Post New

So, you're sitting on some cash, thinking you want to buy back into Berkshire next time it's cheap. You want a seriously good entry, but you don't have any idea if it will go any lower. A price dip is a terrible thing to waste, but you never know when it will end. What's a hominin to do?

Wild suggestion:

Write a cash-backed put option. For a strange example, consider the June 2026 $490 strike, current bid is $41.85, also last trade. The current stock price is about $456.50.

Why the odd choice? Long date, and high strike.
Well, book per share might be around $335-345 at end Q2 next year, a sort of on-trend wild guess. That put would get you a net entry price of 490-41.85= $448.15. So, that might be P/B of about 1.30 to 1.34. If the future is even vaguely like the past, that's very unlikely to end badly. If P/B is a fairly "normal"/average level at the time, say $465-480, the odds of assignment are somewhat better than even, and you get your great entry.

Or, maybe the stock price is above average, and you only get to keep the premium and your current cash. That's a rate of return of 9.34%/year on the capital committed to the deal, which is additive to whatever you're earning in interest. My current weighted average interest rate on cash is 3.568% at my broker. That may change, but the total is 12.9%/year rate for now, not to be sneezed at.

Yeah, sure, it's over-complicated, but both outcomes have their charms. I just thought I'd mess with your heads.

Jim

So, you're sitting on some cash, thinking you want to buy back into Berkshire next time it's cheap ..... Wild suggestion: Write a cash-backed put option....

I don't think it's a wild suggestion, but one that makes a lot of sense for someone like me who currently has a huge cash luxury problem. Pity that you for the reasons you stated won´t follow up on it yourself, as it would solve your cash problem too. So you have to buy a house instead.

That put would get you a net entry price of 490-41.85= $448.15. So, that might be P/B of about 1.30 to 1.34.

Or, maybe the stock price is above average, and you only get to keep the premium and your current cash. That's a rate of return of 9.34%/year on the capital committed to the deal, which is additive to whatever you're earning in interest. My current weighted average interest rate on cash is 3.568% at my broker. That may change, but the total is 12.9%/year rate for now, not to be sneezed at.

I don't know. I can present the same numbers differently, and the conclusion might be different.

The 12.9%/year for the next 10.5 months is common to both outcomes, so we can ignore that.

Now the two alternative outcomes are:
A. if BRK < 490 you must buy it for $490
B. if BRK > 490 you don't buy it

I think the thing missing from your net entry price of 448.15 is that you also have a year of only a 3.5% return. We can't double count the 41.85.

The 12.9%/year for the next 10.5 months is common to both outcomes, so we can ignore that...

Not really. That return includes the disappearance of the in-the-money portion of the premium, something you get as cash only in the event that the stock price is high and the option expires. The constant portion is only the relatively low rate of time value erosion.



A better view is to appreciate that are four entirely mutually exclusive situations for what could happen between now and next June. You can't mix them.


The first two involve no options: just waiting for a moment to pounce with your cash, which the post assumes is what you're doing now.

(1) You sit on cash waiting for a good re-entry, but you never see a number you like, so you end up with nothing but the interest on the cash. Around 3%/year rate, depending on what you hold and how rates change.

(2) You see a price you like some time before then and you buy Berkshire shares. You have your ~3%/year interest on cash till whenever that happens. By definition you get a price you're happy with, but it might be more or less than $448.15. As the months go by, that particular number will become a more aggressive and less likely target. It's 1.45 times current book, gradually dropping to maybe 1.31-1.36 times book next June.


The second two outcomes are the two mentioned in my post

(3) You sit on cash the whole time. Berkshire stays above $480 during the stretch that it might get exercised, so the options expire worthless. You're still in cash at the end, but you've made exactly 9.34%/year higher return than situation (1).

(4) The option is exercised, so you end up having bought the stock at a net entry price of $448.15. This usually happens not that long before expiry, but could happen any time. You get the ~3%/year interest on your cash pile till then. Quite similar to outcome (2), but probably a slightly higher chance of it happening as it doesn't require any price dip at all to happen.


