Fresh all time highs today

Always a nice thing to see.

Hmmmm…also, a fella could probably write a covered call and not regret it too much.

What’s the likely one year return?
Average forward return from this sort of valuation level (using Q3 statements) might be negative in
real terms if the future rhymes with results since the crunch 12 years ago.
If you generously assume that the year end statements will show the firm worth 6-7% more than it was at Q3,
one might expect something in the vicinity of inflation + 2.6% as being typical.

So, writing a call that gets you an exit better than that shouldn’t be that bad a deal.
e.g., January $330 call is bid $25.90, getting you an exit of $533850 = $355.90 per B if the stock is called away.
That’s likely to be a pretty good result: 9.7% more than the current price is quite a bit better one year result than the usual outcomes above.
In other words, you could have had a better exit or, equivalently, buy back better.
Alternatively, if the stock price stops rising, you get to keep the $25.90, getting you a “free” 8% return by January.
Pretty good annualized rate of return, tying up no additional cash beyond the stock you have.

If the stock has a brief plunge in the interim, you can also close (buy back) the call early for a big profit.
It’s pretty common to make 50-80% of the maximum possible profit in 20-50% of the time.

Of course, if you think the stock is going to the moon, or aren’t interested in any liquidation, don’t do this.
I’m a retired guy and have to sell something once in a while.
A bit more typing, but it can give the equivalent of a dividend.

This sort of stuff keeps me off the streets at night.



Good. Please keep off the mean streets of Monaco. :rofl:

I have no idea what I’m talking about of course. Maybe the streets there actually are mean?

I have no idea what I’m talking about of course. Maybe the streets there actually are mean?

Well, there have been rumours of occasional very inebriated people on the streets late at night.
And the occasional entertaining one-car accident in the tunnel when one of them hops in a Lamborghini and tries to lap the F1 circuit route at 4AM.
You also have to watch out for this sort of thing when using the sidewalks.
(Ferrari F40 in flames)

Generally the streets are not mean.
The most likely interaction with an ubiquitous policeman is his waving you across the street while wearing white gloves.
Financial crime would probably be the thing they spend their serious time on.

Of course, it was more interesting in the good old days.
Nothing lately like the dismembered body left at a train station in 1907.…



Average forward return from this sort of valuation level (using Q3 statements)

Interpolating Q3 statements (adding 4%) the current BV/share is close to 1.5. I can’t afford shares to be called away (writing covered calls) but I can’t imagine this historically high level of valuation to be sustainable longterm, so there should be good chances also to profit from 2024 puts, isn’t it?

Apart of course from the possibility that the valuation gets down to historical levels by as expected BV rising 12% or so in each of the next 2 years — without the price ever falling!

But in today’s volatile environment that’s difficult for me to imagine, that there won’t be several opportunities during the next 2 years to unload calls bought now (and to eventually swap them for then cheaper shares).

Would be interesting to hear what our resident option specialists have to say.

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I would love for you to teach a class on options trading using real world Berkshire examples.


I would love for you to teach a class on options trading using real world Berkshire examples.

Well, I sure did a fancy one today.
I tied up another $X in cash and reduced the breakeven on my Berkshire portoflio by 92 times as much.

When I was a little more pessimistic a while back, when the B price was around $310, I wrote some
at-the-money call options to turn some long stock into a covered call position.
(not pessimistic per se, but I want to gradually raise some money this year).
The effective exit price looked like a reasonably good multiple.
Those were March and June $310 call options.
The stock price has risen, so that turns out to have been a bad idea.
So, I closed those positions, now in the money and with lower time value, and wrote new ones
expiring June ($325) and January ($330), roughly at the money and therefore with high time value.
The cash cost for the trades was basically a wash, it’s a longer term position, but I’m now “selling” those shares at an overall net price $21.97 per B higher.
I say “selling” in quotes because if the price is high I will have sold, if it’s low I will have earned some cash.
The reason this works is the combination of three factors for someone writing at the money calls:

  • As a call goes into the money the time value drops, to your advantage.
  • As time goes by, you’re earning money on the time value decay.
  • If you do a longer term position the cash raised is larger.
    The combination means that an unluckily chosen short call price can frequently be rolled “up and out” to improve its breakeven without tying up more cash.
    So, I think (?) the ultimate exit will be an even better valuation multiple.
    Better multiple of today’s value for sure, though it’s hard to say whether it will be a better multiple of the observable value at expiration.
    For the new positions I have, it’s equivalent to (at the counterparty’s option) selling at $521785
    sometime by next January, versus selling at $495826 some time by June.

