Been a month and a half since the last transaction for Berkshire’s (BRK.A) Buffett.
Buffett sold puts on 2.23 million shares at a $75 strike price for $6.35 each. Burlington Northern (BNI) closed today at $74.68. The option strike date is Jan .30th, 2009.
Disclosure (“none” means no position):None
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7 replies on “Warren Buffett Sells Jan. Puts on Burlington Northern $$”
Todd — love the blog.
Can you please explain Buffett’s strategy here to me in simple terms? Options are a foreign concept to me. Is WEB using this strategy to accumulate more shares of BNI via options, or for some other purpose? Why wouldn’t he just buy the shares themselves instead of using options, since BNI is priced on the open market at levels below where he’s bought it before? Thanks in advance for your help.
volatility is crazy ..when it gets that way, the sellers of option get huge premiums…
he made almost 10% on BNI selling the puts. he is selling them at a price he would buy the stock at…no brainer…
i love doing it that way
Todd — I need a little more detail as I am a novice on options. I posted this on another Web site. Is this correct for the one that expires today? Thanks for your help. -Bill
So let’s use the last item on the above list of WEB transactions to make sure I understand this. So on Oct. 6 WEB sold 1.3 million naked puts on BNI to someone. This says the price was $7.02. Does that mean the person/institution on the other side paid Berkshire about $9.1 million for the naked puts (1.3 million * $7)? And on the expiration date (today) that other party gets to “force” WEB to buy the 1.3 million shares at $80 a share? So the benefit for the counterparty is that he/she guarantees himself a payment of $80 a share. Presumably when this person bought the naked put the price of BNI was under $80 (or at least this person thought the price was going to be below $73 by the strike date — so the counterparty is essentially shorting BNI). And Buffett makes a little extra cash for Berkshire with the premiums while buying another 1.3 million shares at a price he thinks undervalues BNI? In other words, we should assume from the above that Buffett thinks that any price $80 or below represents sufficient margin of safety on BNI? Finally, did the counterparty initially own these 1.3 million shares and enter into the contract with WEB to ensure a price of $80? So Buffett will be buying these shares today, correct?
bill..
i sell a naked put to you on 1m shares for a $75 strike expiration 12/20 for $7.
so, for every 100 shares you pay me $700. If, on 12/20 the price of the stock is below $75, you can then make me buy them from you at $75. you make the difference between to current price and $75. If the price is above $75, the puts expire worthless and i just keep the premium.
The strike price is the meaningful cost #
Better?
Todd,
To further clarify:
The strike price – premium is the meaningful cost #. (I.e. 75-7 = $68 per share)
Bill,
(Using Todd’s example)
Sell Puts $7 * 100 = $700 premium in your pocket
Buy 100 shares @ $75 = -$7500 cost
Total (net)cost for 100 shares equals $6800 or $68 per share.
Conversely, if the stock price moves higher than the strike price by expiration (option owner does not exercise the option to sell) Buffett just pockets the $700 premium on the expiration date. He can then write more puts if he wants.
Thanks, Nick and Todd. It seems like this is a much better deal for the seller of the puts than the buyer. Why would the buyer do this? It must be someone who is extremely pessimistic about the direction of the market, or the direction of BNI in particular.
So the buyer of the put options must own whatever number of shares of BNI for which he’s buying puts, correct? For instance the buyer of the BNI puts that expired today must have had at least 1.3 million shares of BNI, and now they have to sell them to WEB for $80?
Thanks again guys.
Bill the buyer is purchasing insurance and, if he owns the underlying stock, hopes he won’t need it.