The starting assumption is that you *want* a re-entry, so (4) is better than (2), as it is more likely to get you the stock. The outcomes are otherwise quite similar.
And if you don't get the stock, then (3) is far preferable to (1).

Jim

The starting assumption is that you *want* a re-entry, so (4) is better than (2), as it is more likely to get you the stock. The outcomes are otherwise quite similar.
And if you don't get the stock, then (3) is far preferable to (1).

Yes, so you can pick a strike & premium that yields the probability of owning the stock that you find acceptable (and net cost).

Or write puts at multiple different strike & premium combinations. The cheaper the price, the more you buy.

Wild suggestion:

Write a cash-backed put option. For a strange example, consider the June 2026 $490 strike, current bid is $41.85, also last trade. The current stock price is about $456.50.

The stock price now is ~470 so I am going to compare the June '26 $500 put with the buy-write of the $500 call.

$500 Put: ~$39. Net cost = 500 - 39 = $461

$500 Call: ~25. Net cost = 470 - 25 = $445

If the stock price is below $500 at expiration, you own the stock at the above net prices.

If the stock is above $500 at expiration, the Put earns you a bit more premium plus interest on the $461.

The stock price now is ~470 so I am going to compare the June '26 $500 put with the buy-write of the $500 call.

$500 Put: ~$39. Net cost = 500 - 39 = $461

$500 Call: ~25. Net cost = 470 - 25 = $445

If the stock price is below $500 at expiration, you own the stock at the above net prices.

If the stock is above $500 at expiration, the Put earns you a bit more premium plus interest on the $461.

I left out: if the stock is above $500 at expiration, the Call earns 500 - 470 + 25 = $55.

The Put earns 39 + ~3% x 461 = $53.

Is there any scenario in which the Put is superior to the buy-write Call?

Is there any scenario in which the Put is superior to the buy-write Call?

Buy-write means you're using up your cash to pay for the stock, so you don't get interest on that.
But it does have higher time value, which becomes your income, because the strike you've chosen is closer to the stock price.

Probably the dominant things to consider are (a) how much you really want to own the stock. (b) what's the lowest entry price you'd consider good enough to be a buyer. (c) what's the lowest price you'd be willing to sell. If you can put numbers to those things, it will help a lot in picking the best strategy to achieve it.

I guess (d) is what you thin the most likely price range is for the stock around about the expiration--you'll need to know that to solve for (a). e.g,. I assume book per share will rise around 1.5% to 2.5% per quarter in nominal terms in a typical stretch these days, and that the valuation multiple that is most likely (though far from certain) is maybe in the 1.37-1.45 range.

Personally I tend to favour put writing as my bullish "go to", because I'm likely to want to enter on a price dip. Price dips are usually on days that option premiums are high, and if it's a panic they tend to rise a bit more for puts than for calls. So you simply get more time value.

Jim

Buy-write means you're using up your cash to pay for the stock, so you don't get interest on that.

Yeah, you're right.

What my calculations omitted was that you get the interest on your cash even if the stock is eventually put to you.

So, at the same strikes, the cash-secured put and the buy-write call have similar payoffs, as expected.

Is there any scenario in which the Put is superior to the buy-write Call?

First step is gathering up all the correct numbers.

Buy stock, sell call:

Buy share at 470               -470
Sell 500 call at 25            25
Interest on 445 @ 4.2% (10/12) -15.58
Deliver stock in June '26      500
NET GAIN                       39.42
PERCENT GAIN = 39.42 / 445 =   8.86%

Sell cash covered put:

Sell 500 put at 39                39
Retain 500 secured cash
Interest on 539 @ 4.2% (10/12)    18.87
Put expires worthless in June '26
NET GAIN                          57.87
PERCENT GAIN = 57.87 / 461 =      12.55%

Am I missing some cash flows here? In theory, selling a 500 put and doing a buy stock/sell call should have roughly equivalent results. I think. Or maybe the prices given for these options are not correct?

Am I missing some cash flows here? In theory, selling a 500 put and doing a buy stock/sell call should have roughly equivalent results. I think. Or maybe the prices given for these options are not correct?

