SHEET Assets

Liabilities

945 PUT option provides income

940 PUT option provides hedge

Notice on our statement from the brokerage that we get an infinite return on the options we sold and a 100 percent loss on the put options that we purchased—very similar to the money we might spend for home insurance.

160

Profile for Jamiel Cotman

Unfair advantage ebook  

by Rich Dad, Robert Kiyosaki

Unfair advantage ebook  

by Rich Dad, Robert Kiyosaki

Profile for jfcotman
Advertisement