Halls of Shrewd'm / US Policy❤
No. of Recommendations: 4
No. of Recommendations: 18
No. of Recommendations: 1
Which OTM calls are you contemplating?
No. of Recommendations: 0
Nice! Let’s hope Mr. Market will not be particularly bipolar after this ATH. I’d forgotten he sliced us 25% in price a couple years ago right after we said Cheers to the new high in March 2022, although the price dive did provide opportunity. Will be interesting to see if he’s taking his meds, for the time being anyhoo.
No. of Recommendations: 4
I sold a batch of traders this morning at $376.76 bought in my IRA at $300 about 10 months ago. Better than T-bills!
May I have another round please? : )
No. of Recommendations: 2
I sold a little bit yesterday at $370 (too early as always), next sell target: $385.
No. of Recommendations: 9
Which OTM calls are you contemplating?
I contemplