Buffet wouldn't use leverage when shorting put contracts. He probably has those $4.7 earmarked and set aside in cash equivalents collecting interest until they all expire. Either he goes long when they end up in the money or he doesn't. Hard to "blow up" when you don't use leverage.
We have some real sharp cookies on this thread. Let's clear a few things up. Buffet has a huge derivatives trading operation. In fact, he has made a fortune in arbitrage. Also, he never uses margin, all his puts are cash secured as is all his stock purchases and put sales. He does use leverage indirectly through the cash flows he generates on his insurance companies. But technically that is more akin to re-investing dividends then outright leverage. And yes, the guy does hedge. For over 4 years he was short the dollar and made a king's ransom on that position. He got out of that position near the top.
and that would be a hedge against what?He is running a US company traded in USD. if you ask him I doubt he would say its a hedge, more like a macro bet. he got out because the carry got worse, thats hardly how one would treat a hedge And he was bragging about 1.65 USD to BRL few months ago so he must have lost some money when brazil tanked
His puts are under water big time. It doesn't matter really. Buffett knows, in the worst case, the govt will bail him out, no problem. So why not sell puts till the cows come home, right?...prime example of moral hazard at play.
It seems guys later in life, Livermore, Kerkorian, I don't know, name some more, do some stupid things when they age. Who's to say this guy isn't going to blow up. The allure of wealth must ring hollow to a guy like this. He is more vocal than ever. I wouldn't doubt if he didn't do something stupid, and will seriously damage his reputation. Anybody watch Greenspan this week? Would anyone have guessed he would have admitted an error? Everything is in play. And some wealthy folks are scared to death, and they haven't sold yet. Friday confused me. Up some before we air it out? We have to get those people to blow out. A lot have sold, but not as many as I thought. Think about this. If you don't think for yourself, and most dont', if you 'do your own stuff', and some do, where do you go for advice? The Schwab commercial says', don't run. But when that fear at 7000, or 6000 comes at you, you'll sell. And maybe Buffett is under pressure we don't see. We don't get away this easily. The real pressure is only five weeks old.
we are on the other side of a big momo play(aka the credit bubble). Most bagholders will hold on like grim death(as per usual) It will be time not price that eventually does these people in. The whole "buy and hold" mentality was sold during the credit bubble of 1987 to 2008. It will take a couple of years of sideways action at the bottom for these folks to figure that out.
Yes, all value investors of the world were buying Nasdaq stocks at 5000. Your "If I can't assess the true value of a stock then nobody can" logic is flawed.
Buffett can't blow up because thats not his style of investing. He doesn't use leverage and he picks stable, large companies.
What did occur to me, before I made the smart-ass comment, is that many here think Buffett is just like they are. He is not. Buffett is doing deals that are not straight-up stock purchases, but rather structured deals. What also occured to my smart-assedness, is that this trade is not an exchange regulated trade, but rather OTC and is very likely given terms that are very one-sided to him on margin call ability of the counterparty. I have my suspicions that the other side of this trade is either an insurance company (he is in the business you know), or a massive pension/retirement fund that bought this trade as a hedge for a long term portfolio. Either way, I have serious doubts that he structured a derivative that would have large potential margin calls associated with it. Step out of your box for a bit, there IS a different world out there.