168- Options: Put Options, Call Options & The Collar

(upbeat music) - Hey everybody, this is Phil Town. - And this is Danielle Town. - Welcome to the invested podcast where we're talking about how to invest properly. - I'm properly. - Via Warren Buffett, Charlie Munger, and me teaching my daughter, Danielle, how to do this. And why should I think I could do that? Why in the world, indeed? I mean, I've been in a couple of-- - 30 years of investing experience. - 30 years of experience? - 35, 40, 40. - 35 getting more. - Getting, a few years of investing experience. And, you know, I'll have some decent success investing. I'm not Warren Buffett, but I can see that I would be a much worse investor if I didn't know how to do this. And I think that if you look at the success that people have as investors consistently over decades, you're gonna find that people who invest the way Buffett does it, who take the time to learn it, have a consistently massively high rate of return compared to everybody else. I would argue double the rate of return compared to everybody else. If everybody else is getting eight, and those of us who are following Buffett are out there getting 16 or more, which when you look at hedge fund managers who actually do it the way Buffett does, you see those kinds of returns over long periods of time. You know, 25, 20, - But I think you just said the key thing, which is long periods of time. - Long periods of time, you can't look at it in even, I wouldn't even look at it lately in a five year period compared to the market, because the market has been on such a tear for 10 years after such a crash, right? So it's coming out of this deep valley, given jet fuel by the Federal Reserve, reducing interest rates and making it basically, there's no other investments for people to do than real estate and stocks, which are the two big consumer investments. So bonds are no good, and bonds are getting rapidly worse as they start to raise interest rates. So it's still the only game in town. And as long as it is, it'll maybe keep going up in spite of how far it's already gone. And that makes it tough for us to invest. Now often people call us value investors, I think there's some truth in that, but not a lot of truth in that. (laughing) Some truth, value investors, there's many, many different kinds of value investors, but many of them buy 50 to 100 stocks and consider themselves value investors and Ben Graham himself who taught Buffett, often owned 200 stocks. And Buffett has gone a real different way than that. - We talked about this a few episodes ago, and I just think Buffett's sort of the long arm of Buffett, like the long arm of the law, has been so long and covered investing now for so many years that to me, value investing is equivalent to Warren Buffett. I mean, not to somebody who has more of a perspective on it looking way back to the 20s and 30s. - Honestly, I think that there are very few quote value investors who invest the way Buffett does. I really don't see it. I mean, the massive funds that are calling themselves value funds and there are probably hundreds, if not thousands of them. - Ah. - None of them invests like Buffett. They're all fully invested all the time. They're 50 to 100 stocks, they're buying everything, they're turning it over, they don't hold forever. I mean, it's so many such a different world. And the reason is real simple, and we've discussed this before, it's just about impossible for a normal fund manager to hold on to client capital if he's sitting in cash for long periods of time while the market's going up, he just can't do it. - Yeah. - Fast to invest. - That's a fascinating comment on perspective, because my perspective, not having the years of experience that you do is that the people I have looked at, obviously, because they're the ones you've told me to look at. So the people I've looked at are the kind that invests into a small number of companies, don't care about being diversified across industries or anything and totally do like Warren Buffett style investing. So to me, that's value investing. I don't even have a clue that there's a thousand or whatever you just said, like many, many, many funds out there that call themselves value investors and yet are they'd find a thousand stocks and just all over the place and totally diversified. And there's just no way you can do that kind of research into that many companies. There's no way. - I love hearing this from you. You are 100% right. And so-- - I'm drunk at the Kool-Aid. - You're drunk at the Kool-Aid. - And so what they do is the investors that do it the way we do do their own homework because they can't rely on somebody else to do the work and find these deals. It's just like you're gonna find one a year or two a year, maybe, okay? And you're gonna add up to maybe 20 in your lifetime that you decide to buy. And Warren has said very clearly, if you do that and you do it right and stay focused and be patient, wait for your opportunity to buy on sale, you get four out of 20, right? You're gonna be rich. So, but these guys can't do that. They don't have the patience by virtue of their career. Their career does not afford them the luxury of sitting in cash for a couple of years, like Buffett's been doing, Munger has been in cash. Munger has not bought a stock in three years. I mean, this is something you have to get that to do really good investing, you have to be willing to wait for the bar to go down lower and lower and lower until it's so low, you know you can't lose. You know you're gonna win. And that doesn't happen every day. I mean, we're waiting a lot of us are waiting in cash