No. of Recommendations: 17
If you are going to try this as a result of Jim's musings, why are you doing the 385 instead of the ~400? 385 when BRK is 383 seems pretty tight, when BRK.B is jumping around 4-5 points up & down a day.
FWIW, my thinking is the reverse. I like the look of writing $385s today, not $4xx.
If you're considering writing calls (and I definitely don't suggest it's a great idea for everyone!) the purpose is to gather some time value. Simply put, the time value is best for the strike prices that are very close to the current stock price. The very high strikes have such low premiums that I don't find it worth the bother. Sure, they are almost certain to expire worthless, but the rate of return is so low I'm sure I could find something else to do that would boost my portfolio in a much simpler way.
I've written $385s lately (only very slightly out of the money), because that's where the time value is. The stock's valuation multiple is high enough that that strike plus premium gives an exit price that would not bother me if the call were exercised. i.e., I'm reasonably confident that I'd be able to rebuild my position at a better valuation level at some point in the future if the stock were called away.
As an aside, as soon as the current "slightly above average multiples" stretch is over, I plan to start writing a lot of cash backed puts.
That's because (as mentioned) I just got a block of cash from a real estate sale and I would like to allocate it. BRK isn't cheap enough today to tempt me just buy outright right now in a big way, so this would give me a little return for a while, and (if assigned) a much better entry price. Until I'm assigned on those, I get the interest on the cash plus the small rate of return from the puts I write. Together, they add up to somewhat more than the rate of return I'd expect from Berkshire stock in the next year or two. Getting the sum to come out near 10%/year shouldn't be a problem, at least until short term rates drop.
Between the call writing (now) and the put writing (soon?), I'm in effect doing a long term option "short strangle"...the wager that a stock's price will stay in a range. For me that means keeping a medium-sized position, but getting paid to commit to buying more if it gets cheap and selling some if it gets expensive. Not as a single trade, though--writing the calls only when the stock price is at the high end of t he range, and writing the puts when it's at the low end of the range. Like a ball bouncing between the valuation paddles of a pinball machine, picking up a little premium on each bounce.
If the stock price would simply crash for a week or two, I could dispense with all this complication and just back up the truck.
Jim
