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As I've mentioned before, I have a fair bunch of money in T-bills at the moment. I hope to deploy a bunch of that into Berkshire, but I do hate to add to my position at the recent seemingly above-average valuation multiples. Even if the valuation level is not MUCH above average, and despite what Mr Buffett seems to have buying. So I wait.

I'm earning some interest, and this amount, though not huge, is actually higher as an annualized rate than what I expect from Berkshire in the next 6-12-18 months if things are "normal". By normal, I mean real trend value growth and valuation multiples typical of the last 15 years or so. Same old, same old. Sure, the price could explode upwards, but that's pretty unlikely: I try to plan things based on the apparently most likely outcomes, merely making sure nothing bad happens in the less likely ones.

So, also as I've mentioned before, it could make sense to write some cash-backed puts at lowish strikes that give a price I'd be willing to pay. The rate of return on these isn't that great, but on the other and, unless/until they are exercised, I'm making the rate of return from the options PLUS the rate of return on the cash backing them up. This is decidedly higher than what I expect from Berkshire's stock in the next while.

I bring it up again because there is another factor at work: since the stock price has been pretty flat the last ~5 months, and the value of a share keeps rising on trend, the re-entry prices that looked ho-hum are now looking not quite so bad. Consequently the rate of return on the put options at the target “fair price” levels are now a little bit more interesting.

Ignore all the false precision in the following, I'm just pasting from spreadsheets to avoid making typos when rounding things off. Think of it as a mere illustration.

So, what's a relatively "normal" expectation for Berkshire from now until early next year? In this exercise I (unusually) want to err just a tad on the side of optimism, so I don't overestimate the chances of a good low re-entry price a long time from now.

We know March book per share, $397,627 or $265.08 per B.
I have a rough guess as to June book per share, $421,100 per share or $280.73 per B from here https://www.shrewdm.com/MB?pid=474517153 That itself might be a bit optimistic and unrepresentative of trend due to the recent Apple pop, but let’s go with it.

We could guess that quarterly nominal book per share might rise 2.5% per quarter. Think of that as nominal 10.4%/year, minus 3.0% inflation, or inflation + 7.4%/year. A good but fairly normal year. That gives us Q3 book of $431,628 or $287.75 per B, and year end book of $442,418 or $294.95. (do recall that I have the goal that these numbers be slightly optimistic--I do not count on these values)

The average ratio of price to known book in the last 15 years has been 1.371. Let's use a nice round 1.4, partly for our theme of "slightly optimistic" and partly because multiples have been a bit higher just lately.

With that multiple, and our pencilled in book per share figures, we can estimate a possible future nominal price trajectory, from the "slightly optimistic" department.
Around/after end Q2: A "normal" price might be around 393 per B
Around/after end Q3: A "normal" price might be around 403 per B
Around/after end Q4: A "normal" price might be around 413 per B

One quick conclusion from this exercise is that almost any entry price under $400 some time in Q4 would probably constitute a pretty sound investment.

So, back to options: yesterday I wrote some December $400 puts for a premium of $10.60. If assigned, that would give me a (re) entry price of $389.40, which per the observation above should work out pretty well. That's only 1.32 times my (slightly optimistic) year end book estimate.

If not assigned, I get a cash rate of return of 5.65%/year. This is in addition to what I'm making on my T-bills and cash backing up the puts in the mean time, which is a weighted average of 5.198%/year. The puts could be assigned at any time, cutting off the interest income from time value erosion, but in practice they never are until the time value is near zero. So, for now I'm making 10.64%/year rate. That is quite a bit better than what I expect as a return in the next year if I were merely to buy Berkshire stock today.

Downsides to all this? Interest rates may fade, and Berkshire's stock price may rise without a dip. I miss getting the stock assigned and get a higher re-entry price when I ultimately cave in and plow back into Berkshire stock, but the "cash while you wait" benefit of interest in the mean time fades. Still, that isn't exactly a wipe-out, and I'll be happy making over 10% this year on that cash. It seems likely that some day there will come a time that things are once again on sale, and having cash and T-bills at hand will seem fortunate.

A key point is that getting back into Berkshire at a higher price than today's isn't necessarily bad...it depends on how much interest I earn between now and then. If the stock price were to rise only a bit over (say) the next year or more, it would still be a pretty good plan.

Jim

So, also as I've mentioned before, it could make sense to write some cash-backed puts at lowish strikes that give a price I'd be willing to pay.

I’ve been doing similar.

My current re-entry would be about $388 based on what I’ve sold so far. I’ve only sold enough to cover about 25% of my previous peak dollars at risk exposure on BRK was earlier this year. Maybe there will be a drop and a better buying opportunity. Now that we have a “clearer” picture on where Q2 book will come in I may decide to speed things up.

Appreciate you sharing.

Jeff

Downsides to all this? Interest rates may fade, and Berkshire's stock price may rise without a dip. I miss getting the stock assigned and get a higher re-entry price when I ultimately cave in and plow back into Berkshire stock, but the "cash while you wait" benefit of interest in the mean time fades. Still, that isn't exactly a wipe-out, and I'll be happy making over 10% this year on that cash. It seems likely that some day there will come a time that things are once again on sale, and having cash and T-bills at hand will seem fortunate.


Aren't you losing the optionality value of the cash in the case of a market pullback?

tecmo
...

Aren't you losing the optionality value of the cash in the case of a market pullback?

Yes. And also "not quite".

Yes, in the sense that the capital I have targeted for a conditional purchase of Berkshire stock is likely to get used for that, rather than for any other opportunity that might arise.

I think of it this way: I have already decided that's what I would do with the money if Berkshire got cheap. It may be a good or bad decision, but that's what I've decided. Given that, I don't mind getting paid up front to *commit* to doing what I've already decided to do. I do have to commit to that possibility, rather than merely planning on it, so in that sense yes I'm losing the optionality of the cash pile. Albeit in return for a payment.

But also "not quite". When there is a market pull back, and put options go into the money, they aren't necessarily exercised right away. As a general rule, if there is any meaningful time value that the holder of the option could realize at the current bid by selling them, that person will sell them rather than exercise them. So a market crash a fair while before expiry won't behave (in my portfolio) at all the same way as a market crash shortly before expiry: if there is still time value, it's very very rare to see an assignment.

Additionally, I could see some of this coming: if I think there *might* be something else I'd rather do with that money, I could buy back my puts at any time. Also, I could buy them back and replace them with longer dated ones which would (as noted above) have more time value and be much less likely to be exercised, if for any reason that looked like a better idea. Long story short, I still have pretty much complete optionality unless and until any specific contract I've written is exercised. "Almost" complete, in that the puts I've written may have a mark-to-market loss I'd have to realize, but that's generally small compared to the pile of cash backing them up.

If I were doing this primarily for the income rather than as a way of getting a good price on Berkshire stock, then I'd probably use a variety of different expiry dates and strikes (and perhaps stocks), substantially reducing the chances of assignment in any given week, which in turn would let me use a bit of leverage. You can write puts with notional value of much more than $100k backed up by a pile of $100k in cash, and almost never need more than 1/3 of the cash for assignments, if the puts are staggered. I did this for years. It pays well but it's a fair bit of work, so mostly I don't do it much any more. My IRR over the years (over 100k contracts) was 10.7%/year based on notional capital committed, but my actual portfolio return was that number times the leverage I used.

Jim

Jim, I would like to also sell BRKB DEC puts, but not sure it would make sense for me. To have cash secured puts I would have to sell 3 month T-Bills which are giving me over 5% now. What would be the possible net results.

Jim, I would like to also sell BRKB DEC puts, but not sure it would make sense for me. To have cash secured puts I would have to sell 3 month T-Bills which are giving me over 5% now. What would be the possible net results.

It depends on what else is in your portfolio.

Generally speaking, you just keep the T-bills and collect the interest (value increase) on those, as well as the time erosion on the put. You don't actually need cash to back up the put, if your account has marginable securities in it. If your account has enough "room" for a bit of margin, then if the put is assigned, you just get the stock, and the broker gives you a margin loan for whatever amount is needed in addition to your cash balance at the time. You'll get a message saying this has happened, so you could just sell the stock the next day. You'd have a margin loan for a few hours. This is my situation at the moment. I have both cash and T-bills, but the puts I've written add up to a bit more than the true cash. If everything were put to me, I'd either have to sell some stock or some T-bills to erase the momentary margin loan. I intend to do the latter--the T-bills are just placeholders till I get some more stock at a good net entry price.

If your portfolio does not have enough asset "room" to withstand a purchase from the assignment, then it's more of an issue. But of course the broker might not let you write the put in the first place, in this situation.

What a broker might do is allow you to write the put, but then only when it's assigned realized that you don't have enough marginable securities to support the purchase of that stock. What they'll typically do in that case is buy the stock for you, realize "oops" your margin balance is too high, then immediately turn around and sell some or all of it.

I guess the main think is to know in advance which of these situations applies to your account.

At Interactive Brokers the interest rate difference between cash and T-bills is not huge, say 5.2% versus 4.7% currently. Depending on your balance because they don't pay interest on the first $10k. So you could just sit with a cash balance and forget the T-bills if you like.

Jim

So, also as I've mentioned before, it could make sense to write some cash-backed puts at lowish strikes that give a price I'd be willing to pay. The rate of return on these isn't that great, but on the other and, unless/until they are exercised, I'm making the rate of return from the options PLUS the rate of return on the cash backing them up. This is decidedly higher than what I expect from Berkshire's stock in the next while.

As I've written before, I've been doing this for a few companies that I am interested in buying at somewhat lower prices. I did it with Berkshire for most of the first half of last year, and had the 305's put to me at some point but most of the others expired worthless. Just this morning I did so with Disney, sold some 95 strike puts, the 95 strike minus the ~3 premium for the put option results in a net price of about 92 if assigned. Even though I expect to see Disney in the 80s at some point, I'm willing to begin entering the position in the low 90s.

If it's a price you're willing to pay, writing those puts is essentially a no lose proposition - either you keep the premium when they expire worthless, or you get assigned at your desired price. Of course, circumstances can change between the sale of the option and disposal of it (either buying it back, it expiring, or being assigned) but that "optionality" is what you are selling in the first place.

...it could make sense to write some cash-backed puts at lowish strikes that give a price I'd be willing to pay...

In case anybody is interested, I did write some puts against BRK/B that would have given me entry price I'd be happy with.
But with today's price pop, those puts have been quite profitable, so I just closed them.

They might have allowed me to get the stock at a good price, or provide a cash return. Having close them, it's the latter. I made 49% of the maximum possible profit in 10% of the maximum possible elapsed time, so that's pretty good. I didn't bother to calculate the IRR, it would be some silly number.

The realized profit was the equivalent of $4.78 per B share that I committed to (conditionally) buy, in 16.5 calendar days. The stock price is up more than that, but of course I didn't actually have to buy any stock to get the profit...I kept earning interest on the capital.

Jim

Thanks for the update Jim.

I sold today some 470 and 480 calls for January 2025 to collect some extra cash.
About 10 days ago I bought back some 470 calls January 2025 for a 50% gain in just a couple of months.

Cheers,

Brian

“But with today's price pop, those puts have been quite profitable, so I just closed them.”
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For those with 2nd thoughts about getting off the Berkshire Train back in March…. but stayed on , here’s a 2nd chance……….OR….to get back on for those that got off & thought it a mistake…..

“Berkshire Hathaway Stock Hits Record. Warren Buffett’s Stake at $133 Billion.
Berkshire Hathaway stock has moved into record territory as its class A stock is trading Friday above a closing high from earlier this year. The class A stock is up 1.4% to $638,150 Friday, above a record close of $634,440 set on March 28, Bloomberg data show. The shares now are up 17.”
Read in Barron’s: https://stocks.apple.com/AWdDUvhivTxG3S9l4t2f0CQ

ciao

The realized profit was the equivalent of $4.78 per B share that I committed to (conditionally) buy, in 16.5 calendar days. The stock price is up more than that, but of course I didn't actually have to buy any stock to get the profit...I kept earning interest on the capital.

Any time I've written puts like this, and then closed them a short time later for a substantial fraction of full profit, my first thought is: "if I had just bought the stock and sold it, my profit would have been (say) 3X."

But a cash-back short put can be viewed as selling the stock's upside (because you don't believe it has much upside). A hidden advantage of the short put is that there isn't the nagging question of whether to sell after a run-up. With the stock you never know when to take the profit, while with the put it is a little more obvious due to its capped profit.

those puts have been quite profitable, so I just closed them.

I always grapple with this aspect of these types of trades. Why bother closing them? Instead just wait for them to expire worthless and they close themselves. And, worst comes to worst, if there's a sudden downdraft, I get to buy shares at a price that is attractive to me. The only real reason I can think of to "close them" early is if I want the capital gain now instead of at expiry (for example with Jan 2025 puts that will almost surely expire worthless). The other real reason may be if you need the margin to be available for another trade, but if they are getting close to worthless, they probably aren't consuming much margin anymore anyway (except in tax deferred/exempt accounts where they consume the full exercise price in margin).

those puts have been quite profitable, so I just closed them.

I always grapple with this aspect of these types of trades. Why bother closing them? Instead just wait for them to expire worthless and they close themselves.

Jim can answer this, since the bolded statement is his.

The reason I would close them is that it very cheap to do so after a sudden increase in the stock price, and if the stock falls back I can write the same put again.

The reason I would close them is that it very cheap to do so after a sudden increase in the stock price, and if the stock falls back I can write the same put again.

Indeed. Maybe I can do it 2 or 3 times.

But also, they do tie up capital. You're getting paid for making a decision in advance, but once the payment is negligible the commitment remains. Though I would like to buy some Berkshire stock at a very attractive price, when the moment comes there might be other tempting choices.

Jim

The reason I would close them is that it very cheap to do so after a sudden increase in the stock price, and if the stock falls back I can write the same put again.

1. It may be cheap to do so, but it still costs you some money. And since the stock went up so much, it's almost all time premium you are buying.
2. Yes, you can write the same put again, But because of the elapsed time (between the stock having gone way up, and then falling back down again), you will receive less time premium the second time around. And besides, you CAN sell the same put again WITHOUT buying back the old one! I just looked at the history of a particular put (not BRKB) I sold in Sep '22, it is a Jan '25 put, and I sold some in Sep '22 ($21.75 each), sold some more in Nov '22 ($20.80 each), and twice more in Dec '22 (first at $22.55 each, and then after a big drop at $26.95 each). Today those puts are each trading at $0.25, and I still can't think of any reason to buy them back. Of course, unless I want to book the capital gain in '24 instead of in '25 when they will very likely expire worthless. If I want the gain in '24, I would buy them back in December.

But also, they do tie up capital.

But once the stock made its big move, they don't tie up as much capital as you would think. In my previous post, the put I mentioned in my example is a 140 strike price and the stock is now trading at $224, and the option is now trading at $0.25. That means, if I am calculating correctly, my capital tied up is $14 + $0.25, or $14.25 (That's even LESS than the price I received for selling those options back in late '22), and even though it is tied up, it still earns interest for me all the while.

Here's a link to the way margin is typically calculated for various option trades or combination option trades - https://www.tradestation.com/pricing/options-margi...

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