No. of Recommendations: 7
Does your writing puts mean you think yesterday's weakness is short-lived, that the currently historically unusually high valuation of Berkshire is permanent and here to stay (As otherwise you probably wouldn't agree to eventually having to buy Berkshire at those valuations)?
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You agreeing to eventually buy Berkshire at current levels seems to be in contrast to you having sold nearly all shares (if I remember correctly) when Berkshire was lower. That's why I am curious about your thinking behind it.
You are correct - I sold all my shares at about $425-430, bought a small amount back when they briefly went back down close to $415, and sold them again at $430, and haven't done anything as they rose as high as the $480s. I sold some June 2025 $420 puts yesterday (when the shares were at $465), hoping to get a good price because of the brief anxiety attack of Mr Market (as witnessed by the implied volatility of those options which had increased to over 20%.)
My thinking is along the lines of Jim's arguments, that I would be happy to buy shares at $420, and I'm getting paid about $11 whether I buy them or not. If the price stays high for the next 9 months, I keep my $11 and am jealous of the people who had the sense to just hold onto their shares. If the price drops to $420, then I own (a small number of) shares, at a price basis of $409. Of course, no investment is win/win; with put options, you always have to also consider the possibility that you are in effect picking up nickels in front of a steamroller. If the shares go down to $300, I won't be so happy about being forced to buy them in June at $409, when I could buy them for $300. This is where the price comes into play; if I can only get a 'nugatory*' return, then I am better to avoid the possibility of a really bad return like that one.
I think the interesting question is to ask "What can be considered nugatory?" One simple way of getting an idea of whether the premium I obtain from writing the puts is adequate, is to consider the implied volatility, which mathematically is just the standard deviation of share values that would make the Black-Scholes equation balance at the current premium. This is not a very satisfactory way of thinking, for a value investor, and there are other ways of judging whether the premium is adequate - I would be interested to hear how others address this question.
Regards, DTB
*a lovely word; "trifling, of no value; invalid, futile," c. 1600, from Latin nugatorius "worthless, trifling, futile," from nugator "jester, trifler, braggart," from nugatus, past participle of nugari "to trifle, jest, play the fool," from nugæ "jokes, jests, trifles,", Online Etymology Dictionary.
