PBV of 1.37 of last 15 years.
It’s not cheap right now, IMO.
Three years ago it was cheap. I’m 20%+ CAGR on those.
Skews my thinking, maybe?
The PBV realtime is around (~1.32). That is slightly below average.
Whether BRK is cheap or expensive depends on what it does with the money. BRK has about $500m - $750m gushing in every week. It has $128B cash.
Both great problems to have, but the money is losing value to inflation.
What I did yesterday:
Bought Jan 2025 leaps $250 strike and paid $7500 per leap.
I will wait for a up day and sell a covered call against those leap and collect ~$1400 for Jan 2024.
In Jan 2024 roll this to 2025 and get (~$1400).
Leap matures in 2025 and you get the stock at $250 which is today’s ~1.14 PBV
Looks like you have an error in your calculations. Just like you will exercise the Jan '25 250 call to get the stock at 250, the person you sold the Jan '25 350 call to will exercise that option against you and take the stock from you at 350. Your gain will be 35000 - 25000 - 4700, or 5300, still a very handsome IRR of over 40%!
Last known book $215.73, so we’re at 1.38 currently.
Price to peak book (3/31/22) is 1.3.
I don’t put much store in price to peak book. The portfolio is down about $35Bn since.
The amount in the sheet is $360 (not $350).
Line 1 - On the first line, you BOUGHT a Jan '25 250 strike call for $7500, that gives YOU the right to buy the stock at 250 anytime between now and when that call expires (1/17/2025).
Line 2 - On the second line, you SOLD a Jan '24 340 strike call for $1400, that gives the purchaser the right to buy the stock FROM YOU anytime between then and when that call expires.
Line 3 - On the third line, you BOUGHT BACK the Jan '24 340 call and SOLD a new Jan '25 350 call for net cash of $1400. That Jan '25 350 call gives the PURCHASER the right to buy the stock from you at 350 at anytime between then and when it expires (1/17/2025).
In January of 2025, the stock will very likely be 360 or higher. The person holding the 350 strike price call that YOU sold to them will exercise it against you and BUY the stock from you for $350. That’s how options (in the USA) work.
People really need to educate themselves about how options work before dabbling in them. There are plenty of decent online places to do so, and it only takes a few hours of effort. There’s also an options discussion board here, but not nearly as active as it used to be now that they’ve effectively killed off most popular boards.
Another name for this trade is a “spread”, specifically a “bull call spread”. First a kind of calendar spread (where the two options, the short one, and the long one, have different expiration dates). And then later (after the roll) converted to a regular 250/350 bull call spread. With a bull call spread, the maximum gain occurs at the higher short option strike price, any price above that level adds no gain to the trade (because the owner of the short option you sold gets that part of the gain). In this particular example, if the stock is 360, you get the gain between 250 and 350, and the person holding the 350 call you sold gets the $10 above 350.
oh, I get it. You are assuming that it will be in the money. My projections are if the calls expire.
These covered calls and strikes are not placed yet. I am waiting for a big up day to place the first one.
No, YOU are assuming they will be in the money. The header of your second chart says “price on Jan-2025”. And the line in that chart you highlighted in blue has the price at 360 (in the money). And the numbers on that line and the three lines beneath it are incorrect (as explained above).
They expire on 1/17/2025, there’s no “if” about it. The question is if the holder of the option exercises it on or before that date. If the price is above 350, they will surely exercise them. That’s because they are rational investors, and besides, if they neglect to do it themselves, their brokerage will do it automatically for them.
I get what you are saying.
The $340 and $350 are expected covered call strike price. The strike price will be different when I execute them. Assume that the covered calls are out of money but the premium is right.
Given that assumption, do the numbers make sense ?
If you want decent money for the calls you sell, the furthest out you can go is maybe 370 strike. But even 370 is likely to be hit by Jan '25. The trade will yield you 44% IRR or so. And that’s assuming the roll goes well. There is a risk that in Jan '24 you can’t easily do the roll (i.e. it’ll yield less money to you).
It’s not a terrible trade, but maybe a plain old spread would be easier to deal with. Like a Jan '25 250/350 spread would cost you about $60 and likely have a profit of $40, or about 66% (32% IRR). Or even a quite conservative Jan '24 250/300 spread - cost about 38, almost sure to gain 12 for a 31% return in less than a year (38% IRR). The think I like most about spreads is that you can choose EXACTLY what level of risk and return you want.
I bought more BRK 2025 leaps today. What I was getting for $7500 yesterday was available for $7200 today.
I will sell covered calls on an up day in coming weeks when the market calms down.
when market calm’s down volatility will come down and impact the option prices, FWIW