My Age of Investment
One Thousand and Eleven, chop at the waist or at the ankle?
"Wells Fargo, 100 million put options contracts, trade strike price $15 per share, one-year term, $2 per option premium."
Xia Jingxing sat in his office, looking at the options trading contract sent by Goldman Sachs with great interest. The document also specifically noted the seller—Berkshire Hathaway.
He rubbed his eyebrows. Old Man Ba actually wanted to take a trip into this muddy water. Is it possible that everyone is scared now?
Liu Hai sat opposite Xia Jingxing, immersed in analyzing the contract carefully.
After a while, he raised his head and said, "This business can be done!"
Xia Jingxing didn't answer, opened the cigar box, handed a cigar to Liu Hai, then lit a cigar himself and started puffing away.
Liu Hai also lit a cigar, and he explained his point of view while smoking: "From now on, to the end of January 2009, within this year, as long as the stock price of Wells Fargo is lower than $15 minus the $2 option premium, it will That is to say, if it is less than 13 US dollars, we will make a profit.
If Wells Fargo's stock price falls to $10 within the next year, we can buy it from the market at $10 and then sell it to Mr. Bar at the contract price of $15.
After deducting the option fee, each share can earn $3, and 100 million shares is a profit of $300 million.
The principal we invested is the US$200 million in option premiums, and the rate of return can reach 150%.
In addition to exercising the option at expiration, if Wells Fargo falls sharply before the option expires, the option price will rise sharply. We can sell the put option in hand at a price of US$3, US$4 or even higher, without having to Wait until the option expires.
This can lock in profits in advance and avoid the risk of profit taking and losses caused by a rebound in stock prices later. "
President Xia Jing blew out a big smoke ring and thought carefully in his heart.
Liu Hai talked about the two profit methods of put options, but did not mention the loss methods.
Under what circumstances will you lose money?
If Wells Fargo's stock price does not fall below $15, Vision Capital will naturally not be able to engage in a loss-making business of "buying stocks for $16 or higher and then selling them to Buffett for $15." It will have no choice but to give up the exercise. .
The $2 option premium was thus wasted, and Buffett's side made a profit, netting $200 million from selling 100 million put options.
This transaction was formed based on the two parties’ different judgments on the trend of Wells Fargo’s stock price in the next year.
Whoever has a better vision will cut the other side's leeks.
Xia Jingxing held a cigar in his mouth and said with a smile: "Do you think Wells Fargo can fall to US$10 in the next year? Or the break-even point is US$13?"
Liu Hai replied seriously: "Wells Fargo's stock price is currently fluctuating around $28, and the drop must reach more than 50%.
Normally, this is difficult to achieve, otherwise Buffett would not sell such put option contracts.
However, if the subprime mortgage crisis breaks out with unprecedented force this year, it is still very likely that the stock price will be cut in half. "
Xia Jingxing nodded lightly. In his memory, Citibank was probably the one with the worst fall among the five major banks. It was even cut to the ankles.
As for the performance of Wells Fargo, he vaguely remembers that it is much better than Citibank. Whether the stock price will be cut in half, he thinks it is a high probability event.
In this put option agreement signed with Buffett, he felt that his certainty of winning should be 60-70%.
Even if his judgment is wrong and Vision Capital loses, it will only lose $2 in option premiums, and the loss will be limited.
But the profit potential is infinite, and can even reach several times or dozens of times.
If the share price of a certain stock drops to US$1, and they sell it to Buffett for US$25 in accordance with the agreement, the other party will lose US$2.4 billion for 100 million shares. Even if the option fee is deducted, the loss will be just over US$2 billion.
Thinking of this, Xia Jingxing took out several other contracts with a smile and read them one by one:
"Citibank, 100 million put option contracts, transaction price is $25 per share, term is one year, and each option premium is $2.50."
"JP Morgan, 100 million put option contracts, trade strike price of $22 per share, one-year term, premium of $2.25 per option."
"Bank of America, 100 million put option contracts, trade strike price of $19 per share, one-year term, premium of $1.85 per option."