right now, Buffett's got 120 billion in cash. A lot of very good investors are camped out in cash right now anticipating the next recession. And boy, you can see the wobble going on in the market right now as the market moved down 500 points yesterday. We don't watch the market day to day, but we're watching it here at the top to wonder if this thing is gonna crumble. And I'll tell you, there's a big article that just came out in the Wall Street Journal about how the yield curve is starting to roll over and invert. And when that happens, it has predicted every single recession that we've had going back, I don't know, 100 years. And there's only been one false positive. - Okay, I don't even wanna ask this question. - Go ahead. - What's a yield curve? (laughs) - I know you didn't wanna ask that question. And this isn't a final thing. It's just, I just wanna say that these are the indicators are starting to roll out now, one after the other. So we've got the Schiller we've talked about, right? Schiller PE's through the roof. We've got the Wilshire GDP ratio, which is also through the roof, both screaming that the market's overpriced. And now we have, I mean like Professor Demardden at NYU is the best valuation guy for academics that there is, has recently said that when the 10 year T-Bill starts rolling up toward about 4%, he's gonna be very leery of putting capital into the market. So here we are with the 10 year T-Bill rolling up toward 3% as they're raising interest rates. And so we're on our way to four. And what happens when you have a 10 year T-Bill, that's at 3% and you start raising up the short term rates of a two year T-Bill. If you raise your two year T-Bill to where the two year and the 10 year are paying the same rate of return, they're both at 3% let's say. Okay. Then what you're looking at is a situation where there's a lot of concern about the future. A lot of concern about the future interest rates, like there's not gonna be inflation, there's gonna be deflation and long term deflation and a crappy environment for the economy. And nobody's consuming. That would be what the long term low 3% would look like. And then as you have the short term rate go up, what is happening is essentially the price to rent money stops making sense. In other words, you should pay a less price for renting money for two weeks or two years than you would for 10 years. Okay. - When that makes sense. - So here's what I just heard. The interest rate paid out on T-Bill's of various terms is not the same yet but might be the same at some point. - Right, but it's getting very close. - And it's getting close. And so that's something to look at. - Yes. - Is that an answer to what the yield curve is? Are we talking about different subjects? - When the yield curve inverts, it means that the short term interest rate has risen above the long term interest rate, which is historically not really sustainable. And when you say interest rate, are you talking about like the Leibor interest rate or the T bill T bill interest rate is typically what they're looking at. So really you're looking at the two year versus the 10 years, the typical spread and time. And as interest rates rise on these short term notes, because of inflation rising or the federal reserve is taking off the pressure, it's done to keep yields down. Because that's starting to happen. If there isn't a concurrent optimism about the long term future, then the long term rates don't rise with them. And you get this inversion. They should be long term rates more short term rates less. Right. You shouldn't get paid more on a short term loan than you do in a long term loan. And when you do more in a long term loan, because it's bigger risk, because we don't know what's going to happen. Right. You're got you got to pay more for the for the time risk. Very well done. And therefore you get this what's called an inversion. They go upside down. And when the yield curve flips like that, it is a screaming warning that within the next 24 months or so, you're going to have a big recession. And it's called it right every time so far. But you're saying so. Two year is higher than the 10 years. Yep. Yep. And just buy a tad. Just buy a tad. That's all it takes to throw that red flag up. And it's very close right now in version of what we just said, which is the long term view is actually quite confident then. No, the long term view is just to fire raising the interest rate because of all the risk. Well, it goes the other way. It's like when you have deflationary depression, then your interest rates are coming down. Right. Nobody will borrow anything because they're afraid. So when you start to head to recession, the longer term fear kicks in, right? I mean, people are like, well, the short term would still be optimistic. Short term might be forced upwards by other events. For example, the Federal Reserve is actively raising the short term interest rates. They're just raising their rates. And that drives up the short term rates. And those rates have been going up without affecting the long term rates. They've been sort of little up to flat. And so as these things start to go to inversion, we get closer and closer to signaling recession. We have lots of news out there right now that's scary that would prompt us toward being concerned about recession. The most obvious and the biggest headlines are the trade war that's starting up potentially between the United States and China, which we talked about last time, which is a little bit. But that's what led us to put options in control. Which I know a lot of people are very excited about before you go on a 10 minute