Buffett options trading
By doing so, Berkshire Hathaway was extending its traditional insurance business to provide protection that is stock market related for its counterparties. When the market melted down in and throughout the early part of , the put options looked like a really bad move. As commonly noted, Buffett has gone to tremendous lengths in one of his previous shareholder letters to describe the inefficiencies and pricing of the options market and how Buffett planned to exploit it.
The root of the options problem lies specifically in the volatility assumptions made in the very commonly used Black-Scholes formula. From year to year or day-to-day, stocks can move rather abruptly, and the assumptions of volatility often are baked into the price of options. But when you look at them over longer periods of time, stock market returns are much smoother, and Black-Scholes will value options more highly than it is actually appropriate — which makes them much better to sell instead of buy, and this is especially true when you have puts expecting the market to continue to trend upward.
When Buffett has previously provided financing to large corporations like General Electric and Goldman Sachs, he used warrants that are options like, and they provide a long-term equity kicker to Berkshire Hathaway with this investment. The short answer is no. The deals put together by Warren Buffett are not typically available to your average investor. The long-term options available to the public will normally only run just a few years into the future, but that is not a long enough time for an entire bull — bear cycle to run its course for reversion to the mean to take place.
The one place where long-term options are available at this time is in financial stocks. This is thanks to the TARP bailouts, so five to six year warrants are currently available from several major banks and other financial institutions.
For Capital One and Hartford Financial, these warrants are already in the money — which means that the current price of the shares already exceeds the exercise price of the warrant. This will limit the impact of volatility estimate errors on the warrant price. But we can nevertheless walk you through what it would take, and you decide whether it appears possible for you or not. It takes patience, time and a well-structured plan, probably over a number of years, to achieve.
Take a look at this Excel document which has been modified from the original by forexoma. I am sure you are blown away by the figures. By the way, the excel spreadsheet is built in such a way that you can play with the numbers as you wish.
You can adjust the initial capital, adjust the time frames, the percentage returns you wish to make per month, etc. This is a plan which demands patience and lots of discipline. If the figures are truly outstanding and look achievable, why are many traders not there yet? The reason is simple. Many traders do not mitigate their risk.
They aim for home runs in their trade, looking for that one huge payday. They look at the glamorous cars they can buy with the huge payout, or the things that money can buy and cannot deny themselves the lure of instant gratification. Slow and steady will always win the race when it comes to trading. The hidden principle to achieving what you see on the spreadsheet is compound interest.