Goldman Sachs

We need Long Term Structured Option Contracts…need to LEAP into LEAPS

Leave a Comment / Broker Index Forecasts, Controversies, Derivatives Strategies, Investing Themes, Nifty, Reflections, Sensex, VALUATION / By Gaurav Parikh

I was just wondering…..Currently there is so much volatility in all markets,be it Equity or Commodities…due to earnings uncertainties,anxieties about health of global economy and Financial Systems

Most Experts are advising to think Long Term…Naturally…3 Years + atleast

Then why is it that we have Derivative Contracts structured only for a maximum of Three Months… for Long Term,we need to roll them over and over and over and over again ?

It’s time that we introduce Long Term Option Contracts…This will enable me to take a call on the Markets or a particular Stock or Commodity for a period of One Year and more by investing merely a fraction of what I would have to now in Spot

For example If I felt the Markets would improve in the next two years,I could buy a Nifty Call at Strike price of 2750 (Current Level) that expires in 2011 at a Premium of ,let’s say,Rs 225…Assuming Contract lot is 50,the contract Value is Rs 137500 and I would have to pay Rs 11250 as premium…That is my Cost….I now have the right,but no obligation, to exercise this Call

So if ,let’s say,Nifty moves up and is at 4000,somewhere in mid 2010,I can square of my contract and sell the Call,at a premium of let’s say,Rs 1025 and profit by Rs 800 which aggregates to Rs 40000 on the contract…a return of 356 % in a year or so !

The above is a hypothetical example and it can be argued that Option Premiums may quote at much higher % levels in this volatility…The Nifty Call of Strike 2750 may not be quoted at 225…but more at 500 perhaps or even more !…that’s an 18% premium !

Chicago Board Options Exchange (CBOE) has a registered product on these lines and they have trademarked it as LEAPS.It stands for Long Term Equity Anticipation Securities…This product is available in the form of Calls and Puts for 450 common stocks and Ten Indices and the Expiration Date can extend upto 39 months…In fact CBOE even has the VIX or the Volatility Index Options which is the market estimate of expected volatility and is which is computed from realtime S & P 500 Index Option Bid/Ask quotes

I believe the SEBI Advisory Committee for Derivatives has already suggested the introduction of Long Term Derivative Contracts…Why the delay in the Suggestion being adopted for Implementation ? The Operations Framework by Exchanges is already in place for Futures and Options so this should facilitate the Introduction of Long Term Expiration Contracts fairly easily read more

Did Value Investor and Living Investment Legend, Warren Buffett, invest US $ 5 Billion in Goldman Sachs in September 2008 for reasons other than Value !?

3 Comments / Broker Index Forecasts, Controversies, Derivatives Strategies, Insider Trading, Interesting News Sightings, Investing Themes, Investor Gurus, INVESTOR MISTAKES, Reflections, STOCKS, VALUATION / By Gaurav Parikh

On September 23,2008,Warren Buffett’s (WB) Investment Behemoth,Berkshire Hathaway (BH) announced it would invest US $ 5 Billion in preferred stock of Goldman Sachs and would receive 10% annual dividend.It would also be alloted warrants that would give it an option to invest a further US $ 5 Billion in Common Stock at a strike Price of US $ 115 to be exercised inside five years

This was seen at the time as a WB Confidence booster for the US Financial System and the Share Price of Goldman Sachs closed high at US $ 133 after the announcement

What it apparently was,was just a consequence of the tottering US Financial System….The Share Price of Goldman Sachs has since dived to close at US $ 69 yesterday with a Market Cap now at a low of US $ 27 Billion

There are strong suggestions that this Investment in Goldman Sachs is linked to the Mark to Market Loss Margins on the Bets on S & P 500 and three other Foreign Indices made by WB’s BH in 2007 when Dow Levels were around 13000…Dow has since dropped to 8500 levels

This is the Bets that WB’s BH has made in 2007…he has bet that in the next 15 to 20 years the S & P 500 and three other Foreign Indices would be at higher levels than around the levels at the time the bet was made..BH has used Goldman Sachs as the Broker and has sold Option Contracts of ‘Naked Puts’ and got a premium aggregating US $ 4.5 billion for underlying contract values of US $ 37 Billion to a group of undisclosed buyers

As BH has impeccable credit it was not required to put up any collateral margin at the time of the bet in 2007.However alongwith the Dow which has fallen to levels of 8500,so have all the four Indices on which the bets were made and there is a mark to market loss of around US $ 6.7 Billion till date and the Counter Parties were demanding that Goldman Sachs put up some collateral

Reportedly this Collateral has been provided and disguised by BH as an Investment of US $ 5 Billion in preferred stock of Goldman Sachs

Apparently Mislead Investors,mislead by leading Investment Experts and Investment Media had followed WBinto Goldman Sachs in September and October 2008 at over US $ 100/share…They have seen an erosion of 40% inside two months

SEC must investigate and exonerate WB if this is not true….but the blemish does remain that a Living Investment Legend like WB has drifted away from his Value Investment Philosophy and speculated with Index based Derivative Instruments…which he has constantly cursed as Weapons of Mass Destruction…the temptation was probably just too much and US $ 4.5 billion premium received looked at the time as money for jam…Of course if the Dow revives and crosses 13000 in the next 15 to 20 years,BH would be back in the money as there will be a recovery of the S & P 500 and the other three Foreign Indices too…till then it’s a notional loss supported by a collateral margin now read more

Gaurav's Blog

Categories