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I was messing around on the Check Capital Management site https://checkcapital.com, a site which has been mentioned on these boards before. I saw two investment programs of theirs that I had not noticed before:
(1) one program does covered calls on Berkshire, the returns are better than their bond benchmark although at a higher standard deviation (is that tradeoff worth it to you?)
https://checkcapital.com/investment-programs/#berk...
(2) the second program buys LEAPS on Berkshire, this beats their S&P500 benchmark significantly, again at higher volatility.
https://checkcapital.com/investment-programs/#priv...

Comments
(1) It was interesting to see real stats on implementing a covered call strategy on Berkshire to get returns that are better than their bond benchmark, although with higher volatility. Berkshire should be pretty safe in terms of not going broke, so getting higher returns on something that is safe but maybe not as safe as T-bills, might be attractive to some. But is it worth the extra volatility, and what if you compare to being straight long?
(2) Using options to gain leverage on Berkshire has been discussed on this board, so it was interesting to see real stats on how an established capital management firm implemented this strategy over the years. Apparently it works well in juicing returns.

Is bond index a valid benchmark for their covered call strategy?

Based on the put-call "parity", they should compare their performance against a strategy of holding bonds and selling BRK puts. The latter would have done better than a bond index, making their alpha smaller, and less marketable to muppets.

Interesting that the OP got 6 recs and mine got none.
Pearls before swine. (Or something less harsh :-))
I think it went whoosh over most "investors'" heads here. Oh well.

In words of one syl-lable, Check Capital per-for-mance no good.

Interesting that the OP got 6 recs and mine got none.

I had the same reaction: why the comparison to a bond fund index?

But I didn't understand and less marketable to muppets

Also, I can write covered calls on my BRK shares. And I can buy DITM calls.

<the second program buys LEAPS on Berkshire, this beats their S&P500 benchmark significantly, again at higher volatility.>

Yeah impressive returns. Jim has discussed using Leaps a bunch of times here. (Which I always enjoy.)
And the results have been great...22% annual returns since inception.

https://static1.squarespace.com/static/641cca1972c...

Hmmm... maybe a bit of clarification could be useful: the post wasn't a recommendation to buy.
My interest, and thought perhaps others might be interested, is that Check is a firm mentioned on this board before and they have real world stats on implementing two options stratgies on BRK that have also been discussed on this board before.
Choice of benchmark and other questions (including "why are you doing cc's on BRK in the first place? did it accomplish your goal?") are wonderful questions to ponder.

But I didn't understand and less marketable to muppets

I meant if Check Capital had compared their covered call strategy against a strategy of holding bonds and selling BRK puts (equivalent risk) then their alpha would be negligible. They couldn't pursuade people to hand over their money to invest.

Muppets is an affectionate term that Wall Street traders (Goldman Sachs, notably) employ for rich idiots who shovel money at them thinking the traders know something the investors don't.

Alpha = abnormal returns in excess of expected market returns (beta, short for beta * index returns).

Put call parity:
Bond + call = stock + put
i.e.
Bond - put = stock - call
Which is shorthand for, holding a risk free bond and selling a put on a stock has tge same risks and return as holding that stock and selling calls on it with the same terms as the put (strike price and date).

So no, a bond index alone is not at all a valid benchmark to judge Check Capital's performance. They used it to make themselves look better than their actual performance warrants.

The target audience of their covered call strategy is:
"For stock investors seeking a relatively low-risk alternative yielding a return superior to that of most bonds, Berkshire Hathaway covered call options are an attractive proposition. While stock options are used by some investors to speculate, others use options to reduce risk or earn income. This strategy is part of the latter group."

So, apparently the audience are those that don't like bond funds e.g. due to interest rate risk, and uncomfortable with general equities, but like BRK. They show some results for their covered call strategy on BRK. Their numbers are net of their fee, so it'd be better DIY. They don't specify how they're selling their calls, i.e. how far OTM, lifetime, hold time, if they sell all the time regardless of volatility, etc.

