The transactions on Oct. 8 include two types of contracts. One is 1.19 million shares of puts at the premium of $7.03 per contract. The put option is exercisable until Dec. 9, 2008 at the strike prices of $80 a share. The other is 761,111 shares of put at $5.78 a share. It is exercisable until the same date at the strike price of $77.
The explanation in the filing says: “The put options were written by National Indemnity Company (NICO), a subsidiary of OBH, Inc. (OBH). OBH is a subsidiary of Berkshire Hathaway Inc. ( Berkshire ). As OBH and Berkshire are each in the chain of ownership of NICO, each of Berkshire and OBH may be deemed presently to both beneficially own and have a pecuniary interest in all securities of Burlington Northern presently owned by NICO. Warren E. Buffett, as the controlling stockholder of Berkshire , may be deemed presently to beneficially own, but only to the extent he has a pecuniary interest in, the Burlington Northern securities presently owned by NICO. Mr. Buffett disclaims beneficial ownership of the reported securities except to the extent of his pecuniary interest therein.”
Warren Buffett has been using put options to buy the stocks he likes to own at a lower cost. Although he is against using derivatives, but he did frequently sell put on the stocks he likes to own. As pointed out by users, if you like to buy stocks by selling puts, you need to make sure you have the cash to buy the stocks when the stocks are put on you. Not having enough cash is certainly not a problem for Warren Buffett. Instead too much cash is his problem.
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User Comments:
1. Extramiler says on Oct 12, 2008 at 8:23 AM:
Warren Buffett's famous comments about derivatives had little or nothing to do with exchange traded options, which have margin requirements to make sure that the party selling the option (like WEB) can fulfill its obligations. WEB objected to exotic and unregulated options where a company such as AIG could write unlimited credit default swaps for example, and then not have the wherewithal to fulfill their obligations if necessary. Unlimited, unregulated options built a house of cards that is tumbling down, just as WEB and Munger predicted. So do not criticize Buffett for using these plain vanilla options -- that is not what he was talking about.
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2. Sami says on Oct 12, 2008 at 12:24 PM:
this is a style drift for Buffett in the last few years. He is writing so much puts and opening himself up to a black swan event in BNI and the S&P.
Buffett has plowed through most of his cash reserves in deals lately so if an event happened that could see him go illiquid.
Obviously I am not second guessing him, who am I to do so but it is consistent with Buffett style?
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3. Doubleh says on Oct 12, 2008 at 1:14 PM:
He's taking advantage of current high level of fear in market by selling these puts. Berkshire is taking in approx 1Bil/mth so don't think cash will be an issue. In worst case, he could sell his fixed income investments.
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4. Nport says on Oct 12, 2008 at 8:41 PM:
I think it just shows that WEB is bullish long term. Why not take in cash on stocks that he would buy anyway to lower his cost of ownership. Smart move I say!
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5. Mustapha.nahouli says on Oct 14, 2008 at 9:54 PM:
I was reading DOW JONES NEWSWIRES today that said that Warren Buffett is reported to have sold put options on 1.22 million BNI shares.
"This is the third time in recent days that Berkshire Hathaway Inc. (BRKA, BRKB) reported selling put options on shares of the railroad company.
The latest option sold has a $75 exercise price and expires and becomes exercisable on Dec. 12, according to a filing with the SEC."
WOW...must be really bullish on BNI
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6. Solution says on Oct 16, 2008 at 4:46 AM:
Thats why I bought bni.
Hope the copy Buffet style works.
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8. Augustabound says on Oct 16, 2008 at 2:22 PM:
vuasu Wrote:
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> Buffett
Lol, I gave you 5 stars because that annoys me too.
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