How to make a killing with options

Discussion in 'Options' started by Pekelo, Oct 1, 2017.

  1. Pekelo


    Description of his approach:

    • short term - get in, get out - nice profit, SOLD

    • don't commit 100% of funds, always have cash

    • pair trades - I'd be long MS calls but have some puts on the XLF

    • take a break (1-2 days) and don't trade when I kept making wrong decisions; give up on loser companies

    • target high dollar stocks via options (a $5 stock up 10% is okay, but a fucking longshot ... whereas a mere 3% move on a $100 stock makes a big difference in options and can easily happen)

    • avoid options with high premiums baked in although sometimes with names like AMZN, or GOOGL (wanted to buy GOOGL 940s to start this week) it's hard to avoid. But those googs were trading at ~ $2.75 while the stock was still $13 away from the strike ...okay, fucking Friday they were worth $33. That's what I mean from my last bullet point - GOOGL had only a 3% move but that option went x10
    bln, piezoe and MACD like this.
  2. Impressive. What percentage return is that? (how much did you put in initially)
  3. Pekelo


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  4. comagnum


    And the reason why that persons IRA was at $0 balance was very likely from blowing up on prior failures - if that is even real.
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  5. traider


  6. people, unlike Buffet 5.1 billion - non booked losses- do not want to talk about their losses.
    Just their profits, their wins, when they do well.
    comagnum likes this.
  7. Pekelo


    What I don't get about that position is, that he sold the puts around 2008 15-30 years out, the market has been going up, so how the hell gets he a 5 billion loss, realized or not? He should be having a huge unrealized gain. Sidenote but there is a good chance he won't be alive by the time all of those options expire...
  8. DeltaRisk


    Anyone can access photoshop
    Clubber Lang likes this.
  9. He does have a huge unrealized gain worth
    Some adjustments were made to these positions. In 2008 $400 million more of these puts were sold. Also, the terms had changed on about 10% of the contracts (shortened maturities and lower strike prices – they rolled in and down). In fact the first contracts now expire in mid-June 2018 according to the most recent annual report. Also, in 2010 at the instigation of a counterparty, a handful of the contract positions were closed out resulting in a profit of $222 million and the this also reduced the running initial income from the puts sold to around $4.2 billion.

    The table below shows the running intrinsic and fair value for these short puts since the beginning of 2008 in billions of dollars. The source is Berkshire’s annual reports in which Buffett makes a point to note the intrinsic value of the options as well as the fair market value (which is the required value for accounting purposes). Note at the end of 2008 the unrealized losses for these positions was pretty substantial, but as the markets have recovered, the positions have improved dramatically.


    Remember $4.2 billion in premiums were received for the open positions. The intrinsic value of these positions was $1.0 billion at the end of 2016. This means if they all expired on the last day of 2016 the net profit would have been $3.2 billion plus the $222 million already booked. However, there’s time left and the fair value using an option pricing model puts the value of these options at $2.89 billion, still a decent profit.
    In the next few years several of these options will start to expire and we may learn more about the specifics behind these trades. For now, each quarterly filing by Berkshire Hathaway has me checking in on the big short equity index option trade and reporting back in this space either at year end or when market conditions warrant it.(
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  10. piezoe


    That's all very nice, but when you deal with great leverage you deal with great volatility. That stuff scares the shit out of me. But congratulations. nicely done. And you've offered sage advice too.
    #10     Oct 1, 2017
    comagnum likes this.