monologue. All right. All right. So let's do get to that. So if we think that this market is about to crumble and we own a company that is very profitable for us, but has the potential to continue to be even higher. The stock could go even higher. Should go even higher because we're figuring out the value. Remember, we're looking at the difference when we're looking at an investment between price and value, right, honey? Right. Price and value. So if we say that Chipotle, for example, we think is worth from $510 to $650. So really a loose ballpark, I don't know for sure, but given the analysis that I've run, I can get into that range. So $510 to $650 in that ballpark. I'm pretty comfortable with it. You're saying that's your sticker price intrinsic value of the company. Yeah. Sticker price intrinsic value. That's probably what it's really worth assuming. I'll assuming a reasonable growth of the company and then the higher end, you start to assume some aggressive things about what might happen with Chipotle. Like, okay, they're going to put in a second make line. They're going to have drive-throughs. They're going to open more stores because drive-throughs you can have them everywhere. We're going to assume a fairly aggressive growth into the future and all of that would come back to maybe $650. But remember, I'm judging this. This is really important. You remember this. I'm judging this based on my criteria for investing, which is I want a 15% per year minimum rate of return. And that's very important to keep in mind because fund managers, particularly mutual fund managers, have no such constraint on their view of the value of a business. Many of them are just modern portfolio theory guys and whatever the price is is whatever the price is. Whatever the price is is the value. That's it. Price and value are the same. So they're not thinking about anything. So just, hey, if this keeps growing, it's going to keep going up because it's worth every penny of 400 and whatever it is today, right? Were there any penny of that? What you're talking about with this valuation method here is a method that we put forth in very clear detail in our book, Invested, which you can find anywhere. And just so people know who haven't read that section, you can find the equation. You can see what it is. My dad's talking about it, especially the 15%. Minimum annual rate of return is right there in the book. Yep. So this company, Chipotle, has already been as high as $760 a share. Yeah, that's right. Before they had the Ecoli scare. So from the point of view of the vast majority of fund managers out there, this thing's going back to $760 a share. Oh, I mean, I would say if you listened to all the stuff they're saying about the company, so Chipotle recently brought in a new CEO from Taco Bell, who did this huge turnaround at Taco Bell and is now expected to do the same at Chipotle and is making all the right noises and statements about that. And by the way, there's a really big investor call tomorrow, dad, because remember when you chastised me greatly about not knowing what was going on with Chipotle, because I am an investor, total disclaimer, I'm an investor in Chipotle. I now know about things like special investors calls. I'm probably not going to, this is such an aside, I'm probably not going to listen to it real time. I just, I do better when I can read a transcript, but I do know that it's happening. So that's what's going on with Chipotle. It's kind of the background here of I can totally see other investors just on a pure logic common sense view of the company. They were at, let's say, $750. They dropped down a whole bunch to what, like, $350 or something? 260. Oh, I think they touched it 250 for a moment. Yeah, based on all, I mean, it wasn't just the E. Coli. Like there was some slide because like the case of launch went horribly and there was a bunch of stuff that happened that wasn't so good. And, and then the E. Coli thing was a really big deal for them. So the stock price just slid like crazy. And so the theory would go, tell me if you think I'm wrong on this, just on pure common sense. Okay, Chipotle is still a good company. Everything's the same if they just had that bad PR. And if they can just get everything back on track, they'll go back to $7.60. And then anything new that they add to their offerings, as you said, drive throughs, opening new stores, all the growth stuff they already had had planned and had pulled back on because of these problems, they should go higher than $7.60 would be the argument I would think. Yes, it is. That is the modern portfolio theory argument. And it is just actually, what are you about to say? It's absolutely human because I'm so stupid. It's completely stupid. It's like saying that the value of a company like, like at Chipotle is just like the value of a Picasso. It's what any idiot would pay for it on the margin. So if Picasso sold for 40 million to some, who knows why, right? And then, and now I can buy it for 20 million, I'm getting it for half off. This is modern portfolio theory. This is plain and simple. And this is of course, it's common sense. Oh my God, this is so stupid, it's beyond belief. This is what has people buying houses, you know, at absurd prices. I'm not saying it's the right thing, but this is why people do it. Because you think, all right, so the market, it's not out of nowhere either. It's saying, okay, the market priced this thing at $750 already. Done. We have that data. It's in the bank. I can see it. Then they had all these problems. By pure thinking, okay, I can see this going back to where it was in terms of the business. And where