How I Locked In a 44.05% Discount on KO Shares

75 Shares of Coca-Cola @ Nearly Half Price

As of this writing - September 27, 2013 - I have 75 shares of KO (Coca-Cola) in the Warren Buffett Zero Cost Basis Portfolio (a model portfolio I manage as part of The Complete Leveraged Investing Program).

But here's the cool thing - thanks to all the booked option income generated on the portfolio, the 75 shares of KO have an adjusted cost basis of $21.83/share.

The intraday price on KO as I'm writing this? $38.29/share.

Yes, you read that correctly.

The last time KO was trading that low was September 3, 2009 when it closed at a split-adjusted price of $21.90/share.

That was four years ago (at the time of this writing) and four annual dividend increases ago.

And speaking of dividends - if you were to buy KO shares at the time I'm writing this, you would be looking at a dividend yield of around 2.90%.

But the 75 total shares I purchased on the open market over the previous 3 months have - thanks to my ability to use options to effectively lower their cost basis - a considerably higher dividend yield of 5.13%.

I spent a total of $2927.15 for 75 shares on the open market - just like regular investors do.

(The "regular investor" cost basis on the 75 shares is $39.03/share.)

And remember, the share price on KO as I'm writing this is $38.29/share.

Ouch - Regular investors who made the same open market purchases I did are down $0.74/share in a little over 3 months time.

Capital appreciation is nice, of course, but not essential to how I judge the success of an investment in a world class company like Coca-Cola.

But when you subtract (or "adjust") the $1289.62 in booked option income the portfolio has generated to date from the $2927.15 I used to make the two open market purchases, the net result is that the KO shares really only cost me $1637.53 - or a 44.05% discount to the open market purchase price.

Or . . .

Purchased 25 Shares ........................... $997.70
Purchased 50 Shares ......................... $1929.45
Total Purchase Price .......................... $2927.15
Less Accumulated Option Income ...... $1289.62
Adjusted Cost ...................................... $1637.53
Adjusted Cost Basis (per share) ......... $21.83/share

About the Zero Cost Basis Portfolio

What I call the Warren Buffett Zero Cost Basis Porfolio is a model portfolio that I include and manage (and provide weekly updates on) as part of The Complete Leveraged Investing Program.

The portfolio is modeled on the principles that Warren Buffett used to grow Berkshire-Hathaway into what it is today - investing in high cash flow busineses (heavily concentrated in the insurance industry in the early days) and then reinvesting that cash flow into other high cash flow opportunities.

In our case, the high cash flow comes from the income produced by our value-oriented option trades.

Those accumulated proceeds are pooled and then "reinvested" into (more) shares of world class businesses.

Over time, the idea is to continue generating more option income and use the proceeds to acquire more and more shares of world class businesses.

And as those equity stakes grow larger, they will produce an ever increasing dividend stream which will also be reinvested.

The "zero cost basis" comes from the idea that most if not all of the funds to purchase the high quality stocks inside the portfolio is the result of booked option income, not the portfolio's original capital.

Thus the shares don't really cost us anything.

Our original capital remains untouched and continues to collateralize our conservative option trading operations, like one of Berkshire's insurance subsidiaries.

Why I Love Adjusted Cost Basis

In any case, the portfolio won't always have an exactly zero adjusted cost basis - sometimes it will be positive, sometimes it will be close to zero, and sometimes it might actually be negative - all based on current market conditions and opportunities for attractively priced open market purchases.

And, of course, the adjusted cost basis is very dynamic.

It should always be moving down (at least until new open market share purchases are made).

In fact, at the time of this writing, I expect to book another $689.26 in option income following the October 2013 expiration cycle (which would bring the adjusted cost of these 75 shares to under $1000).

Want to learn more about this unique investing approach and see if it might be right for you?

You can check out my full 7 step process for successful value investing with options right here.

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