A while back a wise person on these boards suggested that selling calls when BRK was in the $350 range might turn out well. Since the stock is ~$300 the options are also down nicely and the question arises whether to buy them back early for ~10c on the dollar, as it were. Any opinions?
Rgds,
HH/Sean
Any opinions?
Sure, opinions are easy. I covered mine back in May. I had Jan23s and once I was able to capture about 60% of the premium I covered. I preferred to have the freedom to do what I wish with the underlying brk pledged against.
I actually bought a few shares today. Buying in the bottom quartile of price to peak book has historically worked out well. I just hope the future resembles the past.
Jeff
I sold a few call options with strike price 340, 350, 380, all expired in Jan/2023. Have not covered, will wait to the end.
Sure, opinions are easy. I covered mine back in May. I had Jan23s and once I was able to capture about 60% of the premium I covered.
I preferred to have the freedom to do what I wish with the underlying brk pledged against.
I too closed mine on the last dip. The majority of the maximum possible profit in a minority of the elapsed time.
But I thought about it afterwards…perhaps the question is not the remaining rate of return, but on what you think/now you would do in future.
Berkshire’s intrinsic value is going to rise only so much by year end, so that can be estimated.
If the price went back up to a high multiple of that sometime before expiry, would you still be a willing seller?
If so, why not get paid now, even if only a small amount, for committing to do what you were going to do anyway?
So letting them run off, collecting a modest rate of return on no additional capital committed, would make some sense.
A key observation is that a short option written against an existing stock position does not tie up any margin cash, nor increase your capital at risk.
The main argument for closing them for a tidy profit when given the early opportunity is only that prices go up and down. And up again.
If the price goes up again, you and I can sell fresh calls at a high price again, again “covering” the same block of underlying shares.
If someone doesn’t see themselves doing that round trim again, and still thinks they’d sell some
stock if we saw those high prices again, there is a case for letting the calls run to expiry.
After all, a little cash is better than no cash…if there is no downside.
The strange thing is that this line of reasoning leads to an odd proposition:
For someone who does tend to lighten up at high valuations (whether temporarily or permanently), it would be logical to write high strike calls at all times.
Even at quite low rates of return.
I am definitely a person who lightens up, and I don’t immediately see a hole in the reasoning, but I can’t bring myself to do that. Yet.
Imagine you buy a Christmas tree every year. You definitely plan to do so this year, and there is no financial or practical hurdle preventing it.
Now, somebody walks up to you in June offering to pay you to commit to buying a Christmas tree this year.
(not from him, not at any particular price, just in general a commitment to buy a tree).
It’s not a lot of money, so you’re tempted to say no. But why not?
In a way, it’s just one more demonstration of how the person who knows what something is actually
worth has a huge advantage, whether it’s a single stock, the broad US market, or coastal land in Florida.
There are lots and lots of ways to do well if you’re informed about the likely value of something.
The discussion on writing calls is just one among many.
Jim
I’ve been looking at BRK’s valuation to book over the last 5 years and how long it stays there. (Not long at high or low levels)
For long periods it sits in the middle of the range and rarely hits the high or lows.
In my mind herefore I’m using 1.1 as a base 1.5 as a high and 1.3 as a median for buy or sell decisions. 300 is 1.3 x book based off a historic book 230 per b. I think 1.3 will give me roughly 8-10% per annum 1.2 10-12%.
Back of the envelope stuff but would probably think about drip feeding in again now.
I’ve been looking at BRK’s valuation to book over the last 5 years and how long it stays there. (Not long at high or low levels)
For long periods it sits in the middle of the range and rarely hits the high or lows.
Just looking at the “last 5 years”.
Pre-covid the typical monthly price was 210-200 and held for a long period.
Any reason why you should not expect this to repeat?
GD_
It’s about market price before Jan 2023, not about IV, which would take much longer time to realize with high probability. My guess is that the chance of reaching 350 is no more than 50% in 6 months.
“Just looking at the “last 5 years”. Pre-covid the typical monthly price was 210-200 and held for a long period.
Any reason why you should not expect this to repeat?”
Retained earnings?
Jim says book value is growing c9% a year, on average I think. So if you buy at the median value you’ll get 9% growth of the share price on average unless there is valuation compression where book value continues to increase but the share price stagnates for a year or two. It’s happened before.
Just looking at the “last 5 years”.
Pre-covid the typical monthly price was 210-200 and held for a long period.
Any reason why you should not expect this to repeat?
You can get long stretches of flat price, for sure.
But value tends to keep on rising, meaning such stretches are times that the stock is getting gradually cheaper even without a price change.
So a long stretch pretty much has to start at a high valuation multiple.
Starting 2007-12-11, after inflation the price was lower 5.4 years late.
But the P/B started that stretch at 1.922 and ended at 1.367
So, to your question, why not expect it now?
Because the valuation level is cheaper than average today, not more expensive than average.
We could certainly see an extended flat spot starting now, but it’s pretty darned unlikely.
The price is $295.95 as I type, at 1.285 times peak-to-date known book.
It has been cheaper than this only about 29% of the time since the credit crunch.
And note that the current multiple is lower than the one at the END of the cheapening stretch mentioned above.
Jim
The strange thing is that this line of reasoning leads to an odd proposition:
For someone who does tend to lighten up at high valuations (whether temporarily or permanently), it would be logical to write high strike calls at all times.
Maybe…just not on days like today perhaps.
I think one would still want to base their decision to sell the call based on some level of valuation as you pointed out. Let’s say today you bought shares at $293 and your tea leaves say you don’t think Brk.b will trade over $360 in the next year. Now say you sell the Jun23 360 call for $7.50 against those shares. If for some reason the stock runs to $360 in a short period of time and you want to lighten up it might cost $35 to $40 to buy the call back, I think, based on the current NTM strikes. That’s a lot of upside to give up unless I’m missing something.
I personally would prefer to sell them when brk is trading in the upper quartile of valuation, but I still have my day job and don’t rely on my portfolio for income 
I might though if I don’t get some actual work done today instead of watching the market.
Jeff
But I thought about it afterwards…perhaps the question is not the remaining rate of return, but on what you think/now you would do in future.
A bull makes money, bear makes money. When you are being piggish about every penny, you lose money. I sold the Berkshire at $350, because most of it was in my IRA and I am okay to pay tax. Similarly the original intent was not to sell Berkshrie but to capture the potential downside with selling the call. When that objective is met, you closed the call.
Now, trying to fight for that penny is… to put it politely, projects often run in to failure because of “scope creep”.