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cannot believe that buffet sold a complex option ...
- Thread starter mind
- Start date
no. there is no free lunch. this is a zero sum game.Quote from donnap:
... I'd say it's likely both sides will make money on this one.
actually adjusted for all brokerage involved in rebalancing
the hedges, it is a negative sum game. one guy looses.
it just might depend on the intensity of the analysis,
whether this becomes obvious or not. all of course IMHO.
"Buyers of the derivatives would be entitled to billions ofQuote from thegazelle:
What is so complex about selling an SPX put, other than the fact that its a non-standard expiration.
dollars from Omaha, Nebraska-based Berkshire if four
stock indexes drop below agreed-upon levels on dates
beginning in 2019."
this is a complex option on a portfolio of indices. corrs
start to play a role in this. this is not a too-complex
option, but it ain't too simple either. and do not forget
that someone has to adjust for the length of the option.
so there must be dynamic hedging going on, which has
a price.
BTW in these days marked to market becomes an issue
even for very long term investments. do not forget that,
be the option as much european as she wants, there is
a current market price of such option. and if this price
shows a loss, then buffet shows a loss. he is basically
short VIX 20 at currently VIX at 60-80.
there is no way to talk regulators out of this. many,
many managers failed due to MTM, claiming that at
expiration everything would be fine. which, BTW, is a
nice little illusion. my personal opinion is that this is the
only way to do such things: enforce MTM everywhere.
all this hold to maturity BS is ... well ... BS. investors
MUST be forced to only hold tiny portions of such investments.
even for very long term investments. do not forget that,
be the option as much european as she wants, there is
a current market price of such option. and if this price
shows a loss, then buffet shows a loss. he is basically
short VIX 20 at currently VIX at 60-80.
there is no way to talk regulators out of this. many,
many managers failed due to MTM, claiming that at
expiration everything would be fine. which, BTW, is a
nice little illusion. my personal opinion is that this is the
only way to do such things: enforce MTM everywhere.
all this hold to maturity BS is ... well ... BS. investors
MUST be forced to only hold tiny portions of such investments.
Quote from jdeezero05:
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".
Obviously he cant get called on it and its a good bet for him (in the end). But the people on the other side didnt buy just to hold it to expiration and as mentioned theres that little thing called margin.
Noone who buys the option now is actually going to hold onto it are they.... Jsut because it cant be cashed in early doesnt mean it cant be sold...... Whoever bought them will be able to sell them off, cover them, add them to part of another position whatever and make a fortune now.
i am very suspicious to this kind of trade. usually thereQuote from jdeezero05:
I don't see what is so complex about this trade on Buffets part...
is an effect that fools the human eye. in this case for
example it looks like an obvious trade for buffet. but if
you take the current situation into account, how MTM
is bringing him into trouble, things start to look different.
what i am trying to say is that these products do not
only have a situation on expiration date. the cost of
holding capital against the daily VaR need to be take
into account as well - which they often aren't.
either you have a complete fool on the other side who is
willing to overpay an option, or it is you who is the fool.
and if you don't know the answer for sure: it's certainly
you. there is no free lunch. i for myself would never
ever do such trade.
my thinking is like that: in this size, you don't have
fools at counterparties (admittedly a conservative
assumption). and whatever price for the option comes
up, it is derived out of current market prices. directly.
it is the outcome of all products currently traded. but
it is seemingly so in your favor. and this is what i am
suspicious about. when the VIX makes a spike we
know that later months are reluctant to follow. when
the short end in rates fluctuates widely, we know that
the long end doesn't. whereever we have something
traded with high liquidity with some time perspective
build in, we know that this later point takes into account
all the in-between-action very efficiently. and my point
is that it is the same with this kind of option: what is
so seemingly in your favor is an illusion. or at least
partly. it is just a trade like everything else BUT it has
certain disadvantages, like MTM risks, counterparty
risks and so forth ...
finally. over the span of a decade our imagination of
what can truly happen is at risk of failing dramatically.
the world CAN differ significantly from now. just look
at the last eleven years. we had the LTCM, net bubble,
911 and now the assumed great recession. don't add
illiquidity of your instruments on top of that. and in
such products illiquidity constantly surrounds you.
some swap here and there, some fx hedge (maybe
the four indices where not US only) and so forth. all
of a sudden you have counterparty risk with various
financial institution. they won't fail all at the same
time your model makes you believe ... well ... this kind
of thinking is at the very heart of the current crisis.