Exactly... those should be stuck at between 16-22 at most. And therefore Warren's trade is a good one!
Ha! First of all, the levels he sold in 2007 where nowhere near 35 (a bit more on that in a sec). Second, some of those trades where wildly exotic (e.g. he sold 15y WOP on SPX/SX5E/NKY xUSD in like USD500mm). Thirdly, a big part of "alpha" was his credit rating - he was essentially getting an un-collateralized loan in the form of premium. PS. 10 year vol is it's own animal due to the interest rate volatility - you have volatility of the spot SPX which is then combined with the volatility of the forward in a non-straight-forward manner. PPS. all in all, actually pretty good trades on his side and he really f*cked up a few firms with the credit/equity correlation aspect of it, they are still looking to lay off that risk at some ridiculous levels.
Ai.. I forgot about the interest rate vol... But surely dividends are related somewhat with interest rates... rates down, divs down as well? So... Futures move less than based on interest rate only? What's WOP?
Divs are constant short term and blend to proportional long-term. In the US div yields do not seem to correlate much to the rates. Obviously, fuck only knows and when you pricing this sort of shit you do it conservatively. Worst Of Put. So at the end, the buyer would have gotten the lowest return of the three indices, crossed into USD. Needless to say that kind of structure is crazy expensive.
"If prices keep looking attractive, my non-Berkshire net worthwill soon be 100 percent in United States equities" - Buffett "Those individuals or institutions who are long term compounders should consider the possibility of using the Kelly criterion to asymptotically maximize the expected compound growth rate of their wealth. Investors with less tolerance for intermediate term risk may prefer to use a lesser function. Long term compounders ought to avoid using a greater fraction (“overbetting”). Therefore, to the extent that future probabilities are uncertain, long term compounders should further limit their investment fraction enough to prevent a significant risk of overbetting." - Ed Thorp
While future probabilities are undoubtedly uncertain, there are all sorts of interesting thought experiments one can perform. In this particular case, the relevant question is something like this: "Suppose you are presented with a 99:1 bet. What percentage of your net worth should you bet?"