I have the advantage that I want to gradually raise some money, but I don’t particularly care what time of year I do it.
It turns out that people are willing to pay me for committing to a particular alternative.

Anyway, sorry for geeking out.



Nothing lately like the dismembered body left at a train station in 1907.

Just how many train stations are there in Monaco? IIRC, there is only one.

I would like to 2nd Phillip’s idea!

Do you have the English version of this? Or if you could point me to a good introduction to options for dummies I might have a chance of understanding anything you just wrote.


Hi Jim,

That is dandy and cool for a tax-free/tax-deferred account. Any idea how to profit with the same view in a taxable account?


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Seriously, nobody thinking Berkshire got a bit ahead of itself, with +50% in less than 2 years (+40% without Corona)?

Nobody apart from Jim expecting (temporarily) lower prices and wanting to prepare or hedge against or making use of them? Only 20 year olds who have all the time in the world to sit such out?

Or everybody thinking the current valuation is simply justified, overdue since a long time, that price finally caught up with value — and that this is sticky?

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Do you have the English version of this? Or if you could point me to a good introduction to
options for dummies I might have a chance of understanding anything you just wrote.

I can try!

Option primers are very good, but with few exceptions they generally don’t talk about how or why to use them.
It’s like taking a woodworking course and they tell you in great and accurate detail how to use a screwdriver, then a hammer, then a drill.
But nothing about how or why to use one or the other to build a book shelf.

The particular effect I made use of yesterday is a bit obscure, but not unreasonably so.
Grab a coffee.

An in-the-money call option is a rain cheque.
The holder of a call option has the right, but not the obligation, to buy something any time they like, up to a certain date, at a pre-agreed price.
In this case we’re talking about things that are more expensive than the price on the rain cheque…“in the money” options.
So, if bags of flour are selling for $5.00, you might have a rain cheque giving you the right to buy
it any time this year for $3.50, or a different one giving you the right to buy it any time this year for $4.90.
The price on the rain cheque, in option terms, is the strike price.

Now, what is the value of the right to buy a $5.00 bag of flour for $4.90 any time this year?
Obviously it’s worth at least ten cents at the moment, the difference between the current price of flour and the strike price on the option.
(in option circles that’s known as the intrinsic value: the immediate profit if you exercised the option and immediately sold the goods)
But less obviously, it’s worth a bit more than ten cents, because you don’t have to put up the money till the end of the year.
Plus, you don’t even have to decide whether to do so or not till then: you can wait to learn more about the wheat harvest, for example.
That extra time to make a decision–optionality–is also worth a bit.
Put together, that’s the time value in the option: the “extra” price of an option in addition to its obvious intrinsic value.
The time value is of course higher if there is a longer time to expiration.

For reasons that can be explained but I won’t bother, the key point is this:
The lower the strike price on an “in the money” option, the lower the time value premium.
The $4.90 rain cheque might be worth 75 cents, meaning a time value of 65 cents.
The $3.50 rain cheque might be worth $1.55, meaning a time value of only 5 cents.
So, the rule: the time value of an option is at its highest when its strike price matches the current stock price.
When it’s “at the money”, in options lingo.

The upshot of this is that there “expensive” and “cheap” ways to hold the upside on the same security.
That’s no surprise.
But, less obviously, which ways are expensive and which ones are cheap will change from day to day, as the price of the stock (sorry, flour) changes.

A few months back I wrote a call option. In return for cash up front from somebody else, I gave them
the power to buy some of my Berkshire stock any time they like in the several months, at an agreed price.
I was thinking of selling that quarter anyway, but didn’t HAVE to, I got paid quite nicely for being willing to let someone else decide.
At the time the stock price was $310 and I gave them the right to buy it for $310 for a while.
Since the two prices were the same that day, the time value in that option was very high. I got paid quite a bit.
And, if I ended up selling to that person, because of the price I got for the option, in effect I
end up selling at a net price quite a bit higher than the market price that day.

