BRKB price/interest

Is anyone adding here or looking at LEAPS? The B shares were only sub 280 value for about a month mid summer. I added a bit yesterday and am thinking about buying more DITM calls Jan. 2024. Imagine more general downtrend. but the BRK market discount seems attractive again here and I imagine WEB is or may be repurchasing soon. Thanks!

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Schwab told me the Jan 2025 Leaps will start trading on 9-12.

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I bought up a bunch of LEAPS in June, and have 9/12 on my calendar as a day to roll them over to 2025 durations. The date is also listed on CBOE’s calendar. I have more LEAPS than normal so I’m not sure I’ll be doing any buying unless goes below 52-week low.

Low prices like we have now make for a good time to sell puts too. I like ones right around 1.1x highest book value to date, and about a year out. I figure book value is likely to increase during the year, making it a bet that the stock won’t trade below book value on expiration day. Sure Berkshire has traded slightly below book value at times, but not for months at a time, and you don’t usually suffer any consequences if it temporarily trades below your put value before the expiration month.

Low prices like we have now make for a good time to sell puts too. I like ones right around 1.1x highest book value to date, and about a year out.

You get very little return on the net cash set aside. Currently annualized return on an ATM $280 June2023 is 10.2%. For a June 2023 $230 put (approx 1.1 Last qtr PB) the annualized return is 4.1%.

Looks like there is very little fear among BRK holders and nobody wants to buy puts.

It is best to sell Puts on stocks where fear is high, thus premiums are juicy, and you have a contrarian view on the company’s prospects. You don’t mind the stock being put to you or earn a juicy return if not. I look for opportunities where annualized return ATM is near 20%.

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Is anyone adding here or looking at LEAPS?

I am somewhat embarrassed to admit that I am now 100% LEAPS for my position, I’m down to zero plain BRK stock.

Remember: leverage is the only way smart people go broke.
Not that smart, of course, because really smart people know that and don’t go broke that way.

My expectation is that I will continue to have very high rates of return on my sundry Berkshire positions until it all blows up in my face.
Getting your leverage via LEAPS makes it hard for things to blow up in your face, but the market can probably find a way.

Jim

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I am now 100% LEAPS for my position

So much for your 1.2x leverage on Berkshire suggestions for the rest of us…

At the beginning of June, I didn’t have my usual level of Berkshire leverage. When the stock dropped, I took half of my Berkshire shares and sold them to buy LEAPS. My thinking was I would save the other half in case it kept dropping.

So I’m not in the same boat only because I didn’t have the guts or was expecting a further drop.

I received a research report from JPM in which they showed a table for the “weekly biggest none-retail order imbalance flow” for last week.

Interestingly, the 2nd biggest positive inflow is BRKa, of +$2.5bn imbalance (the first place is SPY ETF).

More interestingly, BRKb is ranked the #22 most negative imbalances, at $-230m

I have no idea what this means. Maybe someone will know?
Could this because WEB is buying back?

p.s. this is not the only week I see Brka make the list. In fact, I think it’s pretty frequent.

I received a research report from JPM in which they showed a table for the “weekly biggest none-retail order imbalance flow” for last week.

Interestingly, the 2nd biggest positive inflow is BRKa, of +$2.5bn imbalance (the first place is SPY ETF).

More interestingly, BRKb is ranked the #22 most negative imbalances, at $-230m

I have no idea what this means. Maybe someone will know?
Could this because WEB is buying back?

p.s. this is not the only week I see Brka make the list. In fact, I think it’s pretty frequent.

I don’t know why BRK.A shows up on those lists, but it is likely related to the inaccurate volume reporting for BRK.A. Look at a chart that shows volume on the first tick of every morning and you will see that BRK.A does a huge portion of the total reported daily volume on the opening tick - probably some mis-reporting of volume related to the partial share orders being entered as 1 each instead of .001 or whatever the robin hood person is actually “buying.” Are partial share orders the new bucket shop? Not sure how that actually gets aggregated and executed. Either way, BRK.A volume as reported is not real and that is probably why they show up on lists related to volume.

And Berkshire does try to buy the A-shares. And Berkshire will definitely be counted as an institution. And most sellers of A-shares would probably be wealthy individual families/foundations since the institutional liquidity is in the B-shares and that is largely where the institutions stay.

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Is anyone adding here or looking at LEAPS? The B shares were only sub 280 value for about a month mid summer. I added a bit yesterday and am thinking about buying more DITM calls Jan. 2024. Imagine more general downtrend. but the BRK market discount seems attractive again here and I imagine WEB is or may be repurchasing soon.

Is this what you’re thinking about?

https://finance.yahoo.com/quote/BRKB240119C00270000?p=BRKB24…

BRK.B Jan 2024 270.000 call
$47.20

Paying $47.20 (x100) now gives me the right to buy stock at $270 on or before 1/19/24
Do I have that right? I’m a total newb on options.

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Paying $47.20 (x100) now gives me the right to buy stock at $270 on or before 1/19/24
Do I have that right? I’m a total newb on options.

