Derivatives, like all investments, are not inherently good or evil but instead depend upon the risks contain within each contract and the pricing paid or received for entering into the agreement.  At Kennon Green Enterprises, our derivatives trading operations focuses on very specific types of transactions in which we are not subject to counter party performance and that represents a small portion of our total overall capital if all contracts written or purchased by us were to go to zero simultaneously.

This discipline is absent at most investment firms (indeed, some would argue we are being unnecessarily conservative to the point of stupidity).  That’s fine and we recognize that.  Given our past record of growing the business and earning returns on non-leveraged equity far in excess of the average American corporation, we are perfectly content with such an approach.  It comes down to what we believe is our first and most important job: To never lose money. It may seem simple but it is effective.

Typical derivative transactions can include plain vanilla activities such a trading call options, selling covered calls, and writing put options.  In most cases, we are looking to generate incremental returns and add a few percentage points to our annual compounded growth rate.  As volatility hit unprecedented highs during the total market collapse in March 2009, pricing on derivative contracts has become extraordinarily rich, allowing our businesses to earn far more than historically possible.  Our opportunistic approach allowed us to benefit from this temporary situation, putting in place contracts that management believes will make us more than sufficient profits over the coming months and years.