But…you’ve been paying attention, right?
The stock price moved. Now it’s much higher, about $325.
Since the options that I sold no longer have a strike price equal to the stock price, the time value in the options fell quite a bit.
Plus, time was passing, which also makes the time value fall somewhat.
(separately, which we’ll ignore for the moment, the intrinsic value went up and I was losing money on that—
but that was exactly offset by the gain in the shares that I already owned that were “backing up” the option.
It’s no more important than the price movement in something you’ve already sold.
It might make you feel good or bad, but it doesn’t change your financial situation)

Since I sold these options instead of buying them, evaporating time value for the buyer is income for me.

Now, the stock price is higher, so the options with the highest time value are the ones with strike prices around $325, not strike price $310.
So, I closed the position of $310 calls that I had written (= sold = shorted) for a loss.
And simultaneously wrote (= sold) new ones with a higher strike price and much more time value in them.
The high time value in the new ones means that, even though the calls I wrote were a losing proposition
(somewhat like being short the stock while it’s rising),
by switching from one option to another the amount of my loss has been very much less than the amount the stock price has gone up.
The gap in the strike prices from 310 to 325 was far greater than the gap in the price of the options I bought and sold.
I was a buyer of options that had low time value because they were not “at the money”, and a seller of ones with higher time value because they WERE at the money.
I also extended the date by a quarter, which increases the time value of what you’re selling.

Though the number of shares I was long and short did not change, my breakeven changed a whole lot.

In effect, I now have a small wager (which I was paid well to take) that the stock price will be
lower a year from now than what I think it will probably be.
And if I’m wrong, I end up selling a little stock which I was intending to sell anyway, at a net
overall price higher than what I would have realized had I simply sold it the day I started the process.

It’s a bit messy because I had two different contracts before and two different contracts
afterwards, but here is one pair, rolling “up and out” from June $310 to Jan $330.

The wager, started when the stock price was about $310, was this:
I’d be better off having done the deal if the stock price remained below $323.56 till June.
The outcomes were either I’d sell at that net exit price, or pocket $13.56 and still have the stock.
With the price then at $310 and an equivocal desire to sell, a net exit price of $323.56 didn’t look so bad.

By my trades yesterday, with the stock at about $325, my wager changed, and is now this:
I’ll be better off if the stock price remains below $355.83 until January.
The outcomes are now that either I sell at that net exit price, or pocket an additional time premium of $1.98 on top of what I garnered the first time.
i.e., doing this trade raised that much cash per B share for me yesterday, while simultaneously improving my breakeven.

With the price now at about $325, I figured it’s now better to be wagering that the price will be
below $355 till the end of the year than to be wagering that it will be below $323 till June.
And, as with the starting motivation for all this: I want to sell some stock at some point anyway.
So, a net exit price of $355.83 some time this year doesn’t look so bad.
That’s 1.687 times currently known book per share, and the value of a share rises only so quickly.

As mentioned, this was a pretty obscure bit of reasoning and trading.
99% of my option trades in Berkshire are super boring:
When the stock is cheap, buying deep in the money call options makes a lot of sense. Or at least a lot of money.
The time premium is low, so it’s exactly like taking out a low-rate fixed-rate uncallable loan for a couple of years to buy somewhat more stock than you could otherwise afford.
No more to understand than that.
Round numbers, I find myself bumping leverage this way to (say) 1.5:1 when the P/B gets below 1.35,
and holding that till the next time it’s over 1.5 at which time it makes sense to drop back to no leverage.
Though I am loth to admit it in public, sometimes I bump the leverage a bit more than that when the omens are particularly good : )



Holding it in a taxable account since 1999 makes timing an expensive venture.

Holding it in a taxable account since 1999 makes timing an expensive venture.

For sure.
Covered calls, in particular, would be a poor idea.
Except perhaps as a way to sell stock you were going to sell anyway at that approximate time frame.

However, you could vary the position size this way:

Keep your core position. Never sell or repurchase it. Leave it tax deferred.
Let’s assume you also typically have some cash in the account, too.

(1) Wait till next time the stock is cheap. Say, a valuation corresponding to P/B under 1.35.
Buy some call options, using a block of the cash you usually have, equal to (say) 50% of the number of shares you always own.
(2) Wait till the next time the stock is at or above its typical valuation level. Say, valuation corresponding to P/B over 1.5.
Then close the call options for a nice profit.
The core stock position is still unchanged.