They are the same if you don't deduct interest on the outlay in the first example, since you are calculating your return based on $445 of tied up capital, not zero tied up capital and a completely financed position.

First step is gathering up all the correct numbers.

Agreed! But I think your numbers would be more correct as follows...

Buy stock, sell call:
Buy share at 470               -470
Sell 500 call at 25            25
Deliver stock in June '26      500
NET GAIN                       55
PERCENT GAIN = 55 / 445 =   12.36%

Sell cash covered put:
Sell 500 put at 39                39
Retain 500 secured cash
Interest on 500 @ 4.2% (10/12)    17.50
Put expires worthless in June '26
NET GAIN                          56.50
PERCENT GAIN = 56.50 / 461 =      12.26%

The adjustments I made are:

1. There's no interest penalty on the buy-write. It's not costing you any interest, you just aren't making interest. So interest is a zero, not -15.58. That raises the gain and ROI % accordingly.

2. On the put write, you need to put up $461 of your own money, plus the $39 premium, to secure the put. So you're earning interest on that $500 commitment, not $539. This reduces the interest to $17.50 and the net gain to $56.50.

You're left with a .1% difference between the two trade ideas... basically in the noise of a bid/ask spread.

Rob

There's no interest penalty on the buy-write. It's not costing you any interest, you just aren't making interest. So interest is a zero, not -15.58. That raises the gain and ROI % accordingly.

Yes, this is correct! And it's where my calculation went wrong! Thanks.

A better way to consider the whole thing is to create two [fictional] accounts, place $50,000 into each account, and then run the theoretical trades through each account and see how much each account is worth after the theoretical 10 months when the trade ends.

Buy stock, sell call:

Balance $50k       50,000
Buy 100 shares    -47,000
Sell 1 call-500     2,500
Deliver 100 shares 50,000
Interest on bal       192.50

Value at end       55692.50
PERCENT GAIN =      12.79% (5692.50 / 44,500)

Sell cash covered put:

Balance $50k.      50,000
Sell 1 put-500      3,900
Expires worthless
Interest on bal     1,886.50

Value at end       55786.50
PERCENT GAIN -     12.55% (5786.50 / 46,100)

A better way to consider the whole thing is to create two [fictional] accounts, place $50,000 into each account

A problem with that approach is you end up with slop in the equation that can distort the actual return. E.g., in your buy-write, you have a $50,000 account that is only using $47,000 to buy stock. The extra $3,000 doesn't have anything to do with the ROI on the buy-write trade, but is being included in the calculations anyway. And in your put write account, you have a $50,000 account, but only $46,100 is at risk. In fact, you could open a no-margin, cash-secured account with a $46,100 balance, and sell the $500 put for $39, which would use all your buying power and leave you with a cash balance of $50,000, just enough to be assigned without any margin loan.

So... I prefer using only the capital at risk as the "I" in ROI and calculating it separately for each proposed trade. It's the most accurate way of comparing the performance of one trade idea to another.

In your example, on the buy-write, capital at risk is the $47,000 outlay, minus the premium received of $2,500 in your example, or $44,500. That's the most you can lose. The max gain is the premium plus the rise in stock price up to $500, which is $2,500 (premium) plus $3,000 (stock gain) or $5,500 total. That would put your max ROI on this trade at $5,500/$44,500 = 12.3%.

Using that same approach on the put write, your capital at risk is $50,000, minus the premium received of $3,900, or $46,100. Your max gain is the premium itself plus interest received on the capital at risk that is sitting in the account to support the trade, which is $3,900 plus interest of about $1,937 (assuming 4.2% interest on $46,100 for 10 months), or $5,837. That would translate to an ROI of $5,837/$46,100 = 12.66%. This shows the put write is preferable to the buy-write, using the numbers provided above as inputs, but I don't know if 4.2% is realistic - I know IB is paying around 3.8% these days. If we used that figure, it would bring the interest down to $1,460, the max gain down to 5,360, and the ROI down to 11.6%.

I guess one advantage of buy-writes that's worth noting is that although you have to put out cash, you also don't have to worry about earning interest to fill out your ROI estimates. Interest rates can fall and that can potentially cut into returns quite a bit.