Put/call parity aside, are their returns better than "most bonds" as per their stated goal? Yes. Is that the only criterion you should care about? Presumably not, among other things their vol looks higher than their bond benchmark, and while they show a graph they don't give drawdown stats.

Regarding their 'private program' that "employs one and two year stock opions" on BRK, they again don't give details. I think I assumed DITM calls just because that's top of my head. But from their strategy yearly numbers it doesn't look like they are (solely) buying long-term DITM calls.

The Check site used to show Value Line style reports on their holdings, which is why I noodled on over. I didn't find those this time, but instead found their stats on two option strategies that they employ on BRK. Strategy details are lacking, but I was surprised to find real world stats on some options strategies on BRK employed by a large well-established firm. There are lots of ways to skin that cat, chacun à son goût.

Strategy details are lacking, but I was surprised to find real world stats on some options strategies on BRK employed by a large well-established firm. There are lots of ways to skin that cat, chacun à son goût.

OK. So they sold covered calls and got lucky because stocks in general were doing well, BRK in particular. Big deal.

There is no cat unless Schrödinger is involved.

Sorry, not seeing why any of this matters unless it is repeatable, which it is not. Burry and Paulsen can testify.

OK. So they sold covered calls and got lucky because stocks in general were doing well, BRK in particular. Big deal.

It is perhaps worth mentioning that adding call-writing to a long stock position is bearish, not bullish. A covered-call writing strategy should normally expected to outperform the equivalent long-only strategy in flattish and falling markets, but lag in strong bull markets. If it added value while "stocks in general were doing well", that's reasonably impressive. Judicious timing and selection of trades, for example.


Sorry, not seeing why any of this matters unless it is repeatable, which it is not.

Perhaps surprisingly, buy-write strategies outperform long-only most decades, based on academic studies, and analysis from CBOE. Even before accounting for any perceived advantage from lower short term volatility. But, as with running any insurance business, the size of the premium matters. There is a price at which you'll get an underwriting profit on average, and a price at which you won't. The secret is simply to avoid jumping into the insurance business in a soft market (aka low option premiums). Do something else at those times.

As a crude rule of thumb, if the one year volatility index is over 22, it's likely there is a useful opportunity for writing options. At 17, look elsewhere.

Jim

Brkb options are not liquid for sizable trades. The substantive question is, why do covered writes on brkb vs very liquid spy? Plus, if you are an American , the div and the option income on the calls is sheltered in your IRA.

The substantive question is, why do covered writes on brkb vs very liquid spy?

Certainly the premiums on BRK options are usually pretty low, so it's frequently not worthwhile to write them.
But, as for the question about "why not SPY", the risk/reward profile of single stock options is quite different from the risk/reward of the index.
Not to mention that they might have quite different valuation levels, meaning a person might reasonably have very different return expectations.

More interestingly, the risk/reward of an option on the index (or SPY) is quite different from that of the weighted collection of options on all stocks within it.
Even when you adjust for the greater observed volatility of individual stocks.
I presume it's because it's a very different population of option traders, with very different fear and hedging and greed goals in mind.

Jim

'Certainly the premiums on BRK options are usually pretty low, so it's frequently not worthwhile to write them.' Agreed, and if a fund and its followers are all offering illiquid brkb calls, the premiums will always be somewhat lower than expected. I would rather hear about successful strategy's to buy brkb calls, so I can sell into that demand.

Interesting: I contacted them and asked them if they were able to give a little more detail on their second strategy (not the covered call strategy) where they had significantly greater returns albeit with higher volatility.
They're doing debit call spreads: buy a call, sell a call at higher strike.

I didn't probe much more (although IIRC he said 'long-dated'), no doubt there's a limit to the info they'll give a cold caller.
But there you have it, that second program with the high returns (not the covered call one) is their strategy for debit call spreads on BRK.

As a crude rule of thumb, if the one year volatility index is over 22, it's likely there is a useful opportunity for writing options. At 17, look elsewhere.

Are you referring to a specific stock's implied volatility for a put/call one year out? Or the current value of VIX?

