No. of Recommendations: 5
"selling calls will lower your portfolio volatility AND returns."
Is this a misunderstanding? We are talking about covered calls, to make some extra $. Why should selling Berkshire covered calls lower returns - if done conservatively, with a strike price high enough so that there is very low probability of the shares being called away?
There are 4 price quadrants: up/down & a little/a lot.
Both littles are a wash.
In up a lot, your gain is capped, you miss out on all the gain past the strike.
In down a lot, you fully participate in the loss. This is infrequent, but gives you a large loss.
If you continually write covered calls then the law of large numbers says you will sometimes hit the down a lot quadrant.
In order to win at covered calls you have to have a strategy to avoid the down a lot times. And preferably also don't write CCs in the up a lot times.
who say they use this strategy since 10 or 20 years to constantly(!) add 2% or so to the returns of their Berkshire shares ( without ever or only once the shares having been called away).
Not possible. Not possible if done constantly. In the "up a lot" quadrant the stock will get called away.
BWDIK?
For example, suppose your strategy is to sell a CC at 5% above the current price.
BRK-A monthly returns from 1980 to 2024, 528 months:
For the "a lot" quadrant:
126 (23.9% of months) were gain of more than 5% (Average such gain: 10.05%)
51 (9.7% of months) were loss of more than 5% (Average such loss: -8.97%)
For the "a little" quadrant:
196 were gain less than 5% (avg gain: 2.17%)
155 were loss less than 5% (avg loss: -2.22%)
The "a littles" are a wash, so the total gain here is just the option premium.
Up a lot you get stock gain of 5% but miss out on an additional 10% gain.
Down a lot you get stock loss of -5% and the additional loss of -9% (net -14%).
Both mitigated by the option premium.
Assuming I got the math right.
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How far up do you want to go with the strike so there is little chance of it being called away?
10% above current price there were 45 months. 8.5% of months. You'd be getting the 10% return but missing out on an additional 14.9%. Yuck!
BRK-B is currently 400. The next month (May 17'24) 440 call is bid 0.24 ask 0.32.
Probably you could sell the call for 0.28. That's a whole $28 premium! Why bother?
Try 5% OTM, that's the 420 call. Selling 1 call will net you $200 premium.
Who knows, maybe there is something I'm missing?
