6/19/2009 WSJ
NEW YORK -- Options exchanges have started to list options on Warren Buffett's Berkshire Hathaway, allowing investors to speculate on a stock that trades for thousands of dollars per share.
The Chicago Board Options Exchange launched trading on the options Thursday, becoming the first exchange to do so. The options convey the right to buy and sell shares in Berkshire Hathaway's Class B stocks, also known as Baby Berkshires.
Those shares closed Thursday's session at $2,829 -- losing $45 or 1.6%. They represent the most expensive stock on which options at the CBOE are traded.
Another options exchange, the Philadelphia Stock Exchange, plans to follow suit and is scheduled to list options on Berkshire Hathaway on Monday, said a spokeswoman from Nasdaq OMX, which owns the exchange.
While investors typically use options to participate in market activity without having to put up large amounts of cash to do so, the options on Berkshire Hathaway are relatively expensive.
The July $2,800 call options, for example -- the most popular contract on Thursday -- closed at $110.90. And since options convey the right to buy or sell stock in lots of 100 shares, that means just one of the July calls would cost $11,090. Calls convey the right to buy the stock, while puts convey the right to sell it.
Since the contracts are so expensive, they will most likely attract a roster of sophisticated investors with lots of capital to manage.
Some strategists said investors might want to consider selling put options in Berkshire Hathaway. That way, they can collect a premium from the sale and use the proceeds to help offset the cost of the pricey shares.
"These options are probably a better sale than a buy," said Oppenheimer & Co. chief options strategist Michael Schwartz. "If you sell the puts, you effectively buy the stock at a discount."
The Berkshire Hathaway options mark an evolution in the options industry, whereby market makers -- professional traders who take the other side of investors' orders to buy and sell the options -- feel capable of managing the risks associated with such expensive contracts.
Barclays's Barclays Capital is serving as the designated primary market maker for the options traded on CBOE, while Susquehanna Financial Group will serve that role for contracts traded on the Philadelphia exchange.
Because of the risks the market makers shoulder -- namely, having to quote prices for options whose values could quickly change by several dollars -- CBOE granted Barclays Capital a type of waiver. While CBOE typically forces market makers to quote bids and offers within $5 of each other, they removed that requirement for Barclays.
As a result, the prices at which investors can buy and sell the options could be noticeably different.
