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Investment Ideas Anonymous trader’s bet on S&P 500 recalls Warren Buffett’s wager, causes flap on options market

An anonymous trader caused a stir in the U.S. equity options market on Monday with a massive bet that recalled Warren Buffett’s famous wager on global stocks more than a decade ago.

The trader sold 19,000 put options on the S&P 500 Index obligating him or her to buy the market benchmark at 2,100 on Dec. 18, 2020, data from New York-based options analytics firm Trade alert showed.

As long as the index doesn’t drop more than 22 per cent from its current level of 2,582 by that date, the bet will earn the trader roughly $175 million in premiums.

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Buffett’s Berkshire Hathaway sold billions of dollars in stock index options between 2004 and 2008, betting that markets would rise over the next 15 to 20 years. Although the trades were made anonymously, they were eventually disclosed in regulatory filings.

Berkshire has taken in more than $4 billion in premiums on the options. The holding company has other contracts that have not expired, including a final tranche that will settle in 2026.

While Monday’s sale was nowhere near as large as Buffett’s, the trader could still lose more than half a billion dollars if stocks turn sour over the next couple of years.

For example, if the S&P 500 loses 34 per cent of its value by Dec. 18, 2020, the trader will rack up a loss of about $558 million, according to a Refinitiv analysis.

The market has been volatile in recent months, with the S&P finishing 2018 nearly 20 per cent lower than its record high in September, although it has recovered half that ground since.

Another lot of about 3,600 of the same puts traded on Monday, helping boost the total number of the contracts to about 24,000 on the day. Some 5,500 of the contracts also changed hands on Friday, according to Trade Alert data.

Some market participants guessed the trader was likely hedging against another position rather than betting outright that stocks will rise.

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“The natural sellers of long-term downside puts are structured products desks at banks, who are hedging exposure they get from retail clients who buy structured notes that have embedded short put options,” Benn Eifert, chief investment officer at QVR Advisors in San Francisco, said on Twitter.

“That would be my default guess on this.”

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