Equity Derivatives No More – Warren Buffett

Let’s take a deeper dive into Warren Buffets portfolio. Equity-index put options written by Berkshire Hathaway Inc. have started to expire and the remaining options will expire by January 2026. His firm originally initiated these deals between 2004 and 2008 to bet that stock prices would rise in the long run. Not only that, but the options all tied up together added a total of $2.4 billion to earnings from 2008 to 2017.

Analysts say, “This is a really unique piece of business. Not a lot of companies besides Berkshire could have written this business. It demonstrates the unique power of this franchise and their size. Things were a little haywire where banks were going belly-up and there was a lack of confidence in the financial markets and Buffett was betting on some degree of rationality coming into things.”

Buffett has also exited from his past credit-default agreement in 2016. His contracts are also European style, meaning they can only be exercised at expiration date. To date, Berkshire has received $4.2 billion in premiums upfront on options that it has put to work for more than ten years. The derivative bets have created volatility in quarterly earnings and Buffett saw a mispriced opportunity where Berkshire could make money because people were going to pay more for this insurance than it was going to cost Berkshire. His equity put options were just a slice of his derivative exposure that’s been winding down. He struck a deal to terminate some contracts tied to municipal bonds in 2012 and paid $195 million in July 2016 to exit the last credit-default agreement. Keep in mind, his energy business still uses derivatives to manage swings in the price of fuel.

On a separate note, Berkshire Hathaway Inc. is also known to strike deals with companies seeking safe haven and has found ways to invest a pole of more than $100 billion in cash and U.S. treasury bills. Investors following Berkshire should keep in mind that a lot of business has been running away and in need for new opportunities.