No. of Recommendations: 12
I play options in easy to understand situations:
If I want to sell stocks at current price, I sold some call options to avoid paying tax in current year, or to get a fatter price, or just net the proceed for free.
If I want to buy stocks at current price, I sold some put options to get a lower price or just net the proceed for free.
No argument with those, but both of those strategies are fancier and probably harder to understand than the perpetual deep-in-the-money calls approach, which is basically just taking out an uncallable loan (a couple of years at a time) in order to be long some more shares.
For years I just kept rolling my calls, either rolling out, or rolling out-and-up. Every so often the stock price would be high and I could roll up to a higher strike for a very reasonable interest cost, throwing off a lot of money, which I happily spent.
This just meant I had the upside on more Berkshire shares than I would otherwise have had, at the cost of the implied interest rate. I would generally think of the alternatives as 100% of that position size in Berkshire shares, versus 50% in Berkshire shares and 50% in call options with 2:1 leverage. The latter gives you the upside on 1.5 times as many shares, at the cost of interest on the cost of that extra 50%. (don't forget that the implied interest cost is on only the *extra*, not the whole position). So if Berkshire rises in price on average at (say) 9%/year, and you're paying an implied interest rate of 6%/year, the "interest" is 6% on 1/3 of the shares controlled, or 2% on all of them, so you make on average 9-2= 7%/year on 1.5 times as many shares, 7*1.5= 10.5%/year on your cost basis. This can of course be pushed further with higher strike prices and/or less stock, but that example shows that how even a small amount of leverage makes a boring investment return into a quite good one.
Leverage, of course, being the main way smart people go broke. If you're going to do it, make sure the loan is uncallable and long term and cheap, and make sure the asset you buy has essentially no chance of falling in true value. If you follow those rules it's possible to make quite a lot of money without much in the way of obvious risks.
Jim