It does require you to have access to cash to do the option purchase when the opportunity arises.
(you could sell a very small fraction of your long term stock holding to help out with that, with the tax implications)
And it does mean you pay tax on the profitable call options each time that happens–it doesn’t compound tax deferred for decades.
But, you do get to make quite a bit of profit from valuation swings without ever touching your core stock position, so tax on that block remains deferred.
At any given time, you have either (a) the same old long term block of stock, or (b) the same old long term block of stock and some call options.

If the call options you buy have 3:1 leverage, and price rises from 1.35 times book to 1.5 times (presumably higher) book, on a position that is the size of (say) half your core position, that’s a tidy little extra profit.
It sometimes takes 3-5 years of waiting for a good exit valuation level. Sometimes it doesn’t.

The usual reminders:
Leverage is the only way smart people go broke.
But if you’re going to indulge, make sure you tick these boxes:

  • The value of the underlying security is extremely predictable and will definitely not go down;
  • The valuation is very attractive when you start;
  • The implied real interest rate is very low; and
  • The loan can’t be called in any circumstances during your intended investment horizon.
    Long dated call options at about 2 or 2.5 years meet about 3 and a half of those four criteria.
    It’s not quite long term enough…you have to plan on rolling the options at least once, and (very rarely) twice.
    It’s possible the required options will be way too expensive in terms of real interest rate or not available at all when it’s time to roll.
    Not hugely likely, but it’s the main remaining risk to this sort of strategy.



leverage 1.5:1 … sometimes I bump the leverage a bit more than that when the omens are particularly good

Gambler :slight_smile:

One minor detail, in this scenario, without knowing the exact premium, most likely by rolling up, actually money goes out of the option seller. Assuming it gets exercised, yeah they make money. There are circumstances where this may end up being a loser.

Gambler :slight_smile:

Definitely in the “do as I say, not as I do” category : )
Of course, I don’t use high leverage for ALL my position. Just at the edges, when the odds seem good.
I have plain old stock, too.

But occasionally, when things are cheap, I’m willing to make a wager.
Would you buy a little extra stock at (say) 1.25 times book mostly using money borrowed at (say) 6% interest rate for 2.5 years?
Interest rate fixed, the loan can’t be called, no margin debt needed.
The odds seem pretty good that the ending value per share will be higher then, and also reasonably good that the valuation multiple will be higher at some time before then.
The “good things” outcome is the product four numbers: the real value rise, the valuation expansion, the size of the position, and the leverage built into the position.
The “bad things” outcome is mainly that you lose all that “interest” you prepaid, for no benefit.
Though of course bad things could happen to the company, as with any equity investment.

The usual disadvantage is that you might have to wait maybe another two years, at an unknown interest rate, for the wager to pan out.
And therefore “feed” the position with a bit more cash to pay that interest.
Though, oddly, if the firm goes bust then you lose less than if you’d bought the stock or taken out a long term bank loan to buy the stock.

But yeah, gambling. I’m a regular Nicky Arnstein.



Seriously, nobody thinking Berkshire got a bit ahead of itself, with +50% in less than 2 years (+40% without Corona)?

I think BRK was undervalued, and is now slightly overvalued (relative to my expected return). Jim is correct that future returns from this level are likely to be underwhelming. I personally haven’t adjusted things just yet, but will probably sell the shares I purchased back in the fall (at $270s) to get back to a more balanced position. I am a little light on cash having just deployed some to AMZN and DIS during the recent pull-back and I think I want to hold on to those a bit longer while still having some cash available.

Jim’s forecast of returns in the 2% range from here make holding cash not a bad option. All these fancy option strategies seem a bit too complicated for me - but maybe I will spend some time looking at them (or maybe I will just go skiing instead).



But yeah, gambling. I’m a regular Nicky Arnstein.

That’s ok. The very few (pro) gamblers I met in my youth were all fascinating and entertaining characters, giving me a glimpse into a different world, shady, smelling of danger, adventure and excitement — highly attractive and fascinating.

Jim is correct that future returns from this level are likely to be underwhelming.

…for time frames of a year, give or take.

Longer term, the rate of return will gradually approach long run trend value growth rate.
Shorter term, nobody knows.

For somebody who doesn’t much care about whether this year is particularly good or bad (a good view to encourage), it’s not a big deal.
Valuation cycles present opportunities, but there is no particular requirement to take advantage of them.