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In https://www.shrewdm.com/MB?pid=882213795 robm pointed out that with a cash-secured put you earn interest on the entire strike price, not just your backing cash.

So, if earning interest on $500 is good then earning interest on $700 must be really good.

Writing a $700 Jan '27 put will yield almost no time value -- it might even be negative.

However, at an interest rate of 3.6% / year you would earn about 5% for 17 months (til Jan '27). That's about $35 a share.

This put discussion was all in the context of wanting to own the stock. What is the downside of buying the stock via the $700 put, given the 5% discount?

I believe selling a 700 put is going to be very similar to buying the stock and writing a 700 call, after you figure the interest you would get, assuming the likely interest rates between now and Jan. 2027.

Also, the bid-ask spreads on the 700 puts are huge.

If there was free money to be had, it would have been arbitraged away long ago.

Also, the bid-ask spreads on the 700 puts are huge.

Nope.

Bid = 221.70
Ask = 224.70

Stock = 477.24

700 - 221.70 = 478.30

Time Value = 477.24 - 478.30 = -1.06 at the bid

Bid = 221.70
Ask = 224.70
Time Value = 477.24 - 478.30 = -1.06 at the bid

Though I have no comment on the advisability of the $700 puts, it's pretty certain you can do very much better than the bid if selling one of these far-from-the-money contracts.
You can generally trade wide-spread Berkshire options at 25% up the spread or better, and you can pretty much count on doing it at 30% of the way across the spread.

So, you could generally sell this contract at .25*221.70 + .75*224.70 = $223.95

So, to complete the math, assuming your numbers are right,

Stock = $477.24
700 - 223.95 = $476.05
Time Value = 477.24 - 476.05 = $1.19 of time premium at the likely trade price.
Not much, but positive.


Does it make sense to enter a stock position this way? Sure, if the numbers work. For example, much of Berkshire's initial position in BNSF, which was trading at around $80, was via $40 call options purchased for around $40. I'm not entirely sure of the reasoning. Perhaps the implied interest rate embedded in the options was attractive, or perhaps it avoided having to disclose building a position. Options do not appear on 13f forms.

Jim

You can generally trade wide-spread Berkshire options at 25% up the spread or better, and you can pretty much count on doing it at 30% of the way across the spread.

So, you could generally sell this contract at .25*221.70 + .75*224.70 = $223.95

I think you have the .25 and .75 swapped. When selling, the achieved price will be closer to the bid than the ask.

But I was giving a worst-case, to point out that the interest was the main source of reduction in the net price, versus the time-value, which is near zero. Either positive or negative.

If I just want income and not own the stock, and I sell deep in the money and it gets exercised what is the disadvantage of selling right after I have to buy it when exercised?

" If I just want income and not own the stock, and I sell deep in the money and it gets exercised what is the disadvantage of selling right after I have to buy it when exercised?"

Are you an American taxpayer doing this in a taxable account?

yes

" If I just want income and not own the stock, and I sell deep in the money and it gets exercised what is the disadvantage of selling right after I have to buy it when exercised?"

Are you an American taxpayer doing this in a taxable account?

Yes

Writing a $700 Jan '27 put will yield almost no time value -- it might even be negative.

I theory it can't be negative. Because if it were negative, it would be worth buying and immediately exercising the option (US equity options can be exercised at any time through expiry, European equity options can only be exercised at expiry). Thus, arbitrage would exist and that inefficiency would immediately disappear.

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