Warren Buffett's Index Put Trade Explained

Warren Buffett's index put trade is the largest option sale most traders have never seen the terms of. Between 2004 and early 2008, Berkshire Hathaway wrote long dated put options on four stock indexes, collected about $4.9 billion of premium up front, and owed its counterparties nothing unless an index closed below its starting level on one named day 15 or 20 years later. Berkshire's 2008 shareholder letter, dated February 27, 2009, put the combined notional at $37.1 billion, with the first contract due on September 9, 2019 and the last on January 24, 2028.

The contract terms below come from that letter and from the derivative notes in Berkshire's 10-K filings. The market mechanics come from live panels you can open and read.

What was in Buffett's index put trade?

A put option pays its owner when the underlying finishes below the strike price, and the seller keeps a premium for carrying that risk. If that is new, our guide to what a put option is covers the ground first.

Berkshire was the seller. The four reference indexes were the S&P 500 in the United States, the FTSE 100 in the United Kingdom, the Euro Stoxx 50 in Europe and the Nikkei 225 in Japan. Every contract was struck at the market: the strike was the index level on the day the contract was written, so the only question at expiry was whether the index finished above or below where it began. Terms ran 15 or 20 years.

Two clauses did most of the work. First, the contracts were European style, exercisable only at expiry, a distinction our note on American versus European exercise sets out. Neither party could elect to settle early, and only the price on the final day counted. Second, settlement was cash, computed once against that final level. The index path in between never entered the calculation.

The letter's own illustration runs like this. Sell a $1 billion, 15 year put on the S&P 500 with the index at 1300. If the index sits at 1170 at maturity, down 10 percent, the writer pays $100 million. For the writer to lose the full $1 billion, every stock in the index has to reach zero. The premium on such a contract, Buffett wrote, might be $100 million to $150 million, in hand and invested for the whole 15 years.

Why the collateral terms mattered more than the premium

The $4.9 billion arrived once. What made it useful was that it stayed. Counterparties paid at inception, and the contracts called for almost no collateral when the marks moved against the position.

Only a small percentage of our contracts call for any posting of collateral when the market moves against us. Even under the chaotic conditions existing in last year's fourth quarter, we had to post less than 1% of our securities portfolio.
Warren Buffett, Berkshire Hathaway shareholder letter, February 27, 2009

Across all of its derivative positions, Berkshire counted $8.1 billion of derivative float at the end of 2008: premiums received less losses paid, invested in the meantime. A short option position in a brokerage account works the other way around. The broker marks it every session and raises the requirement as the position moves against the account, which is the machinery margin for selling naked options walks through. The uncollateralized contract is the piece of this trade with no retail equivalent, and it is the piece that turned premium into a decade of investable cash.

What has to happen for a 15 year index put to pay off?

Struck at the market, a 15 year index put pays only if the index sits lower 15 years later. The panel groups every 15 year stretch measurable in the daily record of SPY, the largest S&P 500 tracking fund, by where the index finished against where it started.

WITH monthly AS
(
    SELECT
        toStartOfMonth(date)           AS month_start,
        argMax(toFloat64(close), date) AS month_close
    FROM global_markets.stocks_daily_aggs
    WHERE ticker = 'SPY'
      AND date >= '2003-01-01'
    GROUP BY month_start
),
windows AS
(
    SELECT later.month_close / earlier.start_close AS multiple
    FROM monthly AS later
    INNER JOIN
    (
        SELECT
            addYears(month_start, 15) AS month_start,
            month_close               AS start_close
        FROM monthly
    ) AS earlier USING (month_start)
)
SELECT
    multiIf(multiple < 1, 'below the strike',
            multiple < 2, '1x to 2x the strike',
            multiple < 3, '2x to 3x the strike',
            multiple < 4, '3x to 4x the strike',
            multiple < 5, '4x to 5x the strike',
                          '5x or more') AS outcome_bucket,
    count()                             AS window_count,
    round(min(multiple), 2)             AS lowest_multiple,
    round(max(multiple), 2)             AS highest_multiple
FROM windows
GROUP BY outcome_bucket
ORDER BY lowest_multiple

The outcomes fall into 4 buckets. The weakest 15 year stretch in view still finished at 2.19 times its starting level, and the strongest at 6.87 times. Read the limits of that sample carefully: the daily record queried here starts in 2003, so every window in the panel ends in 2018 or later. Longer history elsewhere looks different, and Japan's own index spent the better part of three decades below its 1989 high, which is exactly the kind of stretch that leaves a 15 year at the money put in the money at expiry. The panel is a record of what happened, not a probability estimate.

Why did the position swing reported earnings by billions?

Nothing settled for a decade, yet the position moved Berkshire's income statement every reporting period. Derivatives are carried at fair value, and each change in that value runs through earnings. At the end of 2008, Black-Scholes valuation put the liability on the equity index puts at $10 billion. Set against the $4.9 billion of premiums received, that produced a reported mark to market loss of $5.1 billion on contracts that could not be exercised for at least another decade and had cost Berkshire no cash at all.

The mechanism outlived the trade. Since 2018, changes in the value of Berkshire's equity portfolio have run through reported earnings the same way. The panel sets annual reported net income against the cash the operating businesses generated.

SELECT
    toString(period_end)                                                                  AS year_end_date,
    toString(toYear(period_end))                                                          AS year_label,
    round(argMax(net_income, (filing_date, period_end)) / 1e9, 2)                         AS reported_net_income_bn,
    round(argMax(net_cash_from_operating_activities, (filing_date, period_end)) / 1e9, 2) AS operating_cash_flow_bn
FROM global_markets.stocks_cash_flow_statements
WHERE hasAny(tickers, ['BRK.A', 'BRK.B', 'BRK-A', 'BRK-B'])
  AND timeframe = 'annual'
  AND period_end >= '2015-01-01'
GROUP BY period_end
ORDER BY period_end

In 2015, reported net income came to 24.41 billion dollars against 31.49 billion of operating cash flow. In 2024 the same pair read 89.56 billion and 30.59 billion. Compare the two lines across the 10 years on the chart. The cash line is the operating business. The earnings line carries the marks as well.

