This is such amazing information. Thanks. Since Berkshire Hathaway is a public company, aren't they supposed to disclose the full terms of the options? So $4.9B premium for $37.1B worth of equity for 10-20 years. So what does the Implied Volatility work out to roughly
This is why, in the final analysis, you HAVE to be long the stock market. Buffett has the President's ear more than any other adviser. Buffett is LONG stocks, hedged by SHORT puts (I'm being facetious here as this is DOUBLE long and not a hedge). But, I'm serious when I say go long stocks, because the powers that be will tax Joe Sixpack til his final days so that stocks will not go down!
The next two years are so uncertain. All this spending by the governments, which is barely keeping the economy alive, can't last forever. When the plug is finally pulled then what? This V stock market will be very W. Look at unemplyoment - highest ever. Things for the next 2-3 years are not certain. I am sure we will see the Dow fall below 7000 again and we might very likely see Dow touch 5000. Sure 20 years from now, the Dow will be 30,000 but it may touch 5000 before then!!! :eek:
Funny thing is, he gets the premium now, 20 years earlier. 20 years of compounding on his 20% average is big money. With a 7% compound rate your capital will double every 10 years. This means his premium if he maintains his compound rate will have become up to 4 times the original premium. Plus if he goes long the market, by doing this leveraged long bet, the market experiences more buying pressure. ofcourse, he will probably be dead when the puts mature. He is basically getting free money while hes still alive, he won't be paying back if hes dead! Pretty smart if you ask me.
There is no doubt that this is a great deal for him. But for the average investor it is not possible. If the Dow was to go down a lot, then there would a HUGE margin call! Most induviduals would be bankrupt! Of course for Buffett the margin call is a joke. If the market was to go down 50% he would be down (on paper) $15-20B but his portfolio could cover margin for ten times that amount! So he would not be sweating it at all! All an average investor can do is envy his deal OR buy BRK and join in the fun
failed_trad3r, Warren didn't write the puts, Berkshire Hathaway did. It's easy to confuse since Warren owns about 30% of Berkshire, but the options are owned by his company. His company will be held liable for the options upon their maturities. Wolfgang1756, The puts are European. Comparing these options to regular options is silly, because Berkshire's contracts are private. There will be no margin call, or any request for cash- until the options mature.
How bought the options and why did they do it. It seems like an amazingly larger transfer of cash. I wonder if they were larger shareholders of berkshire or related to the Fed.
Interesting to see WB's justification. Very valid, IMO... although I don't have the wallet needed to test his theory. Just talking to myself here, with my amateur grasp of econometrics and without an option calculator... and appreciate all corrections. Basically, stochastics finance holds that returns are normally distributed with volatility increasing with the square root of timespan (variance increasing with t). This clearly is true when you're talking about the scale of weeks, months, or even a few years... but Buffet obviously doesn't believe that volatility over 10 years will be sqrt(10)=3.16 of annual volatility. Right now, SPY annualized volatility is around 25 (as VIX tells us), meaning we have a ~16% chance the S&P will lose 25% of current value, ~16% chance S&P will gain > 25%. Buffet is asking, is it reasonable to think that at the end of the next 10 years, S&P has a 16% of being < sqrt(10)*25 = 80% of its current value? It's a fair question. Here's where I might differ some what from Mr. Buffet. Why didn't he write some OTM calls, instead? His portfolio wealth is going to be correlated with the broader index... *if* the market does sell off to 80% of current value, he's going to be wiped out on both accounts. If he wrote some OTM calls on the other hand, at least he's somewhat hedged... and will do quite well if his invested premium does better than broader index, as he's assuming.