Nassim Taleb: Ask Me Anything

[sle]

I think those trades were actually genius, in a whole variety of ways...

Well, they looked like a pretty poor idea in November 2008 (a year after inception), especially the SPX/SX5E/NKY worst-of basket at that moment it certainly looked like a lose-lose situation for both Berkshire and the dealers...

 

[Martinghoul]

Well, they looked like a pretty poor idea in November 2008 (a year after inception), especially the SPX/SX5E/NKY worst-of basket at that moment it certainly looked like a lose-lose situation for both Berkshire and the dealers...

Yeah, although even then I thought they waz genius...

 

[ironchef]

It's a well known story, he was selling 10-15 year ATM puts on major indices. Some of it was in vanilla form and some of it was on a basket of international indices that were crossed into USD.
Just like other long dated vol sellers (e.g. HOOP) those are sophisticated trades. In this case, a lot of the pick up came from financing arbitrage since at the time he was not posting margin (and a lot of dealers neglected this fact) and the structures where well thought through.

I knew that specific case but not aware BRK made most of their profit selling puts then and now as he/she said?

 

[sle]

I knew that specific case but not aware BRK made most of their profit selling puts then and now as he/she said?

Well, it was a good trade at the time, but with the change in their margin agreements that ship has sailed (their 10y CDS is with 90 handle at the moment anyway).

 

[Martinghoul]

Well, it was a good trade at the time, but with the change in their margin agreements that ship has sailed (their 10y CDS is with 90 handle at the moment anyway).

Yeah, the trade has run its course, it would seem...

 

[sle]

Yeah, the trade has run its course, it would seem...

Dude, do you check your bbg messages?

 

[tradelosses]

It's a well known story, he was selling 10-15 year ATM puts on major indices. Some of it was in vanilla form and some of it was on a basket of international indices that were crossed into USD.
Just like other long dated vol sellers (e.g. HOOP) those are sophisticated trades. In this case, a lot of the pick up came from financing arbitrage since at the time he was not posting margin (and a lot of dealers neglected this fact) and the structures where well thought through.

I thought they were 100-year options. The counterparty is a fool, that's for sure. Even Taleb in the AMA says he sells ATM options.

 

[sle]

I thought they were 100-year options. The counterparty is a fool, that's for sure. Even Taleb in the AMA says he sells ATM options.

I have first-hand knowledge of these trades
No, the maturities were reasonable, from 10-15, though the sizes were scary. Counterparties where fools for other reasons. Unlike a few other famous option trades (like the MS corporate option trade), these were easily hedged and vol risk was laid off (there usually is a fair amount of demand for long dated vol, mostly by insurance companies). However, most dealers did not take into account a garden variety of risks that were introduced by the combination of non-margined nature of the trade and the really large sizes . That's where it got hairy.

 

[tradelosses]

how much leverage was he using? BRK is pretty big

 

[sle]

how much leverage was he using? BRK is pretty big

I think the total notional was maybe around 30 yards spread across 15-20 dealers. It's impossible to translate that into anything like a leverage number because the firm itself is so correlated to the underlying.