As a crude rule of thumb, if the one year volatility index is over 22, it's likely there is a useful opportunity for writing options. At 17, look elsewhere.
....
Are you referring to a specific stock's implied volatility for a put/call one year out? Or the current value of VIX?


Neither, really---I was referring to the one year volatility index.
VIX is the one-month-forward index for the S&P 500 stocks.
There is a lesser known one-year-forward index that tells you how expensive longer term options are at the moment.
https://www.cboe.com/us/indices/dashboard/vix1y/
Using VIX as a guide will give pretty similar results, with different cutoffs, except in periods that something big expected to happen short term.
Since it is so concerned with the short term, it [over]reacts to short term news/noise a lot, and probably isn't representative of the pricing of the sorts of options one is most likely to write.

My intent was just to put a numeric gloss on the idea of considering option writing only when prices are generally good in the market.
You don't want to look at richly priced options on single stocks during a soft market for premiums (like writing insurance only for drunk drivers).
You want to look at options on good single stocks during a hard market. (insure the shy accountants with Camrys, during periods that everybody is asking high premiums even for them)


Jim

if a fund and its followers are all offering illiquid brkb calls

I'm not sure why you find them so illiquid?
It's the bid/ask that matters, and for big traders the depth at that bid, not the trading volume.

I find Berkshire options pretty easy to trade even in pretty large quantities, and the gaps are pretty narrow for the strikes that are somewhat near the money where one would likely be writing calls.

As a random example, the March $370 calls have a bid/ask gap of 25 cents these days. (it's a call I wrote)
You could probably sell those for 5 or 10 cents above the bid using a limit, which is only 2.5 to 7.5 cents off the midpoint, or 0.01% to 0.02% of the stock price.
Even hitting the bid 12.5 cents below the midpoint, that's a gap loss of only 0.04% of the stock price.

These aren't obscure small-cap options where the bid moves away from you when you get anywhere near it. You can probably hit the bid all day if you like.

Whether writing Berkshire calls is a worthwhile way to make a buck is an entirely different question.
But I don't see any insurmountable problem in terms of market depth unless maybe if you're trading well over a hundred million worth of notional value in a day.

Jim

''I'm not sure why you find them so illiquid?
It's the bid/ask that matters, and for big traders the depth at that bid, not the trading volume.'' mornin Jim, you and I discussed this issue many years ago while I pounding the table for the 50 for 1 split to increase liquidity in the common and the options. Entering limit orders and allowing the market makers to trade around my order isn't an option, for me. If that works for you, that's great. I have physical therapy on the shoulder this morning, gotta run. Best of luck, stay healthy.

My intent was just to put a numeric gloss on the idea of considering option writing only when prices are generally good in the market.


The usual model for option prices does not account for whether the underlying stock is cheap or expensive. The future stock price is assumed to be a Gaussian random variable, with implied volatility representing the normalized standard deviation.

When BRK.B eclipsed $370 last month I wrote ATM covered calls, without checking whether the implied volatility was above a threshold. My criterion was: did I expect the price of BRB.B to be above $370 + premium at expiration.

It seems to me that when the stock is perceived to be expensive there will be relatively more call sellers, which will push the implied volatility down. (That's my intuition, not my observation).

Question is: how does that downward premium pressure compare to the effect of the overall option market volatility?

Entering limit orders and allowing the market makers to trade around my order isn't an option, for me.

I don't really know what you're talking about...what your fear is here.
This is precisely how one trades options. The use of limit orders is mandatory if you don't want to get hosed.

The only sensible approach is to set a limit inside the spread.
If it doesn't fill immediately, no problem: move the limit a bit, repeat till it fills.

I have traded over 100,000 option contracts. It's pretty straight forward.
For Berkshire, when contracts not near the money with a wide bid ask, your execution will generally be around 1/4 of the bid/ask gap away from the midpoint of bid/ask. Sometimes a bit better.

Jim

The usual model for option prices does not account for whether the underlying stock is cheap or expensive. The future stock price is assumed to be a Gaussian random variable, with implied volatility representing the normalized standard deviation.

