Part Two: Warren Buffett

Part Two The reason this is important to me right now is two-fold: 1) I've been writing about the stock as a covered call candidate. The options were really good, about 10% for the September calls. Example, the stock was $7.01 and the $7 calls were going for about 70 cents. You could buy the stock, and then sell to someone the risky option for 70 cents. If you owned 1,000 shares, and then sell 10 contracts of the options, you'd take in $700. Now the stock will rise, stay the same, or go down. Whatever, you get to keep the $700. If you sell the stock at $7 you would lose $10, that's the one cent times 1,000 shares. This scenario is not that important to this discussion, but it proves a mighty powerful point about option pricing, which I'll share as one punchline at the end of this article. 2) This is a piece of Americana—both Bank of America and Warren Buffett—and add to that the deal that was made, you too will say, "Only in America." It's brilliant or it's crazy, you decide. To summarize: The first announcement just said that Warren Buffett is buying $5 Billion of Bank of America stock. What would you think if you owned this stock? It's going to go up, right? It's a bullish sign for American Banks. Other bank stocks might also go up. $5 Billion dollars in the market place will do a lot of good. You would have been mostly wrong. I've noticed that so many people just read the Headlines. Everything on TV is condensed to sound-bites, headlines flashing across the screen. One constant in the stock market is that everybody over-reacts. They over-react when the news is good, and buy. They over-react when the news is bad and sell. It all works out after people read the whole article, get more news, and delve into the details.


Stock MarketWade Cook