Doris Buffett held about $12 million in Berkshire Hathaway stock around 1987. The company does not pay dividends, and she needed cash flow. The broker suggested selling uncovered put options: collect premiums upfront and commit to buying shares if the price falls to the strike price.

On Black Monday, October 19, 1987, the Dow dropped 22.6% in one day, with a cumulative decline of about 31% from August to November. Put sellers were required to post additional margin during the crash, and positions could not be liquidated in time. Public records state that she defaulted on about $2.6 million to the broker, leaving about $2 million in debt, leading to personal bankruptcy; the Virginia broker also collapsed after the same group of clients defaulted.

At the time, she lived in Fredericksburg and did not tell Warren Buffett about this strategy, which she found "more exciting than the boring investments recommended by her brother." Charlie Rose later asked why she didn't call the world's most famous investor before entering the trade. Her response was: "I thought he would be very dismissive."

Buffett refused to pay to settle her debts, reasoning that the money would only go to her creditors and the broker who led her into the trade, effectively rescuing the speculative counterparties. He also never explained another legal way to cash out: borrowing against her Berkshire stock. It was only after inheriting her mother's Berkshire stock in 1996 that she began making small charitable donations as the Sunshine Lady.

In the same family, Buffett later sold long-dated index puts at Berkshire for about $4.9 billion in premiums over 15 to 20 years, pricing the contracts as reinsurance and emphasizing the distortions in long-term option pricing using the Black-Scholes model. The uncovered short-term puts in her personal account and the long-term sales backed by float in the company's account represent different risks.

In market mechanics, the buyer is a stockholder needing stable cash flow, while the seller is a broker packaging insurance premiums as "income." The event was driven by a single-day gap of 22.6%, with funds from the premium collector instantly flipping to liabilities that must be settled at the strike price. Benefiting were counterparties who bought cheap insurance before the crash; under pressure were those who exchanged irreplaceable principal for a coupon that could be worth zero at any time. The absence of dividends forced long-term compounding assets into short-term or potentially negative debt markets.

Source: Public Information