I find a better interpretation is this:
The price of an option goes up and down mainly with the mood of the market.
The residual cost beyond theory (interest rate, time frame, moneyness factors) is given the name "implied volatility" to make it sound fancy.
It's named that because it's what the volatility would have to be if the theory were correct, which of course it isn't, and in any case the future volatility isn't known anyway.
Really it's just a measure of expensive or cheap!

It seems to me that when the stock is perceived to be expensive there will be relatively more call sellers, which will push the implied volatility down. (That's my intuition, not my observation).

One might expect this, but there doesn't seem to be any evidence for it as far as I know.
First, there is the theory of put/call equivalence, which means that the time premia for all options for a given underlying change in price at the same time.
The theory is imperfect, but reasonably close. Buyers of one are bullish, buyers of the other are bearish, but they both get expensive at the same time, so it's not the net bullishness that's determining the price.
More prosaically, the majority of options on prominent stocks are traded as part of some kind of combination. Go long the stock and simultaneously short using some option position, or a more complicated combination, sometimes covering a whole sector. So the buyers of calls (say) are not necessarily bullish on the stock anyway.
Lastly, high prices are seen as bullish to momentum players (and to be fair, not entirely without reason). There are probably more momentum players than there are people who have even a vague a handle on what the shares might actually be worth, so higher valuations might well be expected to lead to more demand for more expensive calls, not less.

Based on my necessarily anecdotal observations, the ratio of price to value does not seem to be something even considered by any meaningful fraction of the option trading community for any stock. It's not at all hard to find someone willing to pay you hard cash for the right to force you to buy for $0.75 something that is plainly worth $1.00.


Question is: how does that downward premium pressure compare to the effect of the overall option market volatility?

I suppose that any additional bid in any market will affect the price to some degree statistically, within the time window that trader joins the crowd. But it is probably not measurable except in extreme circumstances. The prices of all options tend to move together to a very large extent, so mostly it's the entire market you're trying to move with your trade.

The bigger and oft overlooked effect is that option trades can move the price of the underlying security, sometimes quite a bit.
An example:
If you write a call, there is a good chance that the counterparty is a market maker who sheds the risk by buying your call (a bullish move in isolation) and simultaneously shorting the stock (an offsetting bearish move), in a ratio based on the current option delta, to become neutral. As the stock price moves the delta changes, and the market maker will adjust the size of his short position to stay short term neutral. This is the main mechanism (in reverse) behind the Gamestop price spike.

Jim

'' I don't really know what you're talking about...what your fear is here.
This is precisely how one trades options. The use of limit orders is mandatory if you don't want to get hosed.''. Let's try this. The March 15, 370 call currently shows a market of 6.40 by 6.65, is that what you see you or do you see an, inside market? Assuming that's you on the offer , offering say 50 at 6.65, and I'm the MM , and I sell 50 against your order, at 6.60 what's my risk ? Thanks.

Getting a bit far afield here, but what the heck, it's fun and educational:

> This is the main mechanism (in reverse) behind the Gamestop price spike.

Not that I looked closely at that car wreck, but I thought hedge funds were 'short' i.e. anticipating a share price fall, in the classic manner that has nothing much to do with options. Hedge funds were short Gamestop by borrowing shares for a fee, iimmediately sold the shares in the hopes of buying the shares back later at a lower price in order to return the shares and pocket the difference from this "sell high, buy low (and return the shares)" strategy. But redditors organized en masse to buy shares to pump the share price, making the short sellers have to buy back their shorts, i.e. buy shares (at a loss, which was part of the redditors goal i.e. to give hedge funds a bloody nose), and these share buybacks further contributed to the share price rise, at least for a while.

I hedged (ha!) my first sentence with the words "nothing much to do with options" because it's all fungible via put/call parity. Certainly, market makers are staying delta neutral. But my impression was that the Gamestop share price dynamics was not primarily driven by options involvement, BWDIK I only glanced at that car wreck in passing, so perhaps missed gory details.