it was in the market, when the business was doing what it should be doing was $750. Well, there's a fundamental error there. And that is that the assumption is that it was somehow rational to be at $750. That's correct. Why would you make that leap? That's correct. Then you wouldn't be so calm about oh yeah, it's gonna be at 760 except of course that the market is still just as Freaking irrational as it ever has been and since the vast majority of people think exactly like you just said that it was at 760 It's gonna go back to 760 the greed is starting to kick in there the only question is how fast is it gonna get there? Right how safely will it go is the real problem behind us? They're gonna bid it all the way up there and that's a real problem for my kind of investing. That's a real problem It's very very hard for for me to sit in a company as it goes completely to irrational pricing right? I love it when it's a rationally priced low. That's fun because I can buy it But when it goes to a rationally priced high it gets really nuts because the emotion kicks in on me Just like it would on anybody else the greed button starts to get punched and I start thinking man I just keep it in here, right? So I'm just gonna keep the money in there and watch this thing go It's gonna go to 760 for sure. Then let's go beyond. It's like buzz light here or something and it's like okay Well, I'll just ride this through right? I'll just ride this as far as it goes. I'll ride this thing up all the way Yeah, yeah, I want to ride it Well, the problem is you miss this you miss these opportunities Okay, so let me give you Chipotle again remains a cautionary tail in so many different ways Let me give you a new cautionary tail based on Chipotle You ride it to 760 because that's how you're gonna play get every last penny, right? Even though it was fully valued at about 550 and then some I'm really fully valued around 500 and this is back when When the it was doing well following the big recession It went to 550 in about oh December 2014 15 and that's when I was getting out I'd gotten in at about 55 bucks and I wrote it to about 550 something like that And got out and then I had to watch an agony as it went to 760 without me Yeah, I'm sorry. Did you just say you bought it at $55 or share? Yeah, and you sold it at 550. Yeah, yes, yeah That's I'm blowing my mind. I have no words. Well it took years, right? Well, of course it always takes years, but here's the real horrible thing is it went to 760 and I had to watch it do that Yeah, okay now other people just kept staying in it always just stay in it and it went to 760 and they were so happy they weren't me and had sold right and then here comes the crisis and down it goes like a brick But now the philosophy that says just stay with it. It's always price correctly is now it's price correctly at 353 by you know 2016 or so and then it goes up up up to 500 when the news that Bill Ackman is buying into a big chunk of the company comes out and Then another incident with Norrow virus and down it goes like a brick out of no real good reason and then it goes clear down to $250 a share and then it goes all the way back up here, right? So here's the thing you get out at 550 you can buy it back at 260 because you have the cash If you stayed in from 760 to 250 you don't have anything to buy it with So which is better getting out at something just above intrinsic value and if it gets reset to something that's on sale You buy it back or is it better to just ride it through these big changes all over the place and it is what it is whatever happens And but wait you're offering a false choice because the choice is not Ride it up up up up up and then all of a sudden it falls You know more than 50% of its price Because I think it took a while for that to happen right? Yeah It took one so what I'm suggesting here is if you're somebody who's paying attention Surely you could sell our Miniscule number of shares. It's not like we're moving around a hundred million dollars So surely we could sell our shares within a few days of things starting to fall and maybe still You know make a higher profit than we would have otherwise thanks to our Riding it out, but how do you know where the top is? I mean How do you know? It's always going up and down up and down up and down big swings, right? So here's the two choices that that we have as Warren Buffett students because Buffett's done it two different ways All right, so we have early Buffett choice number one and we have later Buffett So early Buffett is a guy trying to become wealthy. I would think most of us would feel a little more like early Buffett Then later Buffett, which is a guy that's very very rich and has become so large It's difficult to move in and out of companies. Yeah, let's ignore that side. Let's ignore later Buffett because later Buffett is staying at no matter what As long as it's a great company As long as it's a great company just ride through it. He's ridden Coca-Cola from being up at I don't know 75 all the way down to 40 35 and ridden it back to wherever it is now So he's not he's and he said and even in the late 90s he was so big he couldn't be nimble enough to get in and out of stuff But that's not early Buffett early Buffett Was fixed on getting out of stuff as it he as it approached intrinsic value So yeah, a view of what intrinsic value was Okay, Chipotle's worth 600 and as it approaches 600 he exited And then move the money someplace where the volatility of money that is the the rate it would grow Would continue to be high and the theory here is really quite good. You want to hear it? Yes, okay, the theory