Berkshire Hathaway Options Trading May Facilitate Speculative Behavior

Published on June 17, 2009

Bloomberg has reported that the Chicago Board Options Exchange (CBOE) will begin offering options contracts on Berkshire Hathaway Class B shares starting tomorrow.  While options can occasionally be useful for hedging risks or engaging in arbitrage opportunities, they are also often used for speculative purposes that Warren Buffett would probably not approve of.  Indeed, the Bloomberg article quoted one money manager who believes the options may appeal to smaller investors:

“It’ll be interesting to see how much liquidity will be there, because it’s a fairly thinly traded underlying stock,” said Steve Sosnick, equity risk manager at Timber Hill LLC, the market-making unit of Interactive Brokers Group Inc. in Greenwich, Connecticut. “Because Berkshire is such an expensive stock there’s always a desire among retail investors to gain exposure to it with a smaller cash outlay.”

It is somewhat scary to think about the implications for an individual who lacks approximately $3,000 to purchase a single B share who decides to “gain exposure” to Berkshire via short dated option contracts.  While the options contracts may offer more sophisticated investors some opportunities, it is easy to see how an active options market for Berkshire stock could be used for speculative practices.

Of course, this is not unique to Berkshire Hathaway.  Most individual investors who trade stock options to speculate on short term stock price movements will suffer large losses in the long run.

Disclosure:  The author owns shares of Berkshire Hathaway.

Berkshire Hathaway Options Trading May Facilitate Speculative Behavior
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