Poll: Options

What percentage of the year do I have open options.

.

  • Always and totally leveraged.
  • Always, no leverage.
  • Often, totally leveraged
  • Often, no leverage.
  • Never, no how, no way,

0 voters

I didn’t vote because I’m not sure what “totally leveraged” means.

Right now, 30% of my portfolio value is Berkshire Calls. It’s been higher, but I sold Calls and bought stock when I reached numbers that will support retirement. I’ve had open options since at least 2016.

I also sold put positions that are secured with available margin. I don’t pay any margin interest unless they get exercised, but I’ve set the values at prices where I wouldn’t mind borrowing. Currently these are Jun 2022 $190 puts, and June 2023 $250 puts. I’ll probably continue selling these when the current ones expire, but their value was only $3k when I first sold them. The majority of my holdings are in IRA accounts where I’d have to secure these puts with cash, so I limit these to my taxable account.

1 Like

Sorry… totally leveaged was meant to mean, doing options using borrowed money, likely on margin, but really any borrowed money.

What percentage of the year do I have open options.
…
I didn’t vote because I’m not sure what “totally leveraged” means.

Likewise.
I have some leverage via calls at all times.
But much of the time it’s relatively minor–not enough to seem to match the phrase “always and totally leveraged”.
Yet that’s the only poll choice that matches.

If the question is truly percentage of the year, then shouldn’t the options be something like

  • All the time
  • Almost all the time
  • Sometimes
  • Rarely
  • Never

More insightful might be

  • A lot, usually or always
  • A lot, but only sometimes
  • Some, usually or always
  • Some, but only sometimes
  • Never

Jim

4 Likes

Re Berkshire options something else would be interesting: I think it was in April or May that after the run up to $280 or so quite some posters thought about selling calls for some additional “dividend”, usually mentioning strikes of $310 or $320, sometimes $330 or $340, apparently thinking that’s high enough to be quite sure those shares won’t be called.

As we are after just a little over 1/2 year already at or close to those strike prices I am wondering whether there are now regrets having done that?

1 Like

Jim…

By all means please redo the poll, so that more people feel comfortable voting.

That would be just fine with me

:slight_smile:

jan

:star_struck:

Re Berkshire options something else would be interesting: I think it was in April or May that after the run up to $280 or so quite some posters thought about selling calls for some additional “dividend”, usually mentioning strikes of $310 or $320, sometimes $330 or $340, apparently thinking that’s high enough to be quite sure those shares won’t be called.

As we are after just a little over 1/2 year already at or close to those strike prices I am wondering whether there are now regrets having done that?

I had sold $320 calls and bought them back in June. I posted about it here: https://discussion.fool.com/bv-2075-34859878.aspx
Recently I sold some $370 and $430 calls: https://discussion.fool.com/as-my-current-covered-calls-at-305-t…

Obviously I wish I had waited a little bit selling those covered calls, but no regrets. I still expect to be able to buy them back with a profit or to expire worthless.

Using covered call is a fair question. I always want to optimize the circumstances. My $320 calls until this week seemed likely to expire worthless. Not so today. But still 2 weeks to go?

I have had calls get exercised in the past and always been able to buy BRKB back at a lower price shortly thereafter. Stocks do fluctuate.

My initial thought is that I was 75% BRKB. In 2020 as the S&P 500 rallied and when I sold out and moved it too BRKB. Of course I always had a lot of BRKB to begin with, so this increased my concentration.

I am a bit of a wheeler dealer, so selling covered calls forces me to hold on to the stock. Knowing my nature this strategy helps me to stay in my position longer?

Overall, logic tells me that lowering my concentration to near 50% from 75% may be rational. Even 50% may be higher than I desire. Given, markets are fickle, Buffet may pass away, and that I have attained enough wealth to live on. I think I prefer to use the proceeds to add to my T Row price funds. The timing of when to move over the cash and start buying the funds will be tricky.

For know I sit and wait for the next 9 trading days to play-out. Worst case is I wake up in 2 weeks with a whole lot of cash.

I also have covered calls on MSFT & PCG. Those are in the money but falling fast.

1 Like

Stock options completely contradict the core values of Berkshire Hathaway. How can you possibly predict how the stock price will move and when? Remember that options expire worthless in a few months. My idea of hedging is to just not own as much in the first place.

Stock options completely contradict the core values of Berkshire Hathaway. How can you possibly predict how the stock price will move and when? Remember that options expire worthless in a few months.

The core value of Berkshire is a high degree of predictability of future earnings and IV aka stock value (value, not price).

This makes it a far more attractive candidate for options than your average unpredictable (T…?) company as (with a bit of help from the knowledgeable posters of this board) it’s much easier to determine when it’s clearly undervalued.

IF you are of the opinion that in the long run the market is a weighing machine and IF you think 2.5 years provide a good chance for it to be that weighing machine, then options are not exactly a casino roulette bet (I am sure nobody here buys options that expire in just a few months; for that we had far too good education by “Mr.Monaco”).

I suggest you read what Jim wrote about Berkshire’s swings from high to low BV/share and revers which is quite enlightening re risk versus chance in case of BV/share extremes.

In short: Investing amateur that I am I think it’s exactly the other way around, that Berkshire’s core values make it sometimes the ideal candidate for options.

