No. of Recommendations: 1
Jim says:
This can of course be pushed further with higher strike prices and/or less stock, but that example shows that how even a small amount of leverage makes a boring investment return into a quite good one.
At the moment I keep a high amount of cash in my investment account. One might or might not debate the wisdom of that, but I mention it because I think that if you do desire to keep cash in your portfolio, you are BETTER OFF not using DITM leverage for long term stock holdings.
This result holds as long as the cash in your account is earning a LOWER rate than the implied interest rate on your DITM leverage loan. I think that will effectively always be the case if you are looking at Cash held in bonds with expiry similar to the expiry of the DITM calls, but maybe this assumption is get-around-able?
I just checked the 1/21/2028 expiry $280 strike BRK options with BRK on 1/6/2026 trading at $499.02 and I calculate the implied loan as having a 5.21% APR. That is a pretty good and a pretty low APR, but it is higher than I get on my cash, which is right around 4%, possibly a little lower.
So that means, IF I do a DITM leverage on my BRK I am simultaneously (implicitly) borrowing at 5.21% while saving at 4%, which is a dead loss of 1.21% per year on the cash I have done that with. I would be 1.21% to the good if I simply got rid of my BRK leverage and held the shares, plus slightly less cash.
I am wondering
1) is there a way to get better than 5.2% on cash with a term of about 2 years, which is the term of the BRK call I looked at?
2) Is there some other reason/value in holding the cash in one pile while having the implicit 5.21% loan I am paying for with the DITM call?
