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.
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 ...
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.
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.
I canât 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 Buffettâs 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? Thatâs his breakeven point considering the returns he will receive on the premiums.
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.
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.
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.