No. of Recommendations: 27
Just a follow up on the post from August, in case anybody is interested in how such things sometimes go.
"Wild suggestion:
Write a cash-backed put option. For a strange example, consider the June 2026 $490 strike, current bid is $41.85, also last trade. The current stock price is about $456.50.
Why the odd choice? Long date, and high strike.
Well, book per share might be around $335-345 at end Q2 next year, a sort of on-trend wild guess. That put would get you a net entry price of 490-41.85= $448.15. So, that might be P/B of about 1.30 to 1.34. If the future is even vaguely like the past, that's very unlikely to end badly. If P/B is a fairly "normal"/average level at the time, say $465-480, the odds of assignment are somewhat better than even, and you get your great entry.
Or, maybe the stock price is above average, and you only get to keep the premium and your current cash. That's a rate of return of 9.34%/year on the capital committed to the deal, which is additive to whatever you're earning in interest. My current weighted average interest rate on cash is 3.568% at my broker. That may change, but the total is 12.9%/year rate for now, not to be sneezed at.
Yeah, sure, it's over-complicated, but both outcomes have their charms. I just thought I'd mess with your heads.
And to be complete, a perfectly reasonable comment from later in the thread:
"To repeat, this debate would make Buffett sick if he read it. Good luck. "
I just thought I'd follow up, since I actually did this around the time of the post, for the reasons stated: I wanted either a good solid cash return or a good entry price on some Berkshire shares, not caring much which.
Here's how it came out:
I wrote June 2026 $480 puts for $35.23, and $490 puts for $41.85, so let's consider it on average as having written $485 puts for a premium of $38.54 and therefore a [potential] net entry price of $446.46 (incidentally 1.38 times today's known book per share, probably a good entry). I had to have $446.46 in cash sitting around in case they were assigned, so that's the amount I put "at risk" for the deal.
I just closed those puts (bought them back) for an average premium of $12.58. I made 67% of the maximum possible profit in 36% of the maximum possible elapsed time. The profit was $25.95 on the $446.46 theoretically at risk, so 5.81% in 116 days, or 18.3%/year rate of return annualized linearly. I also had the committed cash on deposit earning over 3%/year interest which adds to that, so it has been a nice little earner at over 20%/year rate of return.
Why close it early? The maximum remaining profit wasn't very interesting expressed as a rate, and the stock price feels a pinch rich again at 1.597 times known book, so another dip might be in the cards. Who knows, I might be able to do it all over again.
Jim
