Discussion in 'Options' started by tradingcards, Oct 28, 2007.
Did Warren Buffet ever sell covered calls?
Not to my knowledge. But:
- He borrows out stock so institutions can sell it short. It can collect 2-4% annually on the amount borrowed out. He was cited to have borrowed out a portion of his USG stake.
- He sold longterm portfolio insurance to big institutions in 2005. Basically it represented far out of the money put leaps short sold. I believe the strike prices were 30-40% below the indexes trading value at that time.
As you know, Mr. Buffett is a major shareholder in Coca Cola. In April 1993, with Coca Cola stock hovering around $39 per share, Mr. Buffett determined that he would be interested in buying more shares if the price fell below $35.
But instead of waiting for the price to fall, he simply wrote 5 million 'put' options with a $35 strike price. If Coke stock were to fall below $35, the option takers would 'put' their shares to him, which would have meant Mr. Buffett would be forced to buy the stock at $35. This was perfectly fine because he wanted to buy at that price anyway.
But if Coke rose instead, Mr. Buffett would be happy enough, since he collected a $1.50 option premium ($7.5 million). In other words, Mr. Buffett wins on both sides. If the price falls, he gets the stock at his price. If it goes up, he makes $7.5 million.
In fact, Coke never did fall to the targeted price, so Mr. Buffett did not get to buy the stock at $35. But he did pocket the premium when the options expired, and ended the day $7.5 million richer.
"He was cited to have borrowed out a portion of his USG stake."
I think he lent out his entire position as soon as he bought it. The short interest went up about the same size of his position, I forget the year '00 maybe. I think he lent it all to Icahn and don't know if Icahn ever closed out his short position. Rough numbers, I think WEB bought around 14 went to 5 Icahn never closed his position, on the flip side USG goes over 100 WEB never sells, Icahn still has his position(?). I have no clue what these guys are thinking.
Too bad the article does not mention their expiration but by comparing with the present prices of KO options I think they were at least 1 year out.
About 4% annual profit on his cash: 1.5/35 * 100 = 4. Nothing to write home about. I wonder, what was the bank interest rate back then?
With the sub-headlines in that article I don't give any credibility to it or the accuracy of the alleged Buffet option trade back in 1993
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Buffet is a buy and hold investor so I doubt covered calls would be a strategy he would wish to emply. For him it would not make sense to cut off his upside profit potential and as a billionaire I doubt he would need to add to his income through CC premium at the expense of giving up that upside potential.
He does use derivatives though as evidenced by his annual report for Berkshire Hathaway, including Equity Options, Fx forwards/options, and interest rate options.
Hello. I think the 30-yr was a little under 7%, the 10 yr a little under 5%. I don't think he did this looking at the return, I think he wanted to buy the shares > 10% lower. I can't remember if KO had 37.50 strikes back then, but ~10% O-T-M (35 strike) not real aggressive if you really want stock (for Warren) in mho. You're right, it would have helped if the expiration was mentioned. KO was one of the original 14 stocks with LEAPS in 1990, so it might have been the Jan '94 (?) he sold.
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