Warren Buffet's New Scam Is Also Quite Brilliant

Warren Buffet continues to make some very impressive moves for Berkshire Hathaway (BRKA). A couple weeks ago I mentioned that his preferred purchases from Goldman Sachs and GE were now, essentially, insured by the government. So he's got $8.3 billion paying 10% risk-free, with some warrants thrown in just for fun. In the meantime, he's been selling a bunch of puts on Burlington Northern Santa Fe Corporation (BNI), a stock which Berkshire Hathaway is a major holder of. While this is a small move relatively speaking, it is a clever example of how Buffet is printing money for himself and Berkshire Hathaway stockholders (SWEET!) - Here's how this works:

Selling Puts? - The holder of a put has the right to sell a stock at a stated price at a stated future date, regardless of the current market value of the stock. A put holder makes money when the stock goes down, since they can still sell the stock at a higher price. Of course, the holder of the put must pay some price for the right to do this.

For Example, Buffet sold 1.2 million shares worth of BNI puts on October 10th for $7.09 a share, with a stated price of $75 dollars a share and an exercise date of December 12th. So, if the stock stays above $75 dollars between now and December 12th, then the puts are worthless, and Buffet pockets the $8.5 million bucks. If the stock drops below $75 dollars, then Buffet will be paying $75 a share for the stock, but since he's already collected $7.09 a share, he's really only paying $67.91. Nice discount.

Now here's the fun part - volatility these days is ridiculous on the market, so these puts are selling for a lot more than they should. Buffet collected $30.4 million bucks selling BNI puts, which are all currently worthless to the holders because BNI is trading in the mid-$80s. And, of course, the stock won't come back down because everyone knows Buffet is a buyer of the stock, so they surely won't sell their shares for less than $80. Better still, Buffet wants to buy these shares anyways, so he's really just giving himself a big discount, and will be keeping the price up above $80 to keep the $30 million in Berkshires Wallet.

This is really just another reminder that:

1. Warren Buffet has enough money and press to make moves none of us can make, so buy Berkshire Hathaway stock and ride the wave.

2. Buying puts in BNI for $80 or less (or god forbid, shorting the stock) makes you a moron.