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...and spiking the price?

While certainly fun to watch and play along, I don't want a hangover in the morning.

Is Mr. Market front running a kick ass Q4? Is there a stealthy undercurrent of 'flight to safety'?

My Capt. Obvious hunch is it is not Mr. Buffett.

Cheers.

m

While certainly fun to watch and play along, I don't want a hangover in the morning....

I tend to agree.
In my opinion, the stock is not expensive in an absolute sense. But at ~1.57 times last published book it is more expensive than has been typical in the modern era.
(average 1.34 times known peak book since 2008, average 1.38 times last known peak book since 2013/2014)

One could sell June $385 call options, currently trading at $17.
If the stock ends up above $385, that's an exit price of $402 per B, which is a bit over 1.55 times my estimate of not-yet-known end 2023 book.
And of course if the stock price pulls back, keep the $17. Kind of like a half year of 11%/year rate of "dividend" for you.

This is fancier than is necessary. But the complication lets me not have to actually decide whether to lighten up today or not.

In other news, for anybody holding call options and wanting to free up some money, it's not such a bad day to roll some call options to higher strikes. In-the-money strikes which used to be "high" relative to the stock price are now pretty deep in the money and cheaper in terms of time value and implied interest rate, simply because the stock price has pulled away upwards.

Jim

One of the things I have noticed about Berkshire is that everybody has a capital gain (today), a lot of stock is in taxable portfolios, some of the unrealized capital gains are ridiculously substantial.

Since the BNSF deal there has been a lively options market on BRK.B and since Berkshire pays no dividend there are those that use a covered call strategy above the stock.

When Berkshire breaks to new highs, we tend to get these types of follow-through moves as people adjust their positions because they sure-as-hell do not intend to be called out of their low basis stock and pay the tax man.

Also, Insurance stocks are on fire right now and Berkshire tends to break out right before the market sells off in a sort of last ditch flight to quality type thing.

For those with US retirement accounts that do not allow options trading, do you think a comparable strategy would be selling BRK shares at the current price levels and buying a money market fund (VSUXX currently has a 5.30% yield) until a future opportunity arises with lower BRK valuations?

From an analysis of average forward returns from current BRK price/book levels, I believe we might be at or near the point where a 5.30% yield would beat what one would expect BRK to do in the next year, based on averages (noting of course that averages can conceal a whole lot of variation.) And without the risk.

I took that route, sold half of my BRK in the IRA accounts, up 6.5% year to date. I put the proceeds in some high yield bond and preferred stock funds which ought to yield another 6.5% and have a decent chance of some capital appreciation if interest rates don't rebound. That reduced my massively overweighted BRK position and hopefully gives me 13%+/- for the year for the IRA's, which is just fine.

For what it's worth, I trade options in my US retirement accounts consisting of Roth IRAs, Traditional IRAs, and Rollover IRAs. There's a restriction regarding borrowing on margin, so if I sell Calls they can only be covered calls.

For those with US retirement accounts that do not allow options trading, do you think a comparable strategy would be selling BRK shares at the current price levels and buying a money market fund (VSUXX currently has a 5.30% yield) until a future opportunity arises with lower BRK valuations?

I'm somewhat doubtful.

Don't get me wrong--I have long been a fan of lightening up when the price gets a little bit towards the high end of the range. The problem is that the gain from doing so is so small, because how do you know when to get back in? Maybe it will drop to 1.4 times book, or 1.35, or 1.3, or 1.25, or 1. Who knows?

I have often sold some "successfully" at good valuations, most notably in late 2007, but then I get back in again after only a small drop : ) Sure, I'm better off having done so, but it's not exactly life changing.


What has worked MUCH better for me is to keep some sort of way to access dry powder, any way you can manage (including maybe HELOC but not callable broker loans), and go in "big time" on those rare occasions that the valuation level is really cheap. I use the leverage built into options on those occasions.

As an aside, those yields on cash-like instruments won't last long.

Jim

> One could sell June $385 call options, currently trading at $17.

Assume one did this today. The closing price was $385.40. Will this short option get exercised Monday morning?

Is it smarter to roll this contract to 390 if possible first thing Monday instead?

The options will likely not be exercised until the last day of the option if it is in the money. I only see early options exercised when a dividend capture is in play.

I chose to sell options at much higher strike prices. $410 - 500. June 2024 - Jan 2025.

I did several today. May continue next week.

I always expect that BRK can rally 10% at any time.

Luckily I had 20 Jan 19, 2024 $380 calls, that I sold last year when BRK was closer $320. Last week expired worthless. This Friday would be a different story.

