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I'm a bit cash heavy, and Berkshire light, at the moment. I'm not exactly sure what a great re-entry price is...it depends in part how low the price goes in future, which is very much unknown.

One possible way to pass the time: write a put option that gets you the price you'd like, backed up by the cash you have sitting around earning interest.
The time to consider writing cash-backed put options is on a panicky day when the price is experiencing momentary weakness, as that's when premiums are decent. Down 2% today, so that counts.

A random example: a January 2025 $410 put option could be written for a premium about $16.80 right now.
There are two possible outcomes:
* The stock is assigned. You get a net entry price of (strike-premium)=$393.20 in nominal terms, which is 1.36 times current known book. That's about 2% cheaper than the 10 year average P/B. Berkshire has been buying back shares at prices over $400, so that doesn't seem too bad, and the stock will presumably be worth more at year end. But most importantly, the market price might be higher or lower, but the value will presumably be higher at expiry, especially after 8 months of inflation since the entry price is nominal. It's likely to be a good net entry price at around year end.
* Or, the stock is not assigned. As a function of the amount of capital tied up = net entry price, you get an annualized return of about 6.55%/year rate from the premium. But, this is in addition to whatever you're earning on the cash at the moment that would be backing up the put option, around 4.8%-5.4% depending on how you're managing it. Total around 10%/year, which is not that bad at all. In particular, it's somewhat above what I would expect from market returns on Berkshire's stock price in the next 8-12 months if valuation multiples and growth rates are typical.

Just a thought.

Jim

Sorry, ignore that post.
I filled a column with the constant current book value thinking it would just copy the constant down, and Excel added $1 per B share for each row! (each possible put contract)

The re-entry for the contract I mentioned equates to about 1.484 times book, still a fair bit higher than average, not lower than average.

The theory is good I think, but the stock price isn't nearly low enough at the moment for remunerative put writing to offer an attractive re-entry price.

Jim

Well speaking of options, Mr. Market allowed me to close my June’24 400 covered call contracts today @ $9.90 (which I had sold for $8.95 in January ‘24). Figured I did slightly better than break even, considering the cash received up front was in a MM yielding ~5%. Learning experience & exercise, I suppose.

As expiry approached, I admit being a bit more antsy and resistant to part with the “beloved” BRK shares than anticipated! :)

I thought you could only use a money market fund which pays next to nothing to secure the puts?

" I thought you could only use a money market fund which pays next to nothing to secure the puts?"

At Vanguard and fido I use my settlement account, aka, MMY to secure puts I'm short in the IRA or taxable accounts. They yield 5 to 5.4 %.

at vanguard its, VMFXX.

My sweep vehicles are all yielding over 5% except for at TDAmeritrade. TD still allows you to purchase any money fund and it counts as cash to back put sales.

I’ve been selling puts against KMX too for awhile. Fairly easy to get 20%+ yields at prices I find attractive.

Jeff

WEBSpired:
Well speaking of options, Mr. Market allowed me to close my June’24 400 covered call contracts today @ $9.90 (which I had sold for $8.95 in January ‘24). Figured I did slightly better than break even, considering the cash received up front was in a MM yielding ~5%. Learning experience & exercise, I suppose.

Witout counting the money market interest, you lost $0.95 per share on this transaction, $99.50 per contract LOSS. Adjusted for money market earnings on your $8.95, that comes down to a loss of $0.7625 per share or $76.25 per contract.

You did noticably worse than breaking even. If you relized that, then I'd agree you might have learned something.

R:

Thanks RC, yes, you are correct. Not my first loss, but worth the “mosquito bite” imo to keep my BRK shares! I’ll brush up on my basic math! :)

Well speaking of options, Mr. Market allowed me to close my June’24 400 covered call contracts today @ $9.90 (which I had sold for $8.95 in January ‘24).

In January, when BRK.B was $360-$370, you sold $400 calls. Then it made a big move up. So why not sell calls now and recover your (small) loss?

BRK is definitely at a higher valuation now than it was in January. If a covered call made sense then, it makes more sense now.