Buffett's case against Black-Scholes on very long options

The 2008 letter used the puts to make a wider argument about valuing options that run for decades.

If the formula is applied to extended time periods, however, it can produce absurd results.
Warren Buffett, Berkshire Hathaway shareholder letter, February 27, 2009

His test case was deliberately extreme: a 100 year, $1 billion put on the S&P 500 struck at 903, the index level on December 31, 2008. Using the volatility assumption Berkshire applied to its long dated contracts, Black-Scholes produced a premium of $2.5 million. Priced by expectation instead, with the probability of the index being lower a century out set at 1 percent and a 50 percent decline assumed if it happens, the expected payout is $5 million.

The objection is about the input. Volatility measured from how a market moved over recent days or months gets extrapolated across a century, and the two have little to do with one another; the difference between those measures is the subject of historical volatility versus implied volatility. His conclusion in that letter was that Black-Scholes overstated the liability on the long dated puts, with the overstatement shrinking as the contracts approached maturity. He also wrote that Berkshire would keep using the formula in its financial statements regardless.

How did the index put contracts run off?

The schedule disclosed in 2008 ran from September 2019 to January 2028. It did not survive intact. Berkshire restructured part of the book with its counterparties over the following decade, and the disclosed maturities came forward. The FY2019 10-K left $14.4 billion of notional carried at a $968 million liability at year end, with a weighted average remaining life of 1.8 years. The FY2020 note carried $11.0 billion of notional at a $1.07 billion liability, with substantially all open contracts scheduled to expire by February 2023. Set that $968 million liability against the $4.9 billion of premium and the arc is visible: the paper loss of 2008 had unwound well before the contracts matured.

The four indexes did not travel together, which is why the index and currency mix mattered at each expiry date. The panel rebases two dollar priced funds, one tracking the S&P 500 and one tracking the Euro Stoxx 50, to their first year in the record.

WITH yearly AS
(
    SELECT
        ticker,
        toYear(date)                   AS calendar_year,
        argMax(toFloat64(close), date) AS year_close
    FROM global_markets.stocks_daily_aggs
    WHERE ticker IN ('SPY', 'FEZ')
      AND date >= '2005-01-01'
    GROUP BY ticker, calendar_year
),
base AS
(
    SELECT
        ticker,
        argMin(year_close, calendar_year) AS first_close
    FROM yearly
    GROUP BY ticker
)
SELECT
    y.calendar_year                                                       AS year,
    round(maxIf(100 * y.year_close / b.first_close, y.ticker = 'SPY'), 1) AS sp500_fund_rebased,
    round(maxIf(100 * y.year_close / b.first_close, y.ticker = 'FEZ'), 1) AS euro_stoxx_fund_rebased
FROM yearly AS y
INNER JOIN base AS b ON b.ticker = y.ticker
GROUP BY year
ORDER BY year

Both lines start at 100 in 2005. By 2026 the S&P 500 fund reads 614.1 and the Euro Stoxx 50 fund reads 161. A put struck at the panel's opening level finishes worthless at either of those readings, and the first expiries in 2019 arrived with the American index far above the levels of 2004 to 2008. The distance between the two lines is why Berkshire quoted its notional at current exchange rates: a dollar based writer of a Nikkei or Euro Stoxx put carries the index and the currency in the same contract.

Could a retail account run this trade?

No, and the gap is structural rather than a question of size. The longest listed contracts, the LEAPS options, run about three years out, so the maturity itself is unavailable. A retail short put posts margin from day one and is marked every session, so the premium never becomes float. The terms Berkshire negotiated, with no meaningful collateral against tens of billions of notional, were extended to a AAA rated balance sheet that could credibly promise to pay in 2028.

That is the honest reading of the position: what made the premium behave like float sits in the contract terms, not in a market call. The bulk of these contracts were written before the 2008 crash and marked at their worst during it, the same window covered in the 2008 market crash and in buying when others are fearful.

FAQ

What was Warren Buffett's index put trade?

Berkshire Hathaway sold long dated put options on the S&P 500, FTSE 100, Euro Stoxx 50 and Nikkei 225 between 2004 and early 2008, collecting about $4.9 billion of premium against $37.1 billion of notional. Each contract paid the buyer only if the index closed below its starting level on a single expiry date 15 or 20 years later.

Did Berkshire lose money on the equity index puts?

The 2008 accounts showed a $5.1 billion mark to market loss, a valuation entry rather than a payment. By the end of 2019 the recorded liability on the remaining contracts was $968 million against $4.9 billion of premium collected.

Why could the puts not be exercised early?

They were European style. Exercise happens only at expiry, and the closing level on that one day decides the payment. An American style option, by contrast, can be exercised in any session before expiry.

Why do options positions swing reported earnings?

Derivatives are carried at fair value, and the change in that value runs through the income statement each reporting period. A position with no cash movement for a decade can still add or subtract billions from reported earnings, which is what the equity index puts did from 2008 onward.

Can a retail trader sell index puts the way Berkshire did?

Not in the same form. Listed index options run to about three years at most, and the uncollateralized terms Berkshire negotiated are not offered to brokerage accounts. This post describes a historical position for educational purposes and is not a strategy to copy.

Every panel above ships with the SQL that produced it. Open one, change the ticker or the window, and ask the same question on the Strasmore terminal.