ikkyu

Let Warren Buffett Handle Your Portfolio

[Initially published at World Beta]

Greeting Folks,

I am a huge fan of Mebane's stuff and this site has taught me a lot. Thus, I just want to go through an example to see if a pure alpha extraction of a Buffet port is going to work.

Here is how I break it down with today's numbers for a $100,000 port on prices and margin for today. Consider two options. The first might be buying SPY one year at-the-money options. Right now, they would cost about 15% of the port and that is only with a delta of 50 (i.e. an imperfect hedge). You could use emini S&P futures. You would need about 2 and a quarter contracts and your initial maintenance margin would be $13,923( at Interactive Brokers), or roughly 14% of the port, if you could have fractional contracts). You would be asked for more margin if the trade was going your way. You also lose about 1% a year for yours service and there are the trade transactions. I don's see how this is going to work. 3:1 leveraged ETF would require at least 33% of the port (and would work horribly).

Your example had a 50% hedge so that would require about 7.5% of the port value to hedge with a return of 7.4%? Whoops…. You would be at least minus 1% with your service fee. That is assuming your hedges went well (they aren't always so tidy).

I would take a good look at the alpha extraction sales pitch. It doesn't seem to add up to me. Am I missing something?

Cheers from Osaka,
john

Warren Buffett, Derivatives Speculator?

Hey my friend,

Buffett typically sells calls to pay for puts (i.e. collar). This is just about as conservative as any strategy gets! He has been invovled with derivatives for years and years( and that is not a bad thing).
Cheers from osaka,
john