Subject: Re: Price performance
If switching from stock to calls, then I see how one could get some spendable cash while controlling the same number of shares.
But to eventually get back to the same number of shares of stock you'd have to pay more than the cash you took out originally. And the time value of your calls will have been eroding the whole time.

What is the long term benefit? Don't you need some leverage at some point to generate the cash you spent?


Well, you can look at a few ways.

In the first instance, consider the situation that you don't really intend to change the size of your position in terms of share count.
It's true that shifting back to stock later on would use up a lot of cash and your net result would be that you had simply increased your average breakeven cost.
The benefit in this case, if any, is the incremental profits you made on whatever you did with the cash that was freed up. Switching from cash to calls for a while to buy something else at a huge discount may hurt your Berkshire breakeven a bit, but may help your overall portfolio...you'd have to consider the whole portfolio effect.

Another more aggressive/risky way to look at that same "constant position size" situation is simply to think of never switching back to plain stock. If you own the same number of calls for a decade, the extra leverage adds to your long run return provided the average nominal price rise of the stock priced is greater than the average implied interest rate you're paying for the "borrow" built into the calls. Each time the calls are rolled, they are rolled to a later date and [on average] a higher strike price, freeing up cash, yet the degree of leverage is never really changing because each new call is purchased at a strike which is a similar percentage below the stock price. This describes a good chunk of my portfolio. It doesn't free up cash very frequently, but averaged over time it's substantial.

In the second instance, the changes between stock and calls may also entail a change in your position size. The simple observation here is that sometimes the stock is more expensive than at other times. If you are adding to your position when it's cheaper (indulging in a pinch of leverage via calls), and lightening when it's not so cheap (no leverage or less leverage), you're probably getting an extra boost from the leverage.
In round numbers, if 2:1 leverage is costing you 6%/year rate on the implied borrow, the stock has to rise at a rate of [only] 3%/year (nominal, not real) for that position to be a breakeven and the stock has to rise at a 6%/year rate for the cash allocated to the position will do as well as the same amount of cash allocated to plain stock. If the stock rises more than 6%/year during the stretch you own the calls, the leverage turns out to have been a winning wager.

As always, one has to bear in mind that the fun of leverage from calls may come to an end. There may be a day that the calls are no longer available, or no longer available at an implied interest rate that looks good relative to one's expectation for the rise in the nominal stock price. But so long as the fun lasts, it can be fun. I like to keep a spread of expiry dates, tilted towards the distant future, as the fun might end at any time and I wouldn't ever want to be in the situation of having to reduce my position size by a lot while the stock was unusually cheap. I'd live, but I'd be grumpy for a bit.

Jim