2 Likes

Time to time I do options on Berky. Generally Berky is not a great stock for options, the implied volatility, thus the premium is low. In my IBKR account I use (heavy) leverage and mostly prefer selling puts, spreads, limited covered calls. For all of these strategies Berkshire low premium will be taking too much margin.

The only viable Berkshire options are buying slightly deep in the money calls (i.e. longs). When a stock declines 5% these calls could decline much higher %age and typically I avoid.

When you do options on Berkshire, you don’t get the explosive returns and just get some incremental returns.

Right now, I think Berkshire can get to $335, I could come up with no viable option strategy where I can get 30% return.

1 Like

Stock options completely contradict the core values of Berkshire Hathaway. How can you possibly predict how the stock price will move and when? Remember that options expire worthless in a few months.
…
In short: Investing amateur that I am I think it’s exactly the other way around, that Berkshire’s core values make it sometimes the ideal candidate for options.

I think of it as a spectrum.
Let’s assume that buying stock is a reasonably prudent thing to do.
A share of a company can be thought of as equivalent to an option with a strike price of zero and an infinitely distant expiry date.

The closer an option contract is to that, the closer it is to being a normal prudent investment.
The longer the expiry date (usually around 2.5 years available), and the lower the strike price
(generally available well under half the current price), the more reasonable it is as a choice.
At this end of the spectrum it’s still not prudent investing, but it’s not all THAT far away from being prudent investing.
By contrast, high strike prices and short expiries, the favourites of the Gamestop crowd, are like wagering on coin tosses.

e.g., a portfolio of 70% Berkshire stock and a 30% call options, always very long dated and always deep in the money, does not constitute a wild gamble to me.

As an aside, recall that Berkshire bought a big chunk of its original BNSF stake using deep in the money calls.
The stock price was about $80, and Mr Buffett amassed a huge stake in $40 calls.
So, it’s not a heresy to Omaha.

And also recall that Berkshire runs with some leverage. Not a lot, but some.
They borrow money in the bond market, which does come due if you don’t roll it, and invest the funds in (among other things) equities.
A deep-in-the-money call option is nothing more than the purchase of a bunch of shares–
paid for in part with an uncallable term loan with prepaid interest and a balloon payment at the end.
It no more prudent than that, but also no less prudent.

As to the question posed, how can you possibly know how a price will move and when…
Does anyone doubt that Berkshire’s price will be at least a bit higher in 4-5 years? (two option terms, say).
It could be lower, perhaps even meaningfully lower and for a lasting amount of time.
But it’s unlikely enough that it seems a wager worth making if the upside is commensurately attractive.
Is it attractive?
Which would you rather have on your next Berkshire purchase for the next 4 years:
The rate of return on Berkshire stock, or twice that return minus about 2%/year?*
The smart and prudent person opts for the stock. The almost smart person probably goes for the leverage.

Jim

We don’t know how much Jan 2026 call options will cost in January 2024.
But the first two years are known in advance: e.g., on Wednesday, Jan 2024 $170 call options offered 2:1 leverage with a “prepaid” interest rate of about 3.35%/year.
Breakeven for the resulting deferred stock entry was about $485900.

At 2:1, you’re only paying the interest on half the nominal size of the position, hence my “about 2%/year” comment.
Not really suitable for all of a portfolio, but I think it doesn’t sound so bad for part of a portfolio,
especially if started at a time that Berkshire is relatively cheap.
One possible rule of thumb has been that the price be under 1.35 times known book when adding any leverage.

11 Likes

Which would you rather have on your next Berkshire purchase for the next 4 years:
The rate of return on Berkshire stock, or twice that return minus about 2%/year?

Many thanks for providing that background and rationale for using options. I’ve been tempted to try it out for years, but never felt I had a solid feel for the basics. This really does help.

Tom

FWIW, yahoo/finance rates BRK as Undervalued and
Performance Outlook as UP for
Short Term 2W - 6W
Mid Term 6W - 9M
Long Term 9M+

The other day, in not quite 2 months, the Jan’24 200 calls were up almost 40%.
It’s tempting to sell part of that position to lock in that gain.
Also tempting to be greedy and let it ride.

The other day, in not quite 2 months, the Jan’24 200 calls were up almost 40%.
It’s tempting to sell part of that position to lock in that gain.
Also tempting to be greedy and let it ride.

What was the delta and date that you bought them?

The other day, in not quite 2 months, the Jan’24 200 calls were up almost 40%.
It’s tempting to sell part of that position to lock in that gain.
Also tempting to be greedy and let it ride.

I have the same dilemma. I also have Jun’23 145 calls (only 2:1 leverage). One factor in favor of selling half my calls is that P/B is around 1.50. I think the nominal guideline to switch back to long shares was 1.55.

I was also considering selling Mar’22 310 puts for ~$7, cash-secured with the proceeds. Repeat with slightly OTM puts until assignment. Trying to outsmart the market never gets old.

in not quite 2 months, the Jan’24 200 calls were up almost 40%.
It’s tempting to sell part … Also tempting to be greedy and let it ride.

You are 100% better than me, Rayvt. I bought exactly the same ones, but 4 instead of 2 months ago. They are also 40% up, so your CAGR is double that of mine.

P.S.: As I am more fearful than greedy I sold them yesterday.