That’s one example.
But it’s a risky one.
The lower the strike price, the more it resembles a prudent investment.
The strike price you mention, $270, is pretty close to the stock price.
It’s an expensive and risky choice compared to others.

The safest call option is the longest dated, lowest strike one.
At the extreme, an infinitely long duration call option with a $0 strike price is the same as a share of stock.
The lowest strike is also the “cheapest”…the lowest break-even price.

As an example, you could probably buy the January 2024 $135 call option for about $154.40 right now.
If you held on till expiry and then exercised it, it would cost you a total of 135+154.40 per share = $289.40 to own that stock, which is $10.20 more than today’s price.
But you wouldn’t have to come up with all the money today…for that $135 portion of the cost, you don’t have to pay till 504 days from now.
So, it’s a lot like getting a loan from now till expiry date. And nobody can call that loan on you.

The way I calculate it, the implied interest rate on this particular one is 5.92%/year. Not that bad, given the inflation rate.
And you get the upside on 1.8 times as many shares compared with simply buying the stock today, the leverage built into the option.
(a given number of dollars worth of that option controls 1.8 times as many shares as the same number of dollars worth of shares)
If the stock is a good buy at the current prices (I think so, though I could be wrong), the thinking is: it’s better to have 1.8 times as much of a good thing.

This is the dark side of the force, of course.

Jim

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Getting your leverage via LEAPS makes it hard for things to blow up in your face, but the market can probably find a way.

The way I understand the history is Buffett introduced B shares at a 30:1 ratio to the A shares in 1996. In 2010 the B shares were split 50:1 to allow more BNSF shareholders to chose Berkshire stock. Once the B shares split, Berkshire had 50x more volume than before so:

  1. it could be added to the S&P 500
  2. CBOE could issue options on the B shares

What it Buffett decides he wants to do something to stop people betting on Berkshire using options? Could he do a reverse stock split that lowers stock volume enough to stop CBOE issuing options? If so, you might not be able to roll up your options at expiration. If the market reacts poorly to the action, it might also coincide with a low trading price.

If the stock is a good buy at the current prices (I think so, though I could be wrong), the thinking is: it’s better to have 1.8 times as much of a good thing.

PS, stock rice is $279.31 as I type. That’s 1.21 times peak-to-date book-per-share, a not-bad yardstick of value.
Based on results in the last 15 years or so, if the future is similar, my models suggest a central expectation for the next year of inflation plus 15%, give or take.
Maybe more, maybe less, but the idea is that it’s a toss-up whether it will be more or less.

Jim

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Based on results in the last 15 years or so, if the future is similar, my models suggest a central expectation for the next year of inflation plus 15%

Jim, I used to put a lot of weight on that. But lately, with the economic and political environment in my eyes more and more worsening, I see a high probability of Grantham finally being vindicated and the future not being similar to the last 15 years.

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Based on results in the last 15 years or so, if the future is similar, my models suggest a central expectation for the next year of inflation plus 15%
…
Jim, I used to put a lot of weight on that. But lately, with the economic and political environment
in my eyes more and more worsening, I see a high probability of Grantham finally being vindicated
and the future not being similar to the last 15 years.

Different investments can have different outlooks.

The broad cap-weight US market is considerably more expensive than it was 15 years ago.
About 27.5% more expensive than the average valuation multiple around that time, give or take.
As that process continues for any investment asset, risk rises and prospective returns fall.
Holders today have reason to be wary.

Berkshire’s stock, on the other hand, is considerably cheaper than it was 15 years ago.
About 17.5% cheaper than the average valuation multiple around that time, give or take.
As that process continues for any investment asset, risk rises and prospective returns fall.
Maybe Berkshire’s value growth will be poorer in future than it was in the past, but the modest valuation level is a nice tail wind to have.

Those comments, as with anything in the “margin of safety” family of thoughts, speak only to reasonably long time frames.
Prices can do anything in the short term.
If the broad market plunges, it’s likely the price of Berkshire’s stock will fall about the same amount, for a while.
If you’re worried about a brief deep plunge,

  • Holding Berkshire stock as opposed to anything else probably won’t help you, and
  • More generally, just get over it. Make sure you aren’t a forced seller, and ride it out.

As for whether my “central expectation” prediction might have any merit, it depends mostly on the extreme randomness of whether the price is temporarily high or low exactly a year from now.
It’s intended to represent the average of the plausible outcomes.
But there is one silver lining in there: it’s built on historical observations.
During those particular 15 years of observations, Berkshire’s valuation multiples were steadily falling.
If everything else remained about as it was, but the valuation multiples merely stop falling, the expected return would be higher than the prediction.

As of Friday’s close, using only my sundry models that consider the 2008-and-later data, the average one year prediction is inflation plus 16.8%.
If inflation is 4% (who knows?), that’s a nominal price target of $506000.
Over half of that return is simply the implicit assumption of valuation multiples rebounding upwards to their modest post-crisis average.

Jim

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Jim, “copy & paste” is dangerous (but we know what you want to say :slight_smile:

Jim, “copy & paste” is dangerous (but we know what you want to say :slight_smile:

Oops. Busted.
Well, anyone reading it closely enough to spot the problem is probably reading it closely enough to figure out what I was trying to say.

