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Buffett Gives Ammo to the Options Shorts?


But will it really weigh on the VIX?

Remember those kajillions of puts Warrenn Buffett sold a couple years ago? Well, here's an interesting spread for you: Buffett says that he bought back $2 billion of 20-year ~1500 strike puts versus selling 11-year, 990 strike puts for even.

It's tough to value puts out that far unless you're, well, Buffett - or a big trading desk. But I'm hearing that comes out to Buffett selling roughly 1.65 times the amount of 11-year puts for every one he bought back.

In order to hedge this trade, the dealer on the other side of the transaction would have to sell boatloads of vega out 11 years - specifically puts, as he's not long calls.

In theory, this transaction should weigh on longer-term volatility. Buffett's selling puts that have 11 years till expiration. It's doubtful he's hedging this. Selling puts is de facto selling insurance. Berkshire (BRK-A) is an insurance company to begin with; it's just business.

The dealers on the other side, however, will likely use this on their books versus other trades. It gives them ammo to short many a put with lots of time to go, to buy stocks, converts, bonds, or whatever against it.

But in reality, Buffett started selling buckets of longer-dated puts before the market implosion, and that didn't exactly weigh on the VIX. I doubt this roll will, either.
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