cannot believe that buffet sold a complex option ...

Quote from KrispyKreme50:

The other posters are right. Considering how these options are also European options (can only exercise at expiration), the buyers for these options are basically betting that we'll still be where are today close to a decade from now. As the other posters have said, factoring in inflation and the opportunity cost, the people who bought these options are probably on the wrong side of the trade.
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they wanted to just give WB there money, fools...
 
Quote from lemeeeplay:

Only an idiot would buy a 13 year option, especially at these volatility levels.
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He sold them at Indu 13,000... so VIX was prob. around 20.
 
Quote from lemeeeplay:

Only an idiot would buy a 13 year option, especially at these volatility levels.
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why do you dorks keep focusing on the expiration date. You do realize the buyer can trade the option or lock in the profit any time right? Whoever took buffet's other side already made a large chunk of coins, i doubt they are just sittingon their ass waiting for that profit to evaporate.

stop looking at just the expiration date of an option.
 
Quote from newguy05:

why do you dorks keep focusing on the expiration date. You do realize the buyer can trade the option or lock in the profit any time right? Whoever took buffet's other side already made a large chunk of coins, i doubt they are just sittingon their ass waiting for that profit to evaporate.

stop looking at just the expiration date of an option.
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Its a european option and as such cannot be called in before expiration.

2019 and 2027

He got $4.8 billion upfront.

I love how people Monday Morning Quarterback, a man who has built and empire.

I would never take the other side of a trade if Warren Buffett was on it.

Disastrous bet ... or shrewd trade?
The trouble is, world stock indexes, including the S&P 500, have declined sharply since the trade was struck. The past two months have been particularly rough. In its third-quarter earnings release, dated Nov. 7, Berkshire said its loss to date on the trade is $1.87 billion. Surely, that's proof enough that Buffett made a disastrous bet. Right?

Wrong! In fact, Buffett had fully anticipated the possibility of such losses. Describing the trade for the first time in his 2007 letter to shareholders, he wrote: "... our derivative positions will sometimes cause large swings in reported earnings, even though Charlie [Munger] and I might believe the intrinsic value of these positions has changed little. He and I will not be bothered by these swings -- even though they could easily amount to $1 billion or more in a quarter."

In truth, the terms of the trade are highly favorable to Berkshire:

At inception: Berkshire, the option seller, received the full $4.85 billion in option premiums up front. The use of this cash is now entirely at Buffett's discretion. Given his track record as an investor, that's a very valuable feature.
Over the life of the option: The puts are so-called "European" options -- the buyers can't exercise them until they expire. Furthermore, it's unlikely that Berkshire would have to post any margin collateral against mark-to-market losses; thus, although such losses would reduce Berkshire's earnings, they have no economic impact on the company whatsoever.
At maturity: These are long-dated puts, with expiration dates falling between 2019 and 2027. This is an immensely favorable situation, in light of the first point and the long-term upward drift in the stock market.
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http://www.fool.com/investing/value/2008/11/20/whats-wrong-with-berkshire-hathaway.aspx
 
Quote from sellvol:

What makes you think they are going to sit on their hands and pray that their position is positive in 2019? L
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Ehh thats kinda how a european style option works..

I don't see what is so complex about this trade on Buffets part...
The reality is whoever is on the other side of Buffet wanted some liquidity to probly but on some other type of strategy and buying these puts is just part of that strategy.
I really don't see Buffet calling around to see who will write him 15 year euro style puts at the prices he got. Probly the other way around, he thought about it for 2 seconds then said "yes".
 
Quote from stock777:

you idiots can't even do basic research.

nothing said here makes a bit of sense.

fwiw , Buffet has more brains in his earlobe than the lot of you have in your heads.
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You went sniffing around in his earlobe? Yick!
 
something does not add up. he supposedly got $5b in premiums selling 15-year atm puts that risk a maximum of $36b, which amounts to 14% r/r... are you sure they're atm? if so he got screwed big time. you can get better % on dec 2009 atm puts, which are only 1 year out.

either you guys are wrong, or he's stupid. i'd bet it's the former. the puts were probably far otm.
 
Actually the math on received premium is consistent with plain vanilla atm puts with long term estimated volatilities around 20-22% for the underline. There is a spread of the expirations (not all puts expire simultaneously) which is a very smart thing to do from Buffett’s side. The recorded loss of 6.7 billion for the first 9 months of 2008 is also consistent with the above assumptions with a little higher volatility estimation because of the short term effect in the average of 15years vol that the spike of recent volatility will have. And yes, I think if the above assumptions are correct the buyers of the puts are not very smart.
 
I'd rather be long these puts. I'd say it's likely both sides will make money on this one. The seller has a while to wait - assuming he did not offset risk at all.

Whoever said that the buyers are already locking in profits is probably right. But it is also possible that they screwed it up and over hedged the upside - not likely, but in this market shit happens:eek:
 
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