In one sentence: Phil answers a listener's question on 100-share contracts, shows how his Chipotle collar behaved after a 9% drop, warns again that options are a racehorse, and Danielle notes how calm owning a business she understands felt.
Key ideas
- Rule #1 across assets. Phil says the approach covers farms, houses, whole businesses and stocks. Buying real estate or farms at half of worth is hard because those prices move slowly, while stocks are emotional. [00:00–05:30]
- Vancouver example. Foreign money pushes property to cap rates below Treasury yields, in Phil's telling. [02:00–04:30]
- Listener question (David). Options trade in 100-share contracts, so a $460 put needs $46,000 of stock. Phil says it's a leftover of commodity trading and could be one share. [05:00–10:00]
- How the collar played out. Chipotle dipped to about $416 and recovered near $433. The put floored the loss at $460. Phil's call (sold for about $51) could be bought back around $37, a gain of $13–14 a share in a month. [10:00–17:30]
- Obligations are real. A sold call must be covered, so the obligation is covered by owning the shares. Danielle spots the pothole: that is where options hurt. Phil agrees to learn before trading. [14:00–16:00]
- Two rules before touching options. Have a firm view of intrinsic value, and practise for weeks or months, with backtests. Phil cites a 1990s Washington State study that he says found about 99% of option traders lose. I could not check the study. [17:00–19:30]
- Buffett uses options to offset risk. Phil says he's among the largest traders but uses them to reduce risk; most people don't use them that way. [19:30]
- Trail horse versus racehorse. Investing is the trail horse; options the two-year-old racehorse. [20:30–22:00]
- Munger's shift. Buy a wonderful business that compounds, not just the lowest price; even a too-high price gets fixed by time. [21:30–23:00]
- Calm from understanding. Danielle says watching Chipotle fall left her peaceful because she trusted her choice. [23:00–24:30]
- Short-termism. The CEO gave no quarterly guidance but said revenue could more than double to over $10 billion; the shares fell about 9%. Phil calls that the short-term view. He cites a Buffett and Jamie Dimon op-ed against guidance. [24:30–28:30]
- Next. Pricing and valuation from the book, to answer listener questions. [28:00]
How it maps to RuleOne
- The calm Danielle describes is the point of the circle of competence and sticker price on /stock/TICKER/: with a value you trust, a price drop is data, not a threat.
- /holdings/ is where you'd track which of your positions have moved toward or away from sticker price.
- The agent stack doesn't touch options; the guidance here is education only.
Buffett, Munger and Graham links
- Buffett and Dimon's June 2018 Wall Street Journal op-ed against quarterly earnings guidance (Phil cites it; I'm giving the gist, not wording).
- Munger's "wonderful business at a fair price" shift: Buffett's 1989 letter, where he says Munger moved him away from cigar butts.
- Graham on the investor versus the speculator: The Intelligent Investor, chapter 1.
Words to know
- Contract (options): one option covers 100 shares.
- Buy back (an option): closing a sold option by purchasing it.
- Earnings guidance: a company's forecast of its near-term results.
- Short-termism: focusing on the next quarter over the long run.
Try this
On /stock/TICKER/ for a holding, write the one-sentence reason you own it and the news that would change it. Next time its price drops, check whether the news met that bar before reacting.
Check yourself
- Why do options use 100-share lots?
Answer
A historical leftover of commodity contract sizes, and it still sets the minimum. - What are Phil's two preconditions for trading options?
Answer
A firm view of intrinsic value, and long practice including backtesting. - Why did the shares fall on the CEO's call, according to Phil?
Answer
Short-term holders wanted next-quarter numbers and got none, despite a long-term revenue goal.
Short quotes
"Options are a racehorse. Don't mess with options till you really understand." (Phil, ~21:00, auto-transcribed)