is the theory is that as a company rises to intrinsic value Then the velocity of growth will begin to decelerate drastically from When it was valued at let's say a hundred dollars a share and you bought it at 50 and then over the next year it went back to 100 There the growth rate was 100% a year so enormous velocity of growth Now once it's back to 100 it's back at intrinsic value It's velocity of growth of your investment should be the growth rate of the company whatever that is Now, what if you've got Riggley's chewing gum here? It was a hundred dollars. It went down to 50 Or it's got a hundred dollars of value it goes to 50 you buy it at 50 a year later It's back up to 100 the recessions over whatever and boom you just doubled your money at a hundred percent growth rate in one year And now Riggley's will continue to grow for the next 30 years at 4% Okay, now what if you had another place to put the money wouldn't you want to move it? Yes, of course. Yes, we had this conversation. Yeah, this is called velocity We should move the money once it reaches and reaches intrinsic value If there's another place to put it that is better that's very very important and right now right now We're faced with this terrible situation where we have a lot of money in cash and there's no real place to put it See the aforementioned beginning of our conversation About how it's difficult to be a value investor right now right so I'm not really seeing the problem with good with the like ride it out Yeah, so really the only issue is at this point um Getting back to our original desire to talk about put options here Um is do we want to protect ourselves from the downside? So this could be a very volatile stock this announcement that's coming out tomorrow could be very volatile It could send the stock down to 400 it could send it to 300. I don't know what they're gonna say right? Totally so here comes this announcement and on the announcement the stock could crumble and The value of having a view of of the importance of having a view of the value of the business relative to the price Is that you can do things with options trades Um to protect yourself if you have a very strong sense of where this should go Okay All right, so I'm gonna fully disclaim here that I don't know anything about options. I have tried to memorize how they work and it will not stay in my brain Well, feel so bloody confusing feel good about it. They don't stay in anybody's brain. It's the only way to get it in your brain Is to ride the bike you just have to just do it and after a while it starts to make sense I can see that so options are also not even something that's available to everyone You have to meet certain criteria in your brokerage account or to even be able to trade and buy options and They are a highly risky Uh Investment or shall we say speculation choice which is totally not true Oh come on It's completely true. Oh, it's the lawyer in you talking. It's not true Yeah, it's the lawyer in me because it's true And I want everybody to be aware of what's going on here with these things that you're about to talk about If you decide you're going to gamble with options it becomes true But options were originally created so that farmers could reduce their risk not increase their risk Did you know that? No. No. So, Ms. Lawyer, let me explain the. All right, but this is for education and entertainment only. Always. Always. I don't want to. Education and entertainment only. Yeah. Don't go out and do this because if you do it wrong, then Daniel's 100% right. This stuff can bite you in the butt. If you are not a knowledgeable with options, you should stay away from them or what you should do really is learn. And that means open up a paper trading account at a broker, which means you're not using real money. And do it with a brokerage that has good options information. You know, that can be a trade station, think or swim, Schwab, e-trade, fidelity. They all got options stuff on their broker site. And they all have paper trading capability, interactive brokers, another one. And just play with it and see what happens and and try to think about it the way I'm going to teach you guys right here. And that is that options were originally created or version of options were created so that farmers who had wheat in the ground wouldn't be at risk for a huge price drops that would cause them to lose money by the time the wheat was ready to harvest. So what they would do is they would find someone who wanted the other side of the trade. They're a wheat seller and they wanted to find a wheat buyer. Right. So you could see how a baker who wants flour at a great price would. And if you like the price, let's say in June, it's a pretty good price. I can make pizza and make a make a profit. If I can buy my flour at this price, he might want to lock in the price of the wheat at that price of June price. But he can't get the wheat until September. And so the farmer who also agrees, okay, that's a pretty good price for a bushel of wheat. I'll make money at that price. Then the farmer wants to lock in the price in June as well. So they could come to an agreement if they could find each other. And this is where you get into the world of the Chicago board of exchange and commodities and futures and all this kind of stuff. And out of that came a much more liquid kind of market for options of all sort, not just wheat and flour. But you'd be able to hedge your bet by using the options on stocks on a lot of stocks. I think about 3,000 of the 11,000 stocks we look at have options that trade on them. The big ones almost all do. Okay. So when we're looking, when I'm