I jumped the gun and wrote June $375 calls, with a break-even of $390. I'll keep rolling them because I don't see BRK as a stock that is going to run away from me. Too predictable. It could take months for my calls to break even, but it'll happen eventually.

I jumped the gun and wrote June $375 calls, with a break-even of $390. I'll keep rolling them because I don't see BRK as a stock that is going to run away from me. Too predictable. It could take months for my calls to break even, but it'll happen eventually.


This is somewhat similar to my situation. The price has been higher lately than originally appeared likely--a rare season in the sun for Berkshire shares. My original guesstimate of likely late-2024 market price was around $380, if valuation multiples and growth rates had both remained typical of recent years. (seems silly now, but it didn't then). I have rolled my positions, some more than once, and nothing has been called away.

When you roll your calls up and out, try to pick contracts that meet all of these tests:
(a) you are increasing your breakeven. New strike+premium is higher than old strike+premium.
(b) each roll is for a credit, not a debit. The premium on what you're selling is higher than that on what you're buying. You are gaining cash, not consuming cash.
(c) since you are rolling to a later date, you ideally also want to be increasing your breakeven by an amount which approximates how much fair value is likely to rise in that amount of time. Otherwise your new exit could be at a higher price but not at a richer valuation multiple.


You will typically find that test (a) will be met. But in order to meet (b) you will have only a pretty modest benefit on criterion (a), so keep an eye on (c).

The reasons for (b) is that you don't want to rack up a bunch of cash losses from your rolls that you have to recoup later with more and more premiums. It's best not to be in the situation of having to dig yourself out of a hole cash-wise. And the reason for (c) is that if you end up having to roll more than once, you don't want your exit valuation multiple to be ratcheting downwards.

Jim

When you roll your calls up and out, try to pick contracts that meet all of these tests:
(a) you are increasing your breakeven. New strike+premium is higher than old strike+premium.
(b) each roll is for a credit, not a debit. The premium on what you're selling is higher than that on what you're buying. You are gaining cash, not consuming cash.
(c) since you are rolling to a later date, you ideally also want to be increasing your breakeven by an amount which approximates how much fair value is likely to rise in that amount of time. Otherwise your new exit could be at a higher price but not at a richer valuation multiple.

Thanks for succinctly summarizing exactly the factors I've been wrestling with. Strikes and expirations have to be chosen carefully to avoid the stock running away from you.

Inflation is the wild card that is hard to predict and overcome.

Inflation is the wild card that is hard to predict and overcome.

Indeed.
Especially since I think revenues are quite easy to adjust for inflation, but book value not so much.
If some division owns a factory with a certain depreciated value that approximates its true value, they can raise the prices of the things they're making (fixing revenue) but the book value of the productive assets will stay in nominal terms.

On the revenue and profit side I have been tentatively concluding that Berkshire has not done so fantastically during the inflation spike...either some cyclical slowdown, and/or pricing not keeping up with inflation. Measured a number of ways the inflation-adjusted observable value growth recently has not been on trend.

Jim

When you roll your calls up and out, try to pick contracts that meet all of these tests:

I can argue both sides of this issue. :-)

The alternative viewpoint is that rolling the in-the-money call consists of 1) closing the call at a loss, and 2) selling a new call. On considering this further, I think those two actions should be independent.

The loss on the expiring call is irreversible. So why should the strike and expiration of the new call depend on how far underwater it is?

Making money with covered calls boils down to choosing wisely when to write a covered call.

But sometimes you're still wrong. The losing bet doesn't change the best way to make money with a covered call. It's either a good time to write a call or it isn't.

The alternative viewpoint is that rolling the in-the-money call consists of 1) closing the call at a loss, and 2) selling a new call. On considering this further, I think those two actions should be independent.
The loss on the expiring call is irreversible. So why should the strike and expiration of the new call depend on how far underwater it is?

You *can* think of it as two separate trades. But you may or may not find that the most useful approach.
Yes, the first leg lost money. The second one might or might not have a gain, which may or may not be more than the first loss, so you might or might want to do the second one. But if your investment thesis hasn't changed and the first one lost money, then the second one is an even better deal that the first one, so it's a continuation of the same single initial investment decision. You're just waiting for it to work out, which hasn't happened yet.