Rob

I guess one advantage of buy-writes that's worth noting is that although you have to put out cash, you also don't have to worry about earning interest to fill out your ROI estimates. Interest rates can fall and that can potentially cut into returns quite a bit.

I find the main advantage of put writing is that you haven't actually laid out much cash. If you have written puts with various strikes, expiry dates, and underlying stocks, then you can use the same cash pile to back up more than its face value worth of short puts. I did this for years, and never needed to actually use more than 1/3 of the cash for assignments. Even if you did need more than your pile, you'd merely be in the situation of using a broker loan for a day till you sold the stock you'd been assigned, so the "tail risk" is not particularly bad.

The advantage of the leverage is that you can use pretty low return underlying puts which can be at low likelihood of assignment and/or against very solid securities. A boring portfolio with a pinch of leverage can be a wonderful thing, often better than an unleveraged portfolio against more speculative items.

Of course in this context it's a discussion about an entry on a particular security, meaning the only diversification would be by date, so yes, the "real world" put/call equivalence holds more than usual.

Jim

“ If you have written puts with various strikes, expiry dates, and underlying stocks, then you can use the same cash pile to back up more than its face value worth of short puts. I did this for years, and never needed to actually use more than 1/3 of the cash for assignments. Even if you did need more than your pile, you'd merely be in the situation of using a broker loan for a day till you sold the stock you'd been assigned, so the "tail risk" is not particularly bad.“ Yikes bro, this is the Berkshire Hathaway board are you trying to kill uncle Warren? There is zero chance, zero, that Buffett would ever bless shorting puts on margin. This is a terrible idea, off the charts, terrible. Over the years Ive had several friends go very broke doing silly sh$t.This is a top three way to go broke. This should not be on the Brk board, porn is more appropriate. Unreal.

I look at it from the arbitrage viewpoint.
If one was reliably better than the other, everbody would know it.
If one was reliably better than the other, the big players like Goldman Sachs would be doing it and collecting "free" money.
Some people would kill their own grandmother to collect an additional basis point.

Thus the price would shift to cancel out the difference. Probably.

At any rate, just the discussion & disagreements of which is better most likely demonstrates that any difference is so small as to be negligible.

From a practical standpoint, I could see that a cash-secured put could be more dangerous. There would always be the temptation, or just forgetting that the cash is encumbered, to do something else with the cash like buy something else.

This is a terrible idea, off the charts, terrible. Over the years Ive had several friends go very broke doing silly sh$t. This is a top three way to go broke.

Heh.
Reminds me of a post written long ago by an Aussie known as roguetraderette.[*]


" "The Three Worst Investment Strategies Ever"
#2 Writing Puts: The problem with this strategy is that you make a few bucks that you get to keep if you’re right, but you lose your home if you’re wrong. Pretty crap deal, if you ask me. Selling puts for income is the worst strategy ever – you get a pittance every month, and take massive risk to do so. Added to that, the only way to effectively manage that risk is to spend some of that pittance on protection. Awesome."




This should not be on the Brk board, porn is more appropriate. Unreal.

I think as lot of the discussions going around on the BRK board is because Berkshire Hathaway investing is about as exciting as watching paint dry.

-----------------------------
[*] She eventually went broke and stopped posting. She primarily concentrated on trying to make income with options & futures.

“ I think as lot of the discussions going around on the BRK board is because Berkshire Hathaway investing is about as exciting as watching paint dry.“ There is never an acceptable reason to suggest a terrible idea. Retail investors should not be selling naked puts unhedged on margin. Hopefully Buffett isn’t reading this, and he would put brother Jim in financial reform school, imo.

" "The Three Worst Investment Strategies Ever"
#2 Writing Puts: The problem with this strategy is that you make a few bucks that you get to keep if you’re right, but you lose your home if you’re wrong. Pretty crap deal, if you ask me. Selling puts for income is the worst strategy ever – you get a pittance every month, and take massive risk to do so. Added to that, the only way to effectively manage that risk is to spend some of that pittance on protection. Awesome."


It's not really very a helpful snip to quote.

