Post New

After costly debacle(s) with Tesla puts I told myself "Never again puts. Only calls". A friend with decades of experience in option trading (He doesn't do it anymore, saying it was a zero sum game for him, that he mostly was right from the direction, but wrong from the timing) replied "Why? It's the same whether you bet with puts on falling or with calls on rising prices".

Is it?

A) The max. profit with puts is limited (underlying shares don't go lower than 0).

B) If your options are not very short-lived time is more against you with puts than with calls, as companies with continuing profits over time become more valuable and stock prices in general therefore tend to rather rise than fall (the indexing argument).

Especially if you want to play the option game "safe" (what a contradiction in itself :) and buy the longest running LEAP's, expiring in years, because of B) time clearly is on the side of calls, not puts.

Maybe my fellow posters, especially those "playing" themselves with options, have comments?


P. S. : Just for entertainment purposes, here is my current reason for those musings: 1 month ago I bought a bouquet of SaaS puts, expiring in November. Perfect timing --- if I had bought calls instead! Saul with his frustrated post "Is this the bottom?" or so to which I then pointed here hit the bottom absolutely perfectly. So for 1 month now I watched those stocks rising and my puts sinking.

I am not convinced if continuing to hold I might not be vindicated in the end, but time value is running out@. So I am using every opportunity to get out of this mess with a blue eye only. That's possible because economic data currently do not favor SaaS stocks. Every few days for one or the other such company there is a Q1 earnings report saying not only the hypergrowth times are over, but partly even warning of lower earnings. That's why a few days I could unload Shopify nearly without a loss (2 days ago 10% down), yesterday Okta without a loss (nearly 20% down yesterday) and today probably S without a loss (yesterday 35% down). But while it's nice being able to avoid losses that's not exactly the purpose of the game.

So it seems for SaaS stocks the time of differentiation has come, of darwinian selection, with the strongest in a specific field like "endpoint security" taking everything (all the customers) and the losers withering away --- which of course makes the SaaS game much more challenging for Saul & Co. compared with the time one might have succeeded even if one had thrown darts. That's probably the reason why Saul now puts so much focus on traditional valuation.

'' Maybe my fellow posters, especially those "playing" themselves with options, have comments? '' since this is the brk board, what would Buffett and Munger advise for Americans ?

That said, I'm currently short the June 16 , 285 puts and the 330 calls.

After costly debacle(s) with Tesla puts I told myself "Never again puts. Only calls". A friend with decades of experience in option trading (He doesn't do it anymore, saying it was a zero sum game for him, that he mostly was right from the direction, but wrong from the timing) replied "Why? It's the same whether you bet with puts on falling or with calls on rising prices".

Is it?

Are you asking whether going long calls or going long puts are the same? Of course not! In one case you are going long the underlying, in the other you are shorting the underlying. Stock on average goes up over time, so betting short, on average is a loser while going long, on average, is a winner. Does this mean you can't make money going short? No, but it means it is a lot harder to make money going short.

Or are you asking whether going long by buying calls and going long by selling puts is the same? Well these are a lot more similar, probably more similar than different. Some people think they are earning the time value of options when the short a put instead of going long a call, but that is not quite right. As you note, the performance of options is not symmetric to rising and falling prices. So going long using calls, you have a hard limit on your losses: you can't lose more than every penny you invested in going long the calls. But writing (or selling) puts to open a long position, you can in principle lose a lot more than you "invested". Of course it is tricky to say how much you "invested" when you write a put since you actually get paid cash to write a put. But let us say you find a put with about the same leverage and time-to-expiry as a candidate call position. You are risking more on the downside writing the short put than buying the long call. To make up for this extra risk, writing calls is cheaper up front, you actually get given cash when you write the put, but you will have a longer tail of losses writing puts than buying calls.

And in any case, unless you are buying in the money LEAPS to get some leverage, you are betting on the timing of the market in any other option trade. Don't kid yourself by thinking you are not.

R:

'' Maybe my fellow posters, especially those "playing" themselves with options, have comments? '' since this is the brk board, what would Buffett and Munger advise for Americans

I have never heard of Buffett or Munger doing anything with options in the short term. Every trade I am aware of has been multi-year options.

They believe they can predict the market better in the long run than in the short run. In other words, they don't believe they can time the market, or perhaps more to the point, they don't believe they have to try to time the market in order to make money.

