Bullshit. If one wants to learn about Buffett's derivatives contracts they should read Buffett's annual letters to shareholders, not asskiss' pompous, envious, out-of-context rants. Fischer Black and Myron Scholes have forgotten more about options than asskiss will ever know but guess what? Buffett disagrees with how their model values long term options (and explains why in the 2008 letter) and guess who the billionaire is?
You need an estimation of vol (anticipated forward distribution of price) to come up with the "probability of them being OTM at expiry." Under BSM, -$10b is a questionable mark, given SPX IV at the time. It should have been a larger amount. Also, WB should have got more for the puts, even at the low vols extant when he put them on.
In his letter to shareholders, Buffett alludes that there should not be a positive term structure to equity index vol. He wrote the letter when vol was trading in the bottom two-deciles under a positive term-structure. This belief must have been one of the selling points. If not, he wouldn't have made reference to it. He sold atm, so he can't be addressing a vertical-skew. He placed the trade and took a 10B loss on price. He would've have lost a bit more under a flat surface, sure. The positive structure under 10-15% vol flips modality >20-30% on vol. So in the top-deciles he's right, but it's anything but stationary.
so when I as market maker mark my position 2 vols against me then you also conclude I put on a bad trade?
Actually, I made the case that he saved some cash by selling into that +term-structure. Did you lose $10B too? My point was that it was one of his arguments for making the bet.
you edited your post and took your mark comments out, guess you saw it had nothing to do with your earlier argument. I was simply replying to your deleted comments. Obviously marks have nothing to do with the term structure.
really...lol. Everyone else seems to be dreaming but you!!! dude, you have some serious issues. Maybe you should get back into your options corner. You know shit about WB's book but behave as if you are his treasurer. Hilarious.
No, you don't... That's my whole point. If I effectively don't have to mk-to-mkt, I am free to determine my distribution at expiry exogenously. Again, I think of it as a bespoke insurance policy where there is no observable vol mkt. I am pretty sure that such things pre-date BSM.