MaverickBian

Berkshire Hathaway Credit Risk, Index Puts Are Overblown Worries

By the way, put writing and call writing is not favored by the hedge fund world. because these two investment strategies are 100% gamblers' speculation, no risk management at all, especially for call-writing one whose risk is unlimited.

In other words, you collect premium most of time, yet all of a sudden, you lose everything you bet and put writing and call writing belong to this category.

From this perspective, Buffett is not a good risk management investor but a pure speculator. Unless he has a cristal ball, nobody can see through 2019~2027, maybe Buffett can..

Berkshire Hathaway Credit Risk, Index Puts Are Overblown Worries

Just wonder, $4.6bn in CDS premium collection only pays out $4.7bn in the worst case scario. Maybe Buffett thought current market has reached the bottom, just like his investments in GS and GE cases.

Also, although put-writing business is not bearing unlimited risk, but compared to the premium he has collected, the built in leverage remains very large from 5 to 20, depending how close you're out of money.

Sure, European puts writing has no exercise issue, but based on its deminishing value, dealer/brokerage house may ask for more and more deposits or collaterals. And most importantly, hope until the maturity around 2019 or later, the world economy would not be as bad as now: if so, Buffett may lose his hard-earned pants if the strike price is high enough just like S&P at 1300+