If you buy a stock thinking it will soon go up in price by 30%, the hold period to hit that return goal might be slow or quick. Since options expire, and and investment thesis can take time to work out, I personally find it more useful to think of it as a single position that has certain events during its lifetime: an investment thesis, a position opening, [possibly maintenance bookkeeping stuff in the middle], and a position closing. For me, rolling an option is just maintenance work, like renewing a magazine subscription each year.

A good parallel example might be deciding to hedge your portfolio for a year with short index futures. You would normally do this three months at a time, as liquidity is stupendous for the near quarter contract and very much lacking after that. I don't see any particular utility to thinking of that, or doing your own bookkeeping, as four separate transactions with their own profit and loss---you hedged for the whole year, with one decision. If you were a CEO who decided to do this, you'd only have instructed the banker once. I think of options much the same way...it's the length of the position that matters, not the length of the (possibly multiple) instruments you used to implement it.

To me, it's just a long term position. I have some Berkshire long calls that I've been rolling for a decade or more. I don't even calculate how much I've gained or lost on the individual legs. It's just one method of having the exposure to the stock.

But, as you say, it's certainly true they are technically separate contract positions. If nothing else, your tax man or stock broker might care about that distinction.

Jim

The alternative viewpoint is that rolling the in-the-money call consists of 1) closing the call at a loss, and 2) selling a new call. On considering this further, I think those two actions should be independent.

The loss on the expiring call is irreversible. So why should the strike and expiration of the new call depend on how far underwater it is?


I agree in principle. And stated so long ago on the former TMF boards (R.I.P.)
This is exactly how my broker reports the transactions. I think that the main purpose of thinking of it as one long running transaction with a little hiccup in the middle is to fool oneself. Plus the erroneous mindset of "It is not a loss until you sell".
A.K.A. "sunk cost fallacy"

Oh well.

Etrade, and probably other brokers, has a "roll" transaction type, where you put in the existing option and the new option (new strike & expiration) along with the net credit or debit. This leads one to think of it as one transaction. But when it fills, they show a sell and a buy transaction, not one.

So logically, you should select the new option you are rolling to the same way you pick any new option -- and pay no attention to the strike and duration of the old option you are rolling from.

To me, it's just a long term position. I have some Berkshire long calls that I've been rolling for a decade or more. I don't even calculate how much I've gained or lost on the individual legs. It's just one method of having the exposure to the stock.

Certainly an arguably valid way of thinking about it.

In the case of long-dated DITM call options, that's essentially a bit of permanent leverage that you can only implement by taking many short-lived bites because that is the only mechanism available.

Speaking of leverage. I read a paper about the most optimum amount of leverage. Unfortunately I can't find it now.
He pointed out that B&H was leverage 1X, although most people call it "unleveraged". As I recall he said the best amount was a little under 2X. Around 1.75X. 3X was too much and 4X was waaaay too much.
Based on that, for a 200 shares of a stock you would sell 80-100 shares and put that amount of money on 2X leverage. Preferably non-callable leverage, such as futures(?) or DITM calls.

When searching for that paper just now, I ran across another article (which I also cannot find again) that claimed to show that the 2x the daily performance of S&P500 (SSO etf) was not grossly dangerous to hold long term, despite the warnings.

another article (which I also cannot find again) that claimed to show that the 2x the daily performance of S&P500 (SSO etf) was not grossly dangerous to hold long term, despite the warnings.

So I just had a brainstorm and did a backtest. Can't use portfoliovisualizer since they kneecapped it.

But: https://testfol.io/?d=eJytT7FOAzEM%2FRfPQUo7dMiMmF...

Since SSO inception (6/21/2006):
SPY CAGR: 10.43% MaxDD: -55.19%
SSO CAGR: 13.99% MaxDD: -84.67% (!!!!)

Huge drawdown in 2008/2009. Didn't recover until May 2014. Might have been okay with half-decent timing.