<>Not that I looked closely at that car wreck, but I thought hedge funds were 'short' i.e. anticipating a share price fall, in the classic manner that has nothing much to do with options. Hedge funds were short Gamestop by borrowing shares for a fee, iimmediately sold the shares in the hopes of buying the shares back later at a lower price in order to return the shares and pocket the difference from this "sell high, buy low (and return the shares)" strategy.

This was certainly a factor--the reason the retail crowd "attacked" the stock.
But it doesn't seem to be the reason the stock price went parabolic. According to the best analysis I've seen, anyway.

The "smoking gun" explanation for the explosion looks to be this (allegedly):

The exuberant punters bought a bunch of very short dated out-of-the money calls. They had low delta (they move little with each $1 rise in the stock price) because they were at strikes considerably above the stock price.
These calls were sold to them by market makers, who ended up synthetically short the stock. Only a little bit long because of the low delta, but they don't like to be net long.
So, at the same time, the market makers hedged their position by buying some stock. Not too much was needed--low delta again.
At the margin, the stock might have ticked up a hair from their buying, but probably nothing to write home about. At first.
This went on for a while...a LOT of options were bought. Tens of thousands of contracts.
The stock price started rising a bit more from all the buying from the hedging by the market makers.
The gap between stock price and strike price was closing, so the delta was rising to 1. (For each $1 rise in the stock price, the rise in the option price rose fast from almost nothing towards $1).
So the market makers had to buy more stock to keep market neutral, even for the same fixed increment in the stock price.
Which of course drove the stock price up again, but more strongly this time because the underlying-to-strike gap was smaller.
This turned into a positive feedback loop at every step--more price move, more delta, more stock bought, more options bought--so the stock price exploded in a very short time.
The short sellers were the ones burnt, but it doesn't seem to have been their short covering that did it. That wouldn't have been enough buying to cause the spikes seen. The key seems to be the time frame.

Jim

Ooops, these explanations are hard enough to understand without typos that make the logic backwards.
It was supposed to say: (changed words in bold)


The exuberant punters bought a bunch of very short dated out-of-the money calls. They had low delta (they move little with each $1 rise in the stock price) because they were at strikes considerably above the stock price.
These calls were sold to them by market makers, who ended up synthetically short the stock by being short calls. Only a little bit short because of the low delta, but they don't like to be net short.
So, at the same time, the market makers hedged their position by buying some stock. Not too much was needed--low delta again.

Jim

The target audience of their covered call strategy is: ...

Not sure anyone cares, but I closed some of the calls I'd written. (all of my Jan $370 contracts; I have two other strike/date combos left)
I made 82% of the maximum possible profit in 44% of the maximum elapsed time, good enough for me.

Notionally, closing a call like this is equivalent to buying stock on a dip: my net BRK position is now [probabilistically] larger.
I don't think the current price is compelling enough to run out and buy more stock other than in this context, but my share count is up the way I track it, assuming all contracts are exercised.

Jim

The March 15, 370 call currently shows a market of 6.40 by 6.65, is that what you see you or do you see an, inside market? Assuming that's you on the offer , offering say 50 at 6.65, and I'm the MM , and I sell 50 against your order, at 6.60 what's my risk ? Thanks.

Yes, 25 cents is the gap I see on that contract.

Ok, let's assume the bid/ask is 6.40 / 6.65 and you are the market maker.
And I am offering to sell at $6.65 for 50 contracts.
Let's assume the very likely situation that the market maker is also asking at that $6.65 level along side me, since that is the typical spread right now.

(in your example, you as market maker would be the putative buyer at 6.60, not seller)

You (the market maker) won't be a buyer at that $6.65 offer of mine.
Their algorithms calculate what the contract is really worth. In this case, they have decided the right answer is very close to $6.525, the midpoint of THEIR bid and THEIR ask.
That's not using anything to do with stock valuation, but purely based on things like the (aptly named) B-S option pricing model, with perhaps tweaks based on what else they are doing in their portfolio that hour or that day.