Better to be Lucky than good.

I did have several options trigger last week. Most notably MSFT & Googl in size. Not so lucky on those.

Gator: I always expect that BRK can rally 10% at any time.

Therefore your
I chose to sell options at much higher strike prices.
Understood (I hope).

What I don't understand:
$410 - 500. June 2024 - Jan 2025. I did several today.

Let's look at the middle, $450. Jan'25 pays $5, around 1.3%. With a high probability to buy them back much cheaper at some point during the next months and to pocket most of those 1.3% that makes sense.

But Jun'24 pays just $0.5 or so. I don't understand what's the point in selling those for - nearly - nothing?

in my simpler {dimmer} way thats "kinda" what I have tried, on balance its gained me a little.. I sell a few when I think high, set aside in cash and buy back on lower price...I'm a bit too caytious to do options/calls/puts etc, so eg my trades look like "sell 50 at X, buy back 54 at Y".. I've gotten about 65 net extra shares doing that over a number of years (in total-not each year} in my IRA...

> One could sell June $385 call options, currently trading at $17.

Assume one did this today. The closing price was $385.40. Will this short option get exercised Monday morning?

Technically possible, but almost certainly not.
The holder of that option could probably sell it for $18, so why would they exercise it to make only a 40 cent profit?
Options are almost never exercised for so long as there is a bid price which exceeds what the holder would make from exercising it.

Is it smarter to roll this contract to 390 if possible first thing Monday instead?

No reason you have to. I did exactly this, and I won't do so. I'm fine with it being in a mark-to-market loss for a while. As mentioned, nothing is likely to happen any time soon. Each day that goes by you're making a little money on time value, plus or minus squiggles depending on the stock price movement. And of course even if it were exercised, I'd just take my profit and buy the stock back again next time I like the asking price.

What I have done sometimes is this:
I think the stock is just starting to get a bit rich, so I write a call only a few bucks above the current price, say 3-6 months out. A bit of time goes by, but the stock soars some more, well above the strike. My positions are in a loss position mark-to-market basis, probably quite a bit on a percentage basis. (always remembering that the stock backing the call is also rising in price...it isn't a loss per se. Depending on how high the stock goes, it's a small net profit having done the call or a small profit combined with a missed opportunity to have sold even higher). But...now I think maybe the rally will continued. The time value of my call will have fallen, partly because of the time elapsed so far and partly because time value falls quickly as the stock price moves away from the strike. So, sometimes I close that one for a loss and write a new one, 3 months further out, for a premium which is usually somewhat close to the cost of closing the first position. This is definitely at a much higher breakeven if the stock is ultimately called away, and may also get me a bit more net time value I can profit from.
This habit is the main reason I don't usually start with long-dated calls when I'm writing them. Frequently I don't just write one, it ends up being a string of them (because I didn't call the top!), until the stock price peaks and pulls back again and I make most of the aggregate profit on the last one.

Jim

Yesterday I bought BRK/B puts. As more I think about it as more I think it was a mistake and I will sell them quickly.

Instead next week I want to sell the first time in my life covered calls:
- Jan'25 $430 for $10 = yield nearly 3%, risk of execution at >= $440
or
- Jan'25 $420 for $14 = yield 4%, risk of execution at >=$434

Plan: Ideally buying back them back already during the year (price dip, low time value etc.)

Emergency plan: Buying back no matter how big the loss if BRK/B rises to $425 respectively for the second option $420. Why? Because those old shares have an exceptional tax treatment here in Germany (gains are tax free), which shares I'd buy today wouldn't have, therefore they are far more valuable than "normal" Berkshire shares.

As this is the first time ever I'd sell covered calls I'd very much appreciate comments.

For Jan 25 I have sold calls from $430 to $500. In all cases I got at least $1.83 for each call. Some were purchased recently and some a few months ago.

Currently I have sold 10K shares in calls. On Jan 19, I had about 20K in calls expire worthless with original values of $2 to $9 per share.

I also sell annually the lowest cost puts available. For Jan 2024 $140, Jan 2025 $140, and $190 for Jan 2026. All below current BV at the time.

I focus very much on having all of my options expire worthless.

"" I also sell annually the lowest cost puts available. For Jan 2024 $140, Jan 2025 $140, and $190 for Jan 2026. All below current BV at the time.

