I am thinking about switching stock for calls.
Now The book value is 1.28 aprox. and getting leverage at this valuation sound attractive.
The key question is how long will it take to return to a p/b above 1.35 to make the switch worth it.
Anyone is considering doing this ? Comments welcome.
Anyone is considering doing this ? Comments welcome.
I just did it.
That doesn’t mean it’s a great idea, but I did.
I won’t say what contracts I bought, but it’s an unpopular one: my trades constitute the entire daily volume so far!
One very simple way to save a few bucks:
If you also have a big cash pile, buy stock rather than calls.
Then, when the market has calmed down a bit and the first time the stock price is higher, switch from stock to calls, same position size, freeing the cash up again.
You’ll save quite a bit in time value.
Less time value to pay when the stock is further from any given strike, AND less time value to pay on a calm day.
Jim
Jim, you actually sell BRK stock to buy BRK calls? That’s the move I’m considering since I’m rather low on cash at the moment. I’ve considered your second way of doing things, but it never seemed to be a high enough “higher stock price” to do the switch back to fee up cash.
Of course Jim likely has a different capital gains tax situation (none) vs. many on this board. But these trades can work in an IRA if you don’t get too carried away with risk.
I am considering buying calls stike deep in the money but I do not know if going till 2024 or going only 1 year ahead jun/2023.
I find it difficult to asses if this will turn around in one year time or not, I think I will go to the longer term to play on the safe side, but not sure.
Any opinions to help me understand a little more?
Jim, you actually sell BRK stock to buy BRK calls?
Generally I avoid that, but I did today.
I have more than one account.
The account I felt like using didn’t have all that much USD cash, and I was in a buying mood.
I avoid the sell-stock-buy-calls exchange when I have cash because time value tends to be pretty expensive on panicky days.
My implied interest rate was poor.
Of course, if inflation stays at these levels the interest rate was negative!
And even if the implied interest rate was poor, the price was very nice.
P/B at the moment is 1.27. Decently cheap in absolute terms, and cheaper than a quarter of the time since '08.
Jim
I am considering buying calls strike deep in the money but I do not know if going till 2024 or going only 1 year ahead jun/2023.
I find it difficult to asses if this will turn around in one year time or not, I think I will go to the longer term to play on the safe side, but not sure.
Any opinions to help me understand a little more?
The prudent thing to do is to pick the longest dated ones available, very low strike,
and also plan on having the patience and funds on hand to roll them out another two years.
So, yes, 2024.
Usually within 4 years something good will have happened, on rare occasion a bit longer.
You do not want to count on something good happening sooner. It probably will, but don’t bet on it.
The non prudent thing to do might go like this:
When it’s really cheap, buy low strike calls only a year out.
Why? When it’s really cheap, on average something good happens pretty soon.
(the rest of the time, valuation is a terrible predictor of stock prices for time frames under a couple of years)
So, some time before those expire, preferably on a day the stock price is much higher and the market is calmer,
you can switch to higher strike calls freeing up some money and buying more time when buying time is cheap.
Or if the stock has really rebounded, just take a profit.
Today’s price counts as cheap, but not really cheap.
It has been this cheap or cheaper maybe 1/4 of the time since 2008, in round numbers.
Jim
I exchanged stock for call options as well today.
Had closed out all my calls earlier in the year – with an average BRKB price at times of sale around ~345 – and had put it to use in various ways. Mostly cash, straight BRKB stock, & GOOGL. Now the cash and BRK money is back to call options.
Nothing too complex. I de-leverage when BRK gets to the ~80th percentile, or higher, price to peak book. I then re-leverage at ~20th percentile and lower.
One rule of thumb that lets me sleep easy is that my breakeven price for the new calls is around or below a price BRK has been buying back shares.
One rule of thumb that lets me sleep easy is that my breakeven price for the new calls is around or below a price BRK has been buying back shares.
Seems reasonable.
Sure, it might get a fair bit cheaper, but we don’t know that yet, and it’s hard to picture bad outcomes starting here.
Barring another dip later, the next year ought to bring double digits with high likelihood.
Plus, stock market slides are good for the value of Berkshire.
I still love that old saw: you make most of your money in bear markets, you just don’t realize it at the time.
I do wonder what Mr Buffett is buying today.
A few Berkshire shares no doubt.
Some Apple? If he liked it at $151 in March he probably likes it at $138 in June. Nothing bad has happened to the value of a share.
Something new?
Never too late to nibble on Google…Mr Market is expressing less optimism about higher future earnings than at Apple.
Jim