saying that options are not just automatically a risky thing, what I mean by that is that I can use an option right here with Chipotle to reduce my risk dramatically. And that's what I wanted to show you guys. So I'm not going to spend a lot of time on it. I'm just going to point to it and you can google some of this data and some of the names that I'm going to give you. And you can kind of read about it and see if you can make sense out of it. But wait, we're not going to spend a lot of time on it. No, I'm going to I'm just going to really explain this thing after explaining it. Okay, I'm going to explain it right now, but it doesn't take forever. All right. What is this called? Right? A put option. What this is called is two. I'm going to show you two options. I'm going to show you a put option and a call option. And this trade has a name and investment. Let me tell you right now this is going to take us more than we got this. Now you're just told me two different ones. Yeah, it's easy. Okay, so write this down everybody. This is called a collar. CLL. Yeah, like a shirt collar. All right. Now this trade begins by owning stock in this case in Chipotle. That is at a price I want to protect. And it is. It's at $464 right now. And this is a price that I want to protect. All right. I don't want to have it go much below that without selling. Okay. Okay. But I also think it's going to bounce around a bit on different announcements over the next year. I think ultimately my view is it's going to go up above 500 probably over the next year. And I'd like to benefit from most of that if possible. In other words, I don't want to get stopped lost out of this thing. I don't want to have an earnings announcement come out or an announcement like it's coming out tomorrow that knocks the price down to, you know, to 400. And I've got an order in there that says sell it if it goes below $460. Because I'm going to get taken out of this thing. I don't want to get taken out of it. Right. I want to be in it to run up. I just can't sell that order. But by the time you do, it's already gone by. Yeah. I just don't have. You could do it like today. No, no, no, no. No. No. No. No. When you when you put in the order, I mean, you can't move that. I suppose if you watch it every minute, but I'm not going to do that. So I'm going to be like, you could just not have a stop loss order. Right. You could not have a stop loss order in which case it goes from $464 to $400. Now you don't know what it, what it, where's it going to go from here? Ultimately, the news must have been bad to have it happen like that. And it upsets you get a lot of emotion and you're busy, you know, double guessing yourself. Why didn't I just sell it at 460? Okay. Okay. So here's what I'm going to do. I am going to buy insurance that says if it goes below $460, somebody in the next year can buy it from me for 460. I have the right to sell this stock at 460 for the next year, no matter what the stock price is. Now, obviously, if the stock price is 500, I'm not going to sell it to somebody for 460. But if the stock price is 400 a year from now, I'll be very happy to sell it to that person for 460. So this is an insurance policy like I would ensure against my house burning down or my car getting wrecked. I'm going to buy that policy just like I would a car insurance or a house insurance. And that thing has a name in in our world called a put option. I'm going to buy a put option. Policy. Yep. To sell at a price set by you. Yep. At some time in the future. Also set by you. Yep. And it's set by me just in this sense that the market provides me the whole bunch of time choices and a whole bunch of price choices. So I've got a huge bunch of choices I can make. I'm just happened to say right now, I'm going to choose the one that says one year. So next June, I have till next June and I have insurance now for a year at $460 a share. So I'm choosing that price. But it's not that you can sell it any time in the next year. Yeah. Anytime in the next year. Yep. An American option I can sell any time in the next year. Now obviously if it goes above 460, I'm not going to sell it. And probably I'm not going to just sell it if it goes to 424 next month. Because I've got an entire year to wait. And what I'm really want to have happened is it goes to 500. Yeah. And I want to benefit from the 460 to 500. I want that next 10%. Okay. Yeah. So now this thing costs me money. In fact, let's just say this cost me $50 to buy this. Well, that's a bummer. Now I'm trying to lock it in. So I've got a 460 sale. But in order to do that, I have to pay $50 out of my pocket right now, which means if I get a 460 sale, I'm really only getting a $410 net because it's cost me 50 to have that insurance. Well, that's kind of crummy. Especially if it goes up. Then I've burned $450 for no reason, right? I bought this insurance policy and my house didn't burn down. Yeah. Well, that would suck. You with me so far? Yes. Okay. So I would like the insurance policy, but I would like it to be free. I don't want it to be $50. So I've got to find some money to pay for it with. This is where the call option comes in. There's an option called a call option that allows me to sell someone the right to buy my stock from me at a set price for a set period of time. In this case, I'm going to say you can buy my stock from me. Let me see now. I'm just going to go over and look at the trade screen and find out what it is exactly at this moment. You can buy my stock from me all the way from now until June at $500 a share, exactly what I wanted. You can buy it from me at $500 a share for the next year and I