"Wachovia Bank, 50 million put option contracts, trade strike price is $18 per share, term is one year, and the option premium is $1.60 per share."
…
Liu Hai took a long puff of cigar, then smiled and praised: "Buffett is really generous. He has purchased a total of 450 million put options for the five major banks, with a contract value of 9 billion US dollars. He can receive a total of 940 million US dollars in option fees.
If the share prices of the five major banks had not fallen by more than 50% this year, he would have easily pocketed the US$940 million, a business without capital!
Even if the decline reaches 55% or even 60%, the $940 million in option premiums can offset almost all losses, or a small loss.
Only if the decline reaches more than 60% or even greater, Buffett will suffer a huge loss.
But extending the timeline to three years, five years or even longer, value investing should be able to make up for all losses. "
Xia Jingxing smiled. The three examples Liu Hai gave actually represent three probabilities. Maybe in Buffett's mind, they are a ratio of 7.21.
That is, there is a 70% probability of making a profit of US$940 million, a 20% probability of making no loss or a small loss, and a 10% probability of a big loss...
This 10% probability of big losses is based on the overall decline of the five major banks reaching more than 60%. The greater the decline exceeds 60%, the greater the losses.
I have to say that Buffett's calculations are quite accurate.
"Buffett is still a bit stingy. The five major investment banks and AIG actually didn't take a fancy to it."
Xia Jingxing's tone was full of regret, because he felt that Old Man Ba was too cunning. Bank stocks were more stable than investment banking stocks in every aspect. Choosing to compete with Vision Capital in bank stocks would undoubtedly have lower risks. It can be seen that Old man Ba still didn't feel dizzy.
In addition, the other party did not take a fancy to AIG, which is also an insurance company, which is even more interesting.
Liu Hai smiled and said, "The five major banks in China are the Workers, Peasants and China Establishing Diplomatic Relations. This is much more stable than the stock price of any securities company, isn't it?
It may not rise sharply, but there will be a bottom line when it falls. Buffett's bottom line is that it will be cut in half. "
Xia Jingxing nodded lightly, "Yes, this is our two different views on the market outlook.
I guess Old Man Ba is happily eating hamburgers and drinking Coca-Cola right now, and he is still complaining in his heart: I don’t know which fool bought so many put options, what a good guy! I make enough money to eat hamburgers for the rest of my life. "
Liu Hai laughed loudly, "It's not that exaggerated! They also have risks, but in his opinion, the risks are controllable!"
Xia Jingxing chuckled, stopped mentioning this, and asked about other things.
"In addition to short-selling the underlying stocks, we also have US$6 billion betting on put options. If five more old guys come, we should be able to finish the bullets."
"It's not that easy. There are only a few Buffetts in the United States, and other institutional investors are not so generous."
Liu Hai shook his head first, then sighed, "There is also the issue of positions. Taking Bank of America as an example, the total share capital is 8 billion shares, and the 160 million put options can account for 3% of the total share capital.
We estimate that we won’t be able to use up all the US$6 billion, and we will have to continue to short-sell the underlying stocks.
There is an upper limit on the profit from short selling the underlying stock, and it will not exceed 100%.
But we have no choice, only this short-selling tool can carry more funds. "
Xia Jingxing didn't speak and sighed slightly in his heart. This was due to the large amount of funds, so they could only use various financial tools such as short-selling the underlying stock and buying put options.
In addition, some funds need to be dispersed to stock index futures. Otherwise, all positions will be concentrated on these large financial stocks, which will have a clear upper limit of income. It is also very dangerous and easy to be short squeezed.
"Dududu~"
The phone on the table suddenly rang. Xia Jingxing glanced at it and saw that it was Jiang Ping.
As soon as he answered the phone, a hurried voice came from the other end: "Jing Xing, look! The Federal Reserve has cut interest rates! The U.S. stock market has rebounded!"
Xia Jingxing turned on the computer and was speechless for a moment. The screen was filled with green and flashing green light.
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