The risk in options comes almost entirely from the fact that they allow leverage. There is no requirement to do so. Like a hammer, there are ways to use them that are smart, and ways that are dumb. It might like be a lottery ticket where your loss is limited to the cost of the ticket, or might be as boring as an uncallable multi-year bank loan. But it's not helpful to post piffle like that quote. For example, few people appreciate that writing a cash-backed put is demonstrably safer than buying the same stock with cash the same day.

I think the quote is probably referring to people who are writing puts without the cash backing, then thinking of the premiums as income. In effect, using an infinite amount of leverage. In my analogy it's like taking a perfectly innocent hammer and throwing it up in the air above your head with your eyes closed.

Consider the examples in the thread. You pocket a very nice cash return (in addition to whatever you're already earning on it), or you get to buy some Berkshire stock at around 1.35 times book instead of 1.6. Which of those outcomes is losing one's home?

For me, put writing is just a conditional way of buying a stock. You get paid quite nicely for the uncertainty, the two outcomes being making a nice return on your cash or buying a stock you like at better than the current market price. In the last 100000 put contracts I've written, I've averaged 11.02%/year, without counting any boost from leverage. It's not such a bad way to make a living.

Jim

I think the quote is probably referring to people who are writing puts without the cash backing, then thinking of the premiums as income. In effect, using an infinite amount of leverage. In my analogy it's like taking a perfectly innocent hammer and throwing it up in the air above your head with your eyes closed.


The analogy would be a good one, if most people writing puts were NOT using leverage and had 100% of the necessary funds to cover the potential losses. Hammers are usually used for sensible things like hitting nails - puts, I'm not so sure. The use that the quote is referring to ("make a few bucks that you get to keep if you’re right, but you lose your home if you’re wrong") is clearly what most investors should not be doing, so it's more like saying throwing hammers up into the air, with one's eyes closed, is a good way to eventually come to grief...


DTB

Regarding naked puts, I think hclasvegas is correct, if one assumes it is possible or BRKB to lose 80 or 90 percent of its value, and drop to under $75 per share or something like that, and then not recover quickly.

I think Jim assumes that this is not possible. Considering Berkshire's cash hoard, I agree that there is a floor under Berkshire's share price. Unless the world as we know it ends.

" Regarding naked puts, I think hclasvegas is correct, if one assumes it is possible or BRKB to lose 80 or 90 percent of its value, and drop to under $75 per share or something like that, and then not recover quickly."


I'll stipulate that unless Charlie took 200 billion to heaven with him and Buffett plans on taking the rest when he passes, brkb will not break 300$$. To repeat, this debate would make Buffett sick if he read it. Good luck.

ucmtsu, no way.

I think the quote is probably referring to people who are writing puts without the cash backing, then thinking of the premiums as income.

Yes, that is exactly what she was doing. Which I figure is why she went broke.

The impression I get from various readings & discussions of options is that most people treat them for income generating or lottery tickets.
And that very few think think of them and use them as a way of lower risk leverage (buying DITM calls) or "put writing is just a conditional way of buying a stock."

And damn few people have written 100,000 put contracts.

I am very active in selling puts and calls on BRKB. For the most part I keep at least 50% or more cash to cover if I had to step up.

One difference is I sell way away from the strike price. Usually as low as offered and as high as offered.

My Jan 26 puts are as low as 190 and as high as 290.

My Jan 27 puts are 230.

I also have calls mostly covered by owned shares from $560 to $620 expiring Jan 26. The Jan $620 are naked. I continue to sell more weekly. If these become in play it would mean that I had made a substantial amount on my current BRKB shares as an offset. I consider the odds of BRKB hitting $620 by Jan 2026 as almost 0%.

Overall I try and generate 2-3% per year in premiums that I expect to expire. But I play way on the fringe.

Now I also recently started selling puts a little closer to the strike price. I have some $440 puts expiring tomorrow and each of the next 2 weeks. Then I have some $410 puts expiring over the next 2 months. If any of these are exercised than I am OK with that.

And damn few people have written 100,000 put contracts.

