No. of Recommendations: 11
Speaking of Jan. BRKB options, any thoughts on holding vs. selling to close a portion (or all) of Jan.2024 240 calls? Price has nearly doubled since purchase last Summer and are now in the LTCG category. No acute need for the cash, but just a consideration given the solid appreciation and already own a good bit of the stock.
As it happens, I have some of that same contract.
My suggestion is not to think of this as an individual trade.
Rather, just think of that as part of your total long term Berkshire share position. (which might change in size in future, or not)
Separately, part of your total Berkshire allocation has been funded with a non-callable loan of $240 per share which will come due next year. The interest has been prepaid.
You're paying an interest rate of about 5.7%/year for the (small) portion of your total Berkshire position which is funded with the loan.
(That's based on the time premium you'd realize if you closed the position right now)
Since inflation is likely to run at 4-4.5% in the next several months, the real interest rate is probably in the vicinity of about 1.5%/year rate.
I think the comments above represent a very useful way to think about your position.
Now, I'll add a couple of comments of a more speculative nature on what that might imply:
I presume the implied loan amount is a quite small fraction of your total Berkshire position's face value: all of them, shares and options combined.
So, maybe Berkshire's stock has to rise in value at (say) only inflation + 0.5%/year rate or less for you to break even after interest expense, maybe less.
Needless to say, that isn't a big hurdle. The interest expense is not going to turn your overall Berkshire investment from a profit into a loss.
So, without saying anything about what I think the price of Berkshire will do in the next 6 or 12 months, this view suggests that having calls isn't necessarily something you can justify ONLY when the stock is cheap and the short term prospects are really good.
For so long as long dated call options are available at fairly low real interest rates, a person could hold some of their position as calls at all times.
This has the advantage that you don't have to spend a lot of time figuring out when it's cheap and when it's expensive and adapting your strategy.
I'm not making a specific recommendation. But one can at least contemplate the notion that simply keeping the options long term would be fine.
At some point, and periodically, you'd roll them to a later date.
Preferably on a date that
* it's long enough before expiry that you're capturing some remaining time value. (that evaporates quite quickly in the last 2-3 months before expiry);
* the stock price is high;
* the market is calm; and
* the anticipated/implied interest rates are low.
Today counts well on the first three, but my gut feel is that we might see some improvement on the last one in the next few months, so maybe (?) rolling later might be better?
Jim
