Buffett’s Long-Dated Puts Stir Up Pricing Controversy

Warren Buffett sold a number of large, long-dated put options against various stock indices between 2004 and 2008, and while those puts are definitely liabilities, there seems to be a big disagreement about how much of a liability they should be reported as.

Options normally priced with Black-Scholes

Options are normally priced using the Black-Scholes equation, which takes a number of factors into account, including the asset’s underlying price, interest rate risk, and volatility. Dan McCrum, writing for FT’s Alphaville, does a great job explaining the nitty-gritty, but even without getting into how Black-Scholes works (or doesn’t, not everyone agrees...