Berkshire Hathaway — led by Chairman Warren Buffett — recently restructured its option positions, taking an array of new positions that will pay off, dramatically, if the stock market grows over the next decade by 15 percent from its present level.
Buffett had been burned by options during the global meltdown that preceded last year's presidential election, after betting $37.1 billion on options tied to global stock prices.
Many of the put options were on the S&P 500. Subsequent, massive losses led Buffett to famously quip that derivatives were "weapons of mass destruction."
According to a report in today's New York Post, the scuttlebutt in the derivatives business has been that Berkshire's new position was coming at a heavy cost, since the original positions were so deep in the red.
Like a struggling gambler doubling down, Berkshire purportedly sold a significantly larger number of short-dated contracts than the original transaction.
The potential risk of loss to Buffet during the next 10 years has actually increased, substantially, but only if the global stock markets dropped from current levels and stayed there.
Buffett on CNBC denied the Post report, saying that the contract changes had not cost him a penny. The trades will be detailed in the company's next SEC filing.
Barron's Magazine reported recently about Berkshire's declining fortunes.
Buffett's affection for a gaggle of financial stocks, including American Express, Wells Fargo, and U.S. Bancorp, are hurting his equity returns.
Berkshire has huge holdings in those firms, and the sizable declines in their share prices this year are dragging down Berkshire's (BRKA) vaunted equity portfolio, which totaled $76 billion at the end of the third quarter, the latest reporting period.
"We estimate Berkshire's equity portfolio could have dropped 14 percent in 2009," wrote Andrew Bary, a columnist at Barron's.
Buffett nevertheless reportedly has bought even more of some positions, including Wells Fargo.
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