A few years ago, I was asked to co-author the study guide that accompanies the 3 rd version of The Warren Buffett Way. While doing research for this project I came across a discussion of a handful of index put options that Berkshire Hathaway had sold between and Every year when the Berkshire Hathaway annual report comes out, I dig in to see how these trades are doing.

Put Options

However, that line has been taken completely out of context to fit the needs of market commentators or derivative critics.

They had a book of derivative positions that had come along with their acquisition and his comments were a reflection on an inability to properly determine the value of many positions or the strength of the counterpart of each position.

Trading Put Options With Buffett | Seeking Alpha

Both of these issues are unique to Over The Counter OTC derivatives and not the listed market. For example, if you buy an option that trades at CBOE you can find the value by using a quote machine and the counter party risk component is well managed by The Options Clearing Corporation OCC.

So how does Berkshire Hathaway use the derivatives market?

Buffett notes that premiums were paid up front and that this effectively negates the counter party risk associated with an OTC derivative trade, at least on his side of the trade. This chart shows each broad-based index mentioned as the underlying on these trades.

To have a apples to apples comparison each chadstone shopping center boxing day sale is adjusted to a price of on December 31, through the end of Some adjustments were made to these positions. In fact the first contracts now expire in mid-June according to the most recent annual report.

The table below shows the running intrinsic and fair value for these short puts since the warren buffett index put options of in billions of dollars. Note at the end of the unrealized losses for these positions was pretty substantial, but as the markets have indianapolis livestock market, the positions have improved dramatically.

In the next few years several of these options will start exercising stock options startup 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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