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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Buffett gets in a bind over options

August 04, 2010 | About:

An interesting article from Reuters about how new legislation might effect Berkshire Hathaway's investments.

One small change in the law could make Warren Buffett's billion dollar bet on global equity markets look less like a winner.

Buffett's Berkshire Hathaway has sold billions in options since 2004, betting that stock markets would rise over 15 or even 20 years.

But a new law requiring most derivatives users to post collateral on trades could diminish potential gains to the point where Buffett could lose interest in keeping his bet. Options prices have been rising amid concern that Buffett might buy back the options he sold, traders said.

Even if rulemakers water down the financial reform law, banks may push Berkshire Hathaway to post collateral now that it no longer carries pristine triple-A credit ratings.

Berkshire Hathaway has prided itself on not putting up collateral on most of its options portfolio, even in 2008 when option values rose, triggering more than $5 billion in paper losses on the contracts he had sold.

Rising options values are likely to have triggered paper losses for Berkshire Hathaway in the second quarter as well. The insurer reports its results on Friday.

Buffett has repeatedly said he is not bothered by those paper losses, but posting collateral could be a problem. When Berkshire Hathaway sold the options, it received billions of dollars in upfront cash premiums. It can use that money as it pleases. If it had to put up collateral, it would effectively get a much lower return on that trade.

Full link here: _http://www.reuters.com/article/idUSTRE6734YK20100804

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

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