Jim

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Since we are at options school I have a stupid question. I have never bought any but was wondering about something.

I understand that a call option might has two elements of value. If the share price rises obviously there is value there. Then secondly, the time between now and the expiry has value because anything can happen. But that as the time runs out the only value left, if any, is the share price less the option strike price.

I can also see how the call option itself trades up and down daily as the underlining share price moves and the time runs out. In a sense I am fighting both the share price and the time clock. Riskier than old fashioned buy and hold. Although there are more sophisticated strategies like selling puts, collecting premiums and laddering and things which if one had skill and interest could dramatically reduce risk and improve returns.

If I buy a call option, what happens on the day of expiry if no action is taken if the share price is higher than strike. Does the broker automatically exercise the option for you(A)? Or (B) is it possible for an otherwise profitable option contracts to expire worthless?

Just wondering.

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I understand that a call option might has two elements of value. If the share price rises obviously there is value there.
Then secondly, the time between now and the expiry has value because anything can happen.
But that as the time runs out the only value left, if any, is the share price less the
option strike price.

Good summary.

I can also see how the call option itself trades up and down daily as the underlining share price
moves and the time runs out. In a sense I am fighting both the share price and the time clock.
Riskier than old fashioned buy and hold. Although there are more sophisticated strategies like
selling puts, collecting premiums and laddering and things which if one had skill and interest could
dramatically reduce risk and improve returns.

As with anything else, yes, they trade up and down daily.
But there is no necessity to try to figure out what that price movement will be.
As you note above, come expiry date the only thing that matters is the stock price relative to the strike price.

If I buy a call option, what happens on the day of expiry if no action is taken if the share price
is higher than strike. Does the broker automatically exercise the option for you(A)? Or (B) is it
possible for an otherwise profitable option contracts to expire worthless?

As to what happens on expiry date:
It used to be pretty variable, but most brokers have settled on the following rule:
If the option isn’t in the money, well, it just disappears from your account because it’s worthless.
If the option is in the money, they exercise it for you automatically.
(Some brokers do that only if it’s in the money by at least a coupe of cents)
If that option exercise transaction uses up more cash than is available in your account that day (cash plus available margin if any),
they immediately sell that stock when the market opens and credit you the proceeds of that sale.
Maybe they sell all the stock, maybe they sell only the portion needed to cover the margin shortfall…it’s hard to say.
It’s best to assume that they will do whichever outcome is worst for you.

The lesson is simple: the best rule is never to own an option that you couldn’t exercise if push came to shove–some way to cough up the cash.
But if you do (I do sometimes), then at least don’t own it just before expiration.
Generally that means you sell it and buy a different one with the proceeds to buy more time to let your investment thesis work out.

Here is a specific example.
At market close on Friday, Jan 2024 $150 calls could be bought for about $138.50.
Those offer 2:1 leverage with implied interest rate 5.64%/year on the borrowed half, for a year and a half.
That is, you get the upside on twice as many shares as you would by putting the same cash into stock today.
Subtract whatever you think inflation will be, to get the real interest rate cost.
The stock price has to rise a nominal 2.8%/year for you to break even. (with 2:1 leverage, you’re only borrowing half the nominal stock value)
On one hand, nobody knows whether stock prices will be high or low a year and a half from now. Life is uncertain.
But on the other hand, given recent inflation figures, that doesn’t seem to be a huge hurdle rate.

As with anything else, the order of steps is important.
First, pick a reliable underlying security for your investment.
Second, pick a moment with an entry price that offers good return prospects…a margin of safety of some sort.
With those first two steps you’ve identified a viable investment opportunity.
Then, and only then, think about the best way to have exposure to the security.
That might be buying the stock. Or, for the aggressive, it might be buying a call option if the implied interest rate is reasonable relative to the stock prospects.
At the moment I think Berkshire call options meet all three tests. I might be wrong.

Jim

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Thanks for the options tutorial, Jim.

I know you’ve given them before…this time I paid attention.

The lower the strike price, the more it resembles a prudent investment.

Yes, the $270 strike did seem risky to me. A win big/loose it all proposition. Not me at all.

As an example, you could probably buy the January 2024 $135 call option for about $154.40 right now.
If you held on till expiry and then exercised it, it would cost you a total of 135+154.40 per share = $289.40 to own that stock, which is $10.20 more than today’s price.
But you wouldn’t have to come up with all the money today…for that $135 portion of the cost, you don’t have to pay till 504 days from now.
So, it’s a lot like getting a loan from now till expiry date. And nobody can call that loan on you.

Coming up with the money to exercise within the accounts I have to use could be tricky.

Does anyone do this in an IRA or 401k?

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Does anyone do this in an IRA or 401k?

Yes. No problem.

Coming up with the money to exercise within the accounts I have to use could be tricky.

Just sell the call before expiration.

Long time ago I had a call expire in the money in an IRA. The broker just credited me the difference between the opening price and the strike, as if I had paid for the stock and sold it.

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