Since they figure the contract is "worth" about $6.525 right now, they won't buy from me at $6.65, nor at $6.60.
They also won't buy at $6.55 either--those prices are all higher than what they have decided the contract is worth to them today.
It's highly likely they'd buy from me at $6.45--it's only a nickel above their bid, and these are relatively easy to trade options so they aren't usually very greedy. Perhaps they would hold out and not buy above $6.40, though that's not my usual experience.

To your specific question, the "risk" to them on the idea of being a buyer at $6.60 is that their computers are telling them that this contract is only worth $6.525, so they'd deem themselves to be losing 7.5 cents per share by doing the trade.

Let's continue:
Now, what is the risk that you, the market maker, have taken on as a result of buying this contract from me at (say) $6.45?
They have made a notional profit of 7.5 cents because it is below what their computer estimates the fair value to be, being the midpoint $6.525. So far so good.
But the market maker has just bought a call that is only a little out of the money, so is as a result sort-of long the stock.
I haven't looked up the delta, but let's say it's 0.6.
i.e., if the stock price moves up $0.10 in the next hour, the B-S "fair" option price will move up 60% as much or $0.06.
So, if the market maker has just bought 1 call from me, he will likely immediately short 0.6 times as many shares, 60 shares of BRK/B, to remain market neutral on BRK.
They are in the business of picking up the bid/ask gaps, not in the business of speculating on the direction of stocks.

If you write a whole lot of calls, creating new contracts in the process, you are very likely causing someone else in the market to short a whole lot of stock.

Jim

purely based on things like the (aptly named) B-S option pricing model
😂 😂 😂 Great!!!

"" (in your example, you as market maker would be the putative buyer at 6.60, not seller)
"" mornin jim, if you are offered at 6.65, and I, the MM< sell 50 at 6.65, I can't lose. WORST CASE, stock moves higher, I'm short 50 at 6.65 ,I buy the 50 you have offered at 6.65, I broke even. IF, brkb trades down,like it did yesterday, I'm short 50 calls at 6.65 , and I will try to buy them back at a lower price, hence a very low risk trade, for me. As a MM< I would LOVE to have you and other retail players put me in that position, 1000 times a day, limit orders for the day , buy or sell!! IN fact, I would send you Sees chocolate's weekly, to show you my appreciation. I type with one finger, so I try to keep it brief, what am I missing? Thanks.

Not sure you meant that MM's were actually synthetically short (sell a call and buy a put) when they sold a call, but yeah, they needed to account for the bad effect on their short calls of share price going up, and as you explain they bought shares to offset (which helped share price to go up!). In principle, they could have done a synth long (buy call and sell put) instead of straight long, but they'd do whatever best for their overall order book. Maybe the call buyers were a different group of more sophisticated investors, and not the original 'diamond hand' redditors?

Jim's sentence is the key to understanding those on the opposite side of the trade from you.
> They are in the business of picking up the bid/ask gaps, not in the business of speculating on the direction of stocks.
They want to pocket the realized bid/ask, and otherwise remain neutral to market direction, hence the phrase "delta neutral". Usually it's a market maker on the opposite side of the trade from you, e.g. if you want to buy a call it's the MM who sells you the call and not e.g. me (assuming I was long a call). They sit in the middle and pick up a risk-free (as much as they can hedge risk) realized bid/ask gap. Nice business, if you can get it (well, they do have overhead)! Because basically every trade is delta-hedged, there's a *huge* amount of money tied to the valuation model they use, I've always wondered about the possible unintended effects of that.

Not sure anyone cares, but I closed some of the calls I'd written. (all of my Jan $370 contracts; I have two other strike/date combos left)

I appreciate you sharing. I have yet to close my Jan contracts I wrote back in August and early September. I know it makes sense to close them out here with so little return left in them, but I may just hold to expiration. I don't see much coming in the next 3mo that would seem to inspire higher prices for BRK, but the market always makes a fool of me.

You mentioned implied interest rates on Jan26 calls being about 100-150bps lower than Jan25 calls in post a month or two back. Boy have those spreads collapsed! I looked yesterday and implied was virtually equal across both at 7.7-8.0% on the lowest strikes. Mirrors what I see in my day job with longer duration rates moving higher even without additional central bank increases. Market guessers seem to believe higher rates are here to stay a bit longer than they thought, for now any way. I will to need to see some pretty low Brk valuations before I jump back in to any long dated calls at these rates.

