If you notice this sounds familiar that is because portions of this blog appeared in this space in November of last year. I dug through the Berkshire annual report and have updated the status of this running trade through the end of 2013. As expected the short equity put trade is doing much better as global equity markets continued to trade higher into the end of 2013. At the end of the third quarter the S&P 500 was at 1690 and it ended 2013 at 1846.
Four times a year Berkshire Hathaway submits a filing with the SEC that discloses their holdings. Most Warren Buffett watchers dig in to see what current holdings have been added to along with any new stocks that have worked their way into Berkshire Hathaway’s holdings. I dig into the filings as well, but I’m looking for something a little different. I want to see what’s up with the short put trade that Berkshire Hathaway initiated back in the 2004 to 2008 time frame.
Some people may be unfamiliar with the trade I’m talking about, but may be aware that Warren Buffett called derivatives financial weapons of mass destruction in the Berkshire Hathaway 2002 annual report. Part of the commentary around this thought had to do with Long Term Capital Management and the focus was more on over the counter derivatives. However, by 2004 Berkshire Hathaway began initiating a pretty interesting over the counter equity index derivative trade. They sold puts on major market indexes.
Between 2004 and 2008 Berkshire Hathaway entered into what is referred to in annual reports as their equity put trade. The firm sold over the counter put options that will expire 15 to 20 years in the future. These positions are on four major equity indexes (S&P 500, EuroStoxx 50, FTSE 100, and Nikkei 225). Also, Buffett has pointed out that these are European style options that may not be exercised until expiration.
Not a ton of information has been forthcoming about these specific positions. Buffett has noted that they are at the money put options written on those four indexes. Also, the timing was not too great as the majority of the trades were done between 2004 and 2007. A small number of trades were added in 2008.
Below is a weekly chart of the S&P 500 with different time periods highlighted to coincide with the progression of events listed below.