cannot believe that buffet sold a complex option ...

[Cutten]

Quote from blackjack007:

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.

Try including interest rates in your options model before you spout off.

 

[Cutten]

Quote from lrm21:

Its a european option and as such cannot be called in before expiration.

But it can easily be hedged, thus locking in a huge profit.

This was an awful trade by Buffett. He sold naked puts just before the worst bear market for 75 years. Losses exceed his profits by many multiples. Selling such a put *now* would be a far better trade, with vol through the roof.

Face it, Warren got schooled.

 

[Cutten]

Quote from marketsurfer:

why not?

much of buffett stuff is a myth, anyway.

The $$$ is not myth. And that's what counts.

 

[mind]

Quote from Cutten:

Insurers underwrite far bigger risks all the time. Everything you said about counterparty risk applies to the people on the other side of Buffett's trade too. You say you'd never sell a put. Even if the premium was $30 bill and the max loss was $1? Ok, lol. But you're not a trader in that case.

well. that is my point. i doubt that there is any opportunity
out there with that kind of risk/return profile. i would
be so suspicious about this kind of trade that i would
not do it for that very reason: too good to be true.

1 out out of 10 such opportunities might be really that
once in a lifetime chance. the other 9 take you straight
to the poor house.

and your remark on insurers. i remember how some
wrapped cdo tranches, receiving a handful of basis points.
sounded like the biggest deal of all. i really do not think
that insurers are the best example for proper risk-
and portfolio-management these days ...

 

[mind]

Quote from Cutten:

The counterparty could hedge now just by purchasing S&P futures, getting a locked in profit. The market could then recover by 2019, leaving Buffett with his $5 billion premium. Both parties would make money in that case.

well, i doubt it works like that. there is this thing MTM.
if buffet dies today and berkshire is closed, then they
have to close everything on the market, including that
option. now unwinding this position is quite a costly
endeavour.

and the other guys might already have locked in that
profit when the sp had fallen by 20%. and it could be
that in five years their position is underwater with sp
being at 2000. yes, they have their locked in "profit",
but then MTM shows the loss of their premium.

all just hindsight. but MTM is a real bastard and sooner
or later it comes out to call you.

my point is: taking MTM into account there is no free
lunch like both winning. this option is not a magic
instrument that makes one win at expiration and
enable the other one to cash in at any time until then.
the game does not work that way. especially not with
deals of that size. you might tweak a small private
bet around margin calls, accounting and other such
inconveniences, but not a 5bn option if your name
is warren buffet.

 

[mind]

Quote from Cutten:

I... you're not a trader in that case.

thinking long and hard about this one. i guess you are
perfectly right: i am not a trader. funny, i have never
seen it like that ... but i guess you nailed me.

 

[gbos]

I can’t understand the fuss about what appears to be plain vanilla put contracts. Yes S&P for example is down from 1400 to 850, but for a 15 years put that mean a 100% up move in valuation. From Buffett’s point of view this is irrelevant because you are not able to find everyday someone offering you a 15 years put at a size of 4,8 billion premiums. He sees it from the investing point of view. Will the S&P worth much lower than 1000 in 15 years? That’s his breakeven point considering the returns he will receive on the premiums.

 

[mind]

Quote from Cutten:

...Selling such a put *now* would be a far better trade, with vol through the roof.

same was true for selling such put at VIX 40 ... would
have taken you out already too. this sounds very much
like knowing after the fact.

you cannot sell an implied vol of 70 for 10 years. that
option is not available. if you get out that far in time
you will probably sell a 20something VIX ... again my
hindsight ... but then, as discussed, i am not a trader.

 

[mind]

Quote from gbos:

I can’t understand the fuss about what appears to be plain vanilla put contracts. Yes S&P for example is down from 1400 to 850, but for a 15 years put that mean a 100% up move in valuation. From Buffett’s point of view this is irrelevant because you are not able to find everyday someone offering you a 15 years put at a size of 4,8 billion premiums. He sees it from the investing point of view. Will the S&P worth much lower than 1000 in 15 years? That’s his breakeven point considering the returns he will receive on the premiums.

two things: MTM and volaspike. berkshire probably has
to value each position in their balance sheet. they have
to show the current evaluation of that option in their
year end statement. at least i assume they have to.
and that simply means they have to show 40-50
VIX percentage points against them on top of the
underlying's movement.

 

[mind]

BTW it is exactly this kind of thinking in derivatives that
is at the very root of the crisis. OTC contracts that are
not subject to margin calls by an exchange. enabling
two parties to appear in proper shape while one of them
is already hit big time.

were that put exchange traded, they both probably had
not done it in the first place. that is my very personal,
non-trader, opinion.

mister, no WMDs ... what a joke.