At least not amateurs like me, perhaps! *

As an investment strategy, it works particularly well for people who have a fondness for really cheap stuff (sometimes cigar butts), like me sometimes. So long asthe price stays low and the market still hates them, you can make a fine rate of return writing puts at levels representing a big margin of safety for a really long time.

Compared to merely buying the same slate of stocks you tend to do a little worse than B&H when a stock really does well in a stretch, but tend to do better than holding the stock when it's rising a bit, flattish, declining a bit, or crashing. So the variation of returns over seasons or years is somewhat dampened.

Jim

* Actually I did it professionally for a while too, but that's a different count of contracts.

I guess one advantage of buy-writes that's worth noting is that although you have to put out cash

It's a very big advantage when things go majorly south. When Buffett sold those puts on the S&P500 back 10 or 20 years ago, he mentioned that one of the reasons he did the trade that way is because HE (Berkshire) gets to hold the capital, and control the capital, for the duration. If things go really bad, let's say the counterparty goes BK, there is much less pain involved in getting hold of the capital in question.

The Jan $620 are naked. I continue to sell more weekly.

But is there really a point? Yes, it's kind of like "free money", but only a tiny bit of money. They're trading at 60 or 70 cents, and total OI is only 521 contracts. That means the entire value of ALL those calls in total is just around $34,000.

I sold 180 of the $620 OI.

I know it seems like a small amount of money. But it is a free $12K.

I can cover 100% of the puts with cash.

For the calls, except for the $620 all are covered by underlying stock. Even the $600's.

The main issue is with the calls it is difficult to sell shares and take advantage of BRK being overvalued and selling. Which rarely happens. Even so, I was able to sell 30% of my shares, all in IRAS, earlier this year at $500+ per share. But I had to hold onto 1,700 shares in an IRA that I would have sold if I did not have linked covered calls. So there was some opportunity cost. However I have been able to sell 3 rounds of covered calls realizing $15+ per share on those 1700 share. So the current price + $15 is a little under $500 per share. Not too bad.

For BRKB shares in a traditional account my basis is too level to sell unless BRK became extremely overvalued. Even at $540 recently, not tempting enough to sell. So selling covered calls is just trying to juice returns a small bit. But it adds up to a pretty good amount of money each year. $600 was the highest strike price available in December 2024.

" I sold 180 of the $620 OI.

I know it seems like a small amount of money. But it is a free $12K.

I can cover 100% of the puts with cash.

For the calls, except for the $620 all are covered by underlying stock. Even the $600's.'


There is a lot to unpack here. Are you saying you often, overwrite the calls, but far out of the money? You went out to jan 27?

You sold 180 calls? Do you have any single daughters or granddaughters who might be interested in a witty older man? Thank you.

My basic calls and puts are usually sold at least a year out. I am selling time. That would be the $600 Jan 26 calls which I sold in Q4 2024. I sold Jan 2027 230 puts in Q2 2025. I only sell puts if they are below the current BV. Almost always at the lowest strike available? My expectation is that in Jan 27 BV will be flat to higher? No guarantee. But even so I am almost at 80% of current BV and likely 70% of future BV.

Rarely do I sell naked calls. But with the stock at $500+ and possibly stretched over value, I decided to sell some high price calls.

“ Rarely do I sell naked calls. But with the stock at $500+ and possibly stretched over value, I decided to sell some high price calls.“ I’m short the Dec 500 and 505 calls, good luck to the buyer, they need 530 ish to break ever. I sold them when brkb was 490. I still don’t understand why Buffett didn’t expedite two years of gifting and advise the foundations to sell into 525 plus , a price he wouldn’t buyback stock near.

For BRKB shares in a traditional account my basis is too level to sell unless BRK became extremely overvalued. Even at $540 recently, not tempting enough to sell. So selling covered calls is just trying to juice returns a small bit. But it adds up to a pretty good amount of money each year.

I do something similar with shares of things that I've owned for decades, where the basis is essentially zero or near zero. For example, over the last two years, I've sold UNH puts periodically, not anywhere close to being in the money, but certainly at prices where I would be delighted to buy more shares. So far, they've all expired worthless and provided an extra ~3.9% of yield in addition to the usual 2-3% dividend.

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