“In January, when BRK.B was $360-$370, you sold $400 calls. Then it made a big move up. So why not sell calls now and recover your (small) loss?”

Fair question and I did think about rolling up and out. I’m still in the option learning phase & content to own stock only for now(BRK up >27% over last 12 months). I wrote some June ‘24 440 covered calls in 2/24 for $6.85/ contract & I’ll just those ride out. The risk of contractually releasing hundreds of Berkshire shares I honestly found more unsettling than anticipated, even if the premium received would have made it slightly profitable.

I did think about rolling up and out. I’m still in the option learning phase & content to own stock only for now(BRK up >27% over last 12 months). I wrote some June ‘24 440 covered calls in 2/24 for $6.85/ contract & I’ll just those ride out. The risk of contractually releasing hundreds of Berkshire shares I honestly found more unsettling than anticipated, even if the premium received would have made it slightly profitable.

I think a key point of any option writing, whether calls or puts, is choosing your position in a "balanced" way. There are always two possible outcomes...either the option is exercised, or it expires. For any position that you open, you don't want to open it unless you are happy with both possible outcomes, preferably equally happy. That's because you will always end up with the outcome that looks worse at the moment you know which one it will be! (it may only look worse for a day, but sure as shootin', that's the one you'll get).

Of course perhaps new information comes in and you change your mind about how relatively acceptable the two outcomes are. You might want to change your mind, and perhaps change your position at that point. There's nothing wrong with that, and it's as true of an option position as it is of a stock position. Things change. But if the news hasn't surprised, then you should be happy with either outcome.

==============

For those of us who wrote some covered calls lately, I believe the important thing is to track it and think about it in a way that matches your investment thesis. Only that way can you keep track of whether your investments are working out for you. I think of switching from a long stock position to a covered call position (i.e., writing a call backed up by a pre-existing long position), as merely a conditional way of selling some of the stock I own. It is in effect a modification to the original investment, and investment thesis, of the original stock purchase itself, not a new stand-alone position: I decided there was a target price that I'd be willing to sell soon. It isn't a new investment, just one way of closing an existing one.

I bring this up to get back to a comment earlier in the thread: a poster took a loss on an option position. Ignore for a moment the fact that the loss was realized--just consider the loss itself that day, realized or not. The thing to remember is, it wasn't a short option position, it was a covered call. That is, a single investment consisting of two legs together. (I presume pretty much nobody here would be writing naked calls against Berkshire without owning any stock...not really the best stock to be bearish on). Thus it wasn't a loss on an option position, it was a gain on the covered call, because during the interval in question the stock half of the CC position went up in price more than the option half of the CC position went down. Whether the option was closed that day or not, the covered call position was more profitable than it was the day it started (the day the CC position was created from a long stock position). Sure, one would have been better off sticking with a plain stock position rather than a covered call position in this interval, but them's the breaks--there were offsetting advantages to be considered, but not all investment decisions work out optimally. A key point is that both alternatives (CC or stock) were profitable in that interval, just one more so than the other.

This is a general rule of all hedged positions and portfolios. It's not really useful to evaluate one side or the other in isolation. One of them will ALWAYS be a loser, almost by definition. Normally there is not even any intent that both sides should be winners. The investment is created as a *combination* with the range of outcomes of the combination in mind, so it's the value of the portfolio--the whole combination--that matters. It doesn't matter whether A gained and B lost, or vice versa, what matters is whether A+B gained, since that's the investment that was created.

Hedging is quite a different situation from having a portfolio which just happens to include wholly independent long and short positions which are all intended to be profitable individually. In that case every position has its own investment thesis, so each one should have its profit and loss and thesis success evaluated on its own.

Jim

"One possible way to pass the time: write a put option that gets you the price you'd like, backed up by the cash you have sitting around earning interest."

I did this for most of the first half of 2023 about monthly. The only month I was assigned was March at 305 strike price. I still hold those shares of course. But once mid-2023 came around, the stock had risen so much and so fast that the put trade wasn't worth it anymore, so I stopped doing it. If we see a decent pullback, I might start up that sequence of trades again.

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