I focus very much on having all of my options expire worthless."" Congrats, obviously you have a very substantial net worth. For others in a lower net worth bracket, you are tying up lots of cash to secure those far out of the money puts you are short, for a very low return. IF, you are using aggressive margin, you are tying up less cash but, for younger investors, not a great way to build wealth long term. The good news is the cash securing the short puts is now earning 5 % plus. BTW, in over 50 years in this game, being short puts on margin, is one of best ways to get into serious financial trouble, or worse. BRK seems , safe to me, BUT, crazy things have happened over the past 50 years. Good luck.

I focus very much on having all of my options expire worthless."" Congrats, obviously you have a very substantial net worth. For others in a lower net worth bracket, you are tying up lots of cash to secure those far out of the money puts you are short, for a very low return.

I share these concerns.

When writing an option contract, you can choose things like the date and strike to skew substantially the relative chances of expiry versus assignment, but you should always be prepared for (and happy with) both outcomes. Markets are unpredictable...best always to assume you'll end up with whatever outcome you weren't hoping for. If you're not happy with that view, don't do it.

Jim

you are tying up lots of cash to secure those far out of the money puts you are short, for a very low return.

Jim,

I always appreciate your insight and thoughts. I am trying to process the statement above. I am certainly prepared for any of my outstanding sold puts and calls to be exercised. However, I am not sitting on any cash reserves waiting for that to happen. Last year I was on margin all year. Just recently raised cash unrelated to naked positions. Keep in mind that usually go naked way out of the money, puts and calls. Sometimes the farthest option out of the money that is available. I do covered calls as well, but that is different.

I have been doing this for 5+ years and netted maybe an extra 50 to 150 Basis points a year.

I have had only 2 options that I am naked on get exercised. DB which I immediately liquidated when it was put to me for a medium loss.
PNC early last year that I held and sold for a gain for 5 points or so.

Of course and a big market move I can easily be exposed. A few have traded in the money but on exercise date they expired worthless. Including BRK 160 puts when COVID started. I sold them for about $25 K and at the worst I was sitting on a loss of $300K +. Fortunately they expired worthless.

My only advice is stocks, even stock of large diversified companies, can move big and fast. So I am usually 40%+ out of the money to start.

Recently I have started focussing of the crazy stocks. I am selling naked calls on CVNA, W, & Coin. All at strike prices 75 to 150% above current prices. Premiums are still huge. I recently had some CVNA $110, that I sold for $3+ expire worthless. I only shad the for about 7 weeks.

Any thoughts would be appreciated.

you are tying up lots of cash to secure those far out of the money puts you are short, for a very low return.

...
I am trying to process the statement above. I am certainly prepared for any of my outstanding sold puts and calls to be exercised. However, I am not sitting on any cash reserves waiting for that to happen. Last year I was on margin all year. ..
Of course and a big market move I can easily be exposed. A few have traded in the money but on exercise date they expired worthless. Including BRK 160 puts when COVID started. I sold them for about $25 K and at the worst I was sitting on a loss of $300K +. Fortunately they expired worthless.
My only advice is stocks, even stock of large diversified companies, can move big and fast. So I am usually 40%+ out of the money to start. ..

I am not a fan of using broker margin. That's a bit of understatement---if I knew where you lived I'd come over an bonk you on the head : ) Gently, of course.
The reason is that a broker margin loan can be called at any time, with no notice and no reason. And you can be assured that it will be on the most inconvenient day, forcing you to sell things at painfully low prices. I have had it happen, emphasis on the "no reason". The broker's fine print says they may be the counterparty buying my liquidated positions.

And always remember, prices can do anything in the short term...anything. The famous flash crash was not an error in any way...those were the real prices. People just didn't like them, because they demonstrated that the emperor had no clothes. There are too many vested interests, including regulators, who benefit from the majority of investors falsely continuing to believe that prices are "orderly" and that huge sudden drops can't happen.

I agree that it is not so bad relying on the *possibility* of a one-day margin loan to accept stock being put to you for the time it takes to notice and sell it. But I do think that anyone writing puts should have a cash pile backing it up, even if the pile is not actually as big as the option liability. I have occasionally gone as far as $4 in notional assignment value for each $1 in cash on hand, relying on the observation that essentially nobody will exercise a call that, at the current bid, can be sold for a greater benefit because of the remaining time value. But if I did not have any cash at all, I would not write any short put options.

So, back to the first point...if you have a pile of cash of whatever size, you want to make a reasonable rate of return on it. Writing puts against it is one way. It will tie up some of that cash if you write a put option. There isn't very much point in doing so if the rate of return on the cash notionally tied up isn't worthwhile. Given that things can move against you, I normally require a 15%/year rate of return on the time value of any position before I'll consider entering it, and will close early any position where the maximum remaining rate of return drops below around a 6-8%/year rate.

Jim

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