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Warren Buffet Trading Put Options!

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March 12, 2008 – Comments (4)

Buffet may be old-fashioned when it comes to technology and the companies he invests in, but he is very shrewd when it comes to the financial markets.  Take a look at page 17 of BRK's 2007 annual report:  http://www.berkshirehathaway.com/2007ar/2007ar.pdf

 Buffet explains that he has sold $4.5 billion worth of long-term puts on 4 different major stock indices (S&P 500 as well as 3 foreign exchanges).  The strike price on the contracts is current market values, and they do not expire until around 2019-2027 (they are also European style meaning they cannot be exercised before expiration).  This means that Buffet collects $4.5 billion which he gets to invest for the next 15 years.  The only way he loses money is if the S&P and these other indices are lower 15 years from now... then he will be obliged to "buy" them back at today's prices.  Despite the near-term turmoil that lies ahead, inflation alone should push these markets higher over the next 15 years.  This seems like a great deal to me.

 You invest $4.5 billion for 15 years and earn an average of 10% (which Buffet can probably do), then you end up with roughly $16.65 billion after taxes!!  I am not an options pricing expert, but I imagine the monetary obligations of these contracts could be figured out through reverse-engineering.  Also, since these are put options, the potential losses are capped by the worst-case scenario of the markets going to 0.  If I could sell put options for 15 years in the future, I certainly would be doing that

 

4 Comments – Post Your Own

#1) On March 12, 2008 at 3:55 PM, EScroogeJr (< 20) wrote:

I'm wondering what kind of fool would buy such an option.

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#2) On March 12, 2008 at 4:05 PM, LordZ wrote:

Its amazing that he who has the gold can make most of the rules...

Still when this old fool dies... he won't take one dime with him...

 

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#3) On March 12, 2008 at 8:30 PM, anchak (99.86) wrote:

I have exactly the same question as EScrooge - especially given your comment of these being Euro style - makes no sense on the buying side - unless you think end of the world is coming.

Given the non-transparent nature of the transaction , I guess we'll never know the buyer (s), if its a concentrated party - it wouldn't be a shabby bet against , not due the financial nature ( the really have long time decay) - but simply against the acumen

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#4) On March 13, 2008 at 2:22 AM, StockSpreadsheet (74.73) wrote:

EScrooge,

Maybe it is one of Abitcatania's (sp?) favorite people, Jim Rogers.  Anyone that thinks that America is going to hell in a handbasket might think this is a good buy.  If 15 years from now our government declares bankruptcy, due to being unable to service our massive debt, then a lot of the stocks on the S&P might also become technically worthless.  That could put the index below current levels.  

Don't think it will happen, but it is the only scenario I could come up with that makes sense to me on why somebody would buy that contract that far out.  After all, a lot can happen in 15 years.

Craig 

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