How does Warren Buffett make money and trade options. How stock market earnings work and what is the deal on dividends, interest rates and yields.
Q2 hedge fund letters, conference, scoops etc
Warren Buffett Trading Options + Your Comments
Transcript
Good day fellow investors. I cannot emphasize enough how much I love your comments. If I can add just a little bit of value to your financial life then my life is rewarded. Today's topics are buffet and options excellent common they're closing his closing his book sales YouTube channel that I would recommend normalized and primary earnings and then yields dividends defaults interest rates and bonds. So let's start with Buffett kwaak Cliff found interesting news on Buffett's action on options. What's my insight on it. So let's first discuss what's going on there between 2004 and 2010. Buffett wrote four point eight billion of index put options on various indices around the world. So those options started expiring in June and we last will expire to 2026. What's the deal there. So when you write an option you sell insurance to someone else. So Buffett said OK if the index in 20 18 that we are now of 2026 depending on the option is below a certain level let's say it was then 1400's and Buffett said if it is below 1400 I'll bite. I'll buy the S&P 500 from you. You're going to pay me some money for that insurance over the long term. And Buffett collects the premiums and then if the is below that level then he has to buy it. So what's his strategy there. If the S&P 500 in 2018 we are talking he was thinking that 10 years ago is below that level. I'm a happy buyer so he will get it at the discount and he will get his money upfront.
Secondly if those options if the SFP 500 is much much higher then those options expire worthless and he can't keep the money that he has been compounding for the past 10 years. Similarly the Footsie index is also higher than it was 2006 2008 2009. So Buffett really made a great deal on that. The estimation is that he made four point two billion then which was the amount he received for those options. Let's say he compounded those four point two billion during 2008 09 and or he was buying at 10 percent. So he made about 10 million 10 billion long term far from selling those 4.5 billion in premiums for 47 contracts from 2006 to 2010 when he disclosed what he was doing. So why did Buffett sell put options. And is this something we could do or buy options for protections. Well as with anything it's the key component there is value when those options are mispriced. As in 2008 2009 Everybody was crazy about insurance protecting their health. And Buffett had a long term view and he was willing to give their then insurance and get the money. So he took advantage again. He did the opposite of what everybody else is doing when everybody was looking for protection. He was a buyer be it buying stocks. He bought Burlington Santa being selling put options longterm European put options European put option is an option where you can do what the contract says only a the expiration date an American option you can do it constantly during that time until the expiration date. So Buffett was protecting himself. He said OK I'm giving you insurance but you can use it only from 2000 18 to 2026.
As the contracts expire. Not before. Big difference always Buffett is doing things smartly. So the key with options is OK. The only advantage I think we individual investors can have is a long term attitude as Buffett had then so we can see OK long term options. You have to see what is the prize there. But out of the money options for protections can't be bought cheaper when the VIX is very low and you have to see how that fits your portfolio with certain stocks. I'm currently researching the markets researching what they are so and starting to look slowly at options learning I will take another year or two to learn properly what and how to best use options and only then I will start dealing with options testing because I think with the long term perspective you can really do well with options just wait for that value to show on your screen. Do not chase yields chase returns with options just wait for them to come to you. That's a low risk high return investments in options. However there is plenty of time in a year two years I will have so much knowledge about the markets and the options Swiftie will be there for me to make money if possible.
