By Chris McKhann
Apparently Warren Buffett really is a derivatives trader.
His Berkshire Hathaway (BRK.A) is poised to post its best quarter in two years, according to a Bloomberg story yesterday. The big driver behind this is Buffett's bets on derivatives -- yes, the very same derivatives that looked as if they might become his very own "financial weapons of mass destruction," as he once called this class of instruments. 
As we have detailed from the beginning, Buffett has sold a large number of puts on four major indexes starting in 2007: the S&P 500, the FTSE 100, the Euro Stoxx 50, and the Nikkei 225. He took in $4.9 billion, with a potential loss of more than $35 billion--but only if all four indexes were at zero come the expiration date (at which point we would be worrying about other things).
Despite the fact that Buffett started selling these puts at the worst possible time, when the market was topping and volatility was low, he has been climbing out of his hole as the markets have rallied and volatility has dropped back to saner levels. All of these profits and losses are on paper at this point, as he doesn't need to pay anything until expiration in at least 10 years.
Moreover, Buffett has the $4.9 billion to reinvest and profit from, which was really his purpose. He was just selling insurance, something he does very well.
Add to that the fact that he apparently rolled down some of these puts during the market decline, taking the strike price down but bringing in the expiration date for even money, and you have yourself one crafty option trader.
(Chart courtesy of tradeMONSTER)