Jeff

I closed some of the calls I'd written.
...
I appreciate you sharing. I have yet to close my Jan contracts I wrote back in August and early September.

FWIW, my decision to close was not just because I'm quick to take a small profit. (a terrible sin which I am sometimes guilty of)
My thinking and often experience is that by closing them early for a good-enough profit, that leaves me the "firepower" to do it all again if the stock price rebounds in the next while.
And of course, having received 80% of the pie already, the effective rate of return on the last 20% is pretty uninteresting.
I can get a higher return on that money as a cash deposit.
(I think my broker deducts short-option liabilities from the cash which is eligible for interest)

Jim

I think my broker deducts short-option liabilities from the cash which is eligible for interest

I'm curious, if you were short brk, are you saying you sold more calls than you had shares to back? Or were the calls sold against long dated calls you are holding that may require a broker to view it differently due to the mismatch of expiration timing? Or is it something completely different I'm not even considering?

In my particular case I only sold pure covered calls where I had shares to back them. All my cash has been earning a nice bit of interest. In hindsight I should have sold enough to cover all my shares but perfection is rarely attainable.

I usually have a mixture of shares and long dated calls so I'm interested in how you view the various exposures. It just so happens I only have shares and covered calls currently because I closed out all of my long dated call positions during the high valuations back in August. I'm always interested in other strategies from those willing to share.

Jeff

I'm curious, if you were short brk, are you saying you sold more calls than you had shares to back? Or were the calls sold against long dated calls you are holding that may require a broker to view it differently due to the mismatch of expiration timing? Or is it something completely different I'm not even considering?

No, I didn't sell more calls than I have BRK positions...that would leave me net short. That would be a pretty risky proposition for such a fine firm, though I might consider it at over 2x book : )

The call position isn't really specifically tied to any long position in any firm sense.
But, I have calls and stock and cash. Since I'm long one way or another more than the calls I wrote, it's in effect a covered call.

What I meant about interest was this:
The call raised cash, which is sitting in my account and shows up as part of the balance.
But I don't believe the cash raised by selling that call counts towards the fraction of my cash pile that is earning interest.
And (I'm embarrassed to admit I don't really know), I think a bit MORE of my cash also does not earn interest while I'm short the call, being a portion that is working as margin security for the potential increase in the liability created by the short position.

Jim

But, I have calls and stock and cash. Since I'm long one way or another more than the calls I wrote, it's in effect a covered call.

That is the way I try to look at it as well. If I own 1000 B shares and own 10 long dated calls (typically varied expirations and strikes) I'm in effect controlling 2000 shares with some mix of shares/calls/cash. I should be pretty comfortable selling up to 20 covered calls against the total 2000 shares controlled. I've never fully covered my long position like that (retirement account rules in the US wouldn't even allow it) but it's how I think about the exposure.

But I don't believe the cash raised by selling that call counts towards the fraction of my cash pile that is earning interest.

Interesting. I just double checked one of my Vanguard accounts that auto sweeps to a money market account. My cash raised by the covered calls in that particular account is earning 5.29%.

Jeff

It is perhaps worth mentioning that adding call-writing to a long stock position is bearish, not bullish.

Incomplete characterization. Generic and irrelevant to Check Capital's marketing material.

"Adding" call writing is bearish, if you hold the stock. No argument there.

But crudely, it is half bullish. Holding a stock is 100% bullish, writing a covered call is 50% bullish, holding a bond is neutral, holding a bond and selling a put is 50% bullish.
selling naked calls, or shorting the stock is 100% bearish.

So overall, writing covered calls while holding the stock is definitely a bullish strategy as compared to holding a bond or selling the stock short. It cannot be compared to holding a bond index, period.

Yeah but notice how their returns for

https://static1.squarespace.com/static/641cca1972c...

start AFTER 2009. I wonder if they would have survived the big drop.

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