R:

'' Maybe my fellow posters, especially those "playing" themselves with options, have comments? '' since this is the brk board, what would Buffett and Munger advise for Americans

Raphl, thanks for the reply. Your above quoting me though I don't understand as I did say in my original post the first part, the one you put in apostrophes, but not the second part.

And in any case, unless you are buying in the money LEAPS to get some leverage, you are betting on the timing of the market in any other option trade.


I respectfully disagree. I have many trades for all of the above (not on TSLA, I have no ability to estimate value there) both buying and selling puts and calls and even in the case of ITM LEAPS I still have a bet on timing the market. There is still a defined expiration date of the LEAP holding where one will be forced to make a decision. Do I take profits/losses and move on or do I maintain the position by either exercising my optionality or rolling to another option contract date into the future?
That is a completely different mindset than buying shares and holding long which, I believe, most stockholders would define as NOT being market timing.

Jim's advice for planning for 1-2 rolls when putting on a deep ITM LEAP position is sound and, in my real world experience, a way to mildly mitigate the timing issue. But make no mistake, timing is still in play because the market can disagree with your valuation opinion longer than you may stay solvent. I recently rolled some BRK jun23 LEAPS out to Jan25 and the interest on that roll was nearly double what I paid for the initial Jun23 contract. The trade is still nicely profitable but there will come a point where interest rates and BRK valuation will force me back to an unleveraged position. That's still market timing when compared to the base case of simply holding shares. I'm comfortable with it for now but others may not be.


Jeff

'I recently rolled some BRK jun23 LEAPS out to Jan25 and the interest on that roll was nearly double what I paid for the initial Jun23 contract.'

I bought some BRK Jan'24 DITM call LEAPS from late last Summer which have worked out pretty well (so far). How would you approach the handling of these over the coming months given your experience & BRK price rise since October? Thanks.

Hi Said,

I think Ralph has come close to answering your question but perhaps not fully. I will add a little here which hopefully when combined with his answer gives you a more complete picture.

I think the lessons you learned or should have learned with TSLA are that:
(1) An overall short position is riskier than an overall long position.
(2) Adding leverage (which options allow you to do easily) magnifies that risk.

I think where you are a little bit less clear is what constitutes an overall long or short position with options.

These are all overall long positions:
- buy the stock long
- buy a call option
- sell (write) a put option

These are all overall short positions:
- sell the stock short
- buy a put option
- sell (write) a call option

Of all of the above, I only use two of them which are both overall long positions:
- buy the stock long
- sell (write) put options

Jim has written on numerous occasions about put writing. I would recommend that you search for some of his posts on the topic.

StevnFool

I bought some BRK Jan'24 DITM call LEAPS from late last Summer which have worked out pretty well (so far). How would you approach the handling of these over the coming months given your experience & BRK price rise since October?

I can't give you investment advice but I do happen to own a slug of Jan24 contracts that I purchased in the fall of 2021 (rolls of Jan22 contracts) and the summer of 2022 (putting leverage back on after pulling back that spring). I still have a day job and my personal situation may be much different than yours so please do your own due diligence. I highly recommend reading Jim's posts on the subject. He is vastly better at articulating the details than I am.

I try to keep my decision points on BRK leaps rather simple. Ideally I would like to buy them at times when BRK is trading in the lower quartile of price/IV and sell when they are in the upper quartile. If we equate that to price/bv I would like to buy under 1.31x and sell at something over 1.42x. I also like to keep my level of exposure spread somewhat evenly across expiration dates to limit risk of needing to make a large cash infusion to maintain leverage if needed.

I would like to roll my JAN24s to JAN26 contracts when they become available sometime in Sept or Oct this fall if the forward returns look attractive. I'm currently a little overweight on the JAN24 so I may choose to roll some to JAN25 at some point. I personally calculate current IV to be $350-$360/share and year end maybe $370-$380 so if I see share prices near those ranges I may reduce my leverage overall and buy shares or hold cash instead. My opinion on IV could change too if net income from Ops comes in weak again in Q2.


Jeff

Many Thanks, Jeff! Your and Jim's option perspectives seems very thoughtful, rational and in line with my (toes in the water) thoughts and experience in call LEAPS which are a lot of fun to supplement my usual buy & hold.

I recall WEB and CTM saying the longest dated options are more likely to be priced inaccurately, and BRK did quite well with those index put options after the GFC. I do appreciate such wisdom so generously shared by Shrewds like yourself.

Post New

Retirement Investing FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.