Buffet's Annual Letter

It's must-read for every investor, and something to look forward to every February.  Buffet once again addressed the put options that he sold on a major US index that expire within 3.5 to 9.5 years.  From the sale of these puts Berkshire has acquired $6.3 billion worth of "derivatives float" as Buffet calls it.  I would call it $6.3 billion worth of options premium.  Many have criticized Buffet for getting involved in these derivatives contracts, but I think depending on the strikes these European options Buffet sold will likely expire worthless.

The way Buffet looks at his short long-dated puts are similar to the way that I look at mine.  Although mine are expiring within a year, I see them as a great way to sell stock insurance on the price of companies I wouldn't mind owning at the strike price minus option premium received.  For my short AAPL puts I would own AAPL at prices of between 160 and 173.  Meanwhile, while I wait for these strike dates I can use my cash balance to take other equity positions I like.  On this topic Buffet says: 

• Only a handful of our contracts require us to post collateral under any circumstances. At last year’s low point in the stock and credit markets, our posting requirement was $1.7 billion, a small fraction of the derivatives-related float we held. When we do post collateral, let me add, the securities we put up continue to earn money for our account.