will sell you the right to do that. And you're going to pay me $49.20. Cool. So now what I've done is I've created a situation where if the stock goes down over the next year and stays down, I've limited my loss to a sale of $4.60 and I've paid for that insurance policy, which costs $50 by limiting my upside to $500, which is where I want to sell it anyway. I think that's roughly intrinsic value. So if I'm happy to unload it at $500, even though it might go to $7.60, probably will. But I'm going to get out of intrinsic value because that's my investing strategy. And I'm going to put this money somewhere else where It's much more likely to grow from on sale to intrinsic value. Again, hopefully I'll find a place to put it. But I'm going to pay for my insurance policy that protects me from my downside by selling this call option, this right to someone to buy my stock at 500. And I get paid almost exactly what it cost me to sell the put. Ta-da! I end up collecting from the call that I sold and paying to the put that I bought. And what I've done is I've limited my upside to 500, which I'm fine with over the next year. And I've limited my downside to 460. So now I have this thing locked in. And it's different than a stop order or a stop loss order because I can just sit there with it. Nobody's, I don't have to exercise my put option until the last day. And then I'm going to get to collect that money if it's below 460. I get the difference. So put it back. Yeah, I mean, it's very interesting because you're obviously, you're putting a lot of emphasis on the insurance policy and limiting the downside, which I totally understand rule number one, don't lose money. Of course, that's what you're talking about. You are also freely limiting your upside. So you would have to be quite certain about your intrinsic value calculations and that you're not going to revise them upward, which is what I keep thinking about that as companies change and grow, like, you know, that intrinsic value isn't a static thing. It's going to be revised every six months or annually. Well, not in a giant way unless something really major is changed with the story. And my version of this intrinsic value looks at the future of Chipotle and says, wow, if everything goes really, really well here, you know, they expand their restaurants, they have that ex-group food. It's years out, I'm thinking back to my equation. And we end up back here, five to six hundred bucks. And so, I mean, this is me and I know that I'm going to be outbid by the rest of the market. Very likely they're going to run this thing up. And if I don't have another place to put the money or, you know, I could, I could easily just, you know, maybe put in a stop loss here or something. But I don't want to do that. I want to, I want to actually set this up so that I have a locked in range and it's very dependent on my very high degree of confidence in my ability to understand the value of this business, which of course, I wouldn't even own the stock if I didn't already have a very high degree of confidence in my ability to know the value of the business. If I don't know the value, what am I doing with this thing in the first place? So obviously going into this, we own the stock with the belief that we understand the value of the business long term over the next year. So it's probably five or six hundred bucks. That's why we bought it at 300 in the first place. Well that hasn't changed. That hasn't changed. So now I still think it's that five to six hundred. But now as we're getting up there, I'm ready to liquidate. And so what is our downside here? If I liquidate this thing at five hundred, I got a basis in it around two, two seventy to eighty, something like that. This is a two hundred and twenty dollar profit on a two hundred and eighty dollar position in what a year and a half or less or something like that. It's a phenomenally high rate of return. We should be very excited by that. And I'm locking it in. I'm locking it in without it costing me anything. And that's the point. You said options are really dangerous. Watch out. I just showed you how they're protecting me from danger. Don't you think that's worth learning about? I think it's worth learning. I'm trying to think of something useful to say because I'm like, "Hmm, puzzling." Her hand is on her chin. She's taking on the thinker pose. Who do I'm thinking this out? I'm going to give you just to think about it for a week. Perfect. And after you've thought about it, you can come back with all of the reasons I shouldn't have done this. Can't wait to hear what that looks like. All right. Until then, I think it's time we go play. What do you think? All right. Thanks everybody. I'm like, well, thanks everybody. Bye. What am I up to this summer? I'm hitting the road. Next up is Birmingham, Alabama. Because I'm taking my three day transformational investment workshop to the Renaissance Resort on July 20th to 22nd. And here's the best part. I am giving a free scholarship to all the invested podcasts listeners. So come and meet fellow rule one investors and learn my personal strategies for picking great companies to invest in. It's going to be a great weekend. Claim your free scholarship at rule one investing.com. Everything discussed on this podcast is either my opinion or Daniel's opinion and is not to be taken as investing advice. Because I am not your investment advisor nor have I considered your personal situation as your fiduciary. This podcast is for your entertainment and education only and I hope you enjoy it. And just figure this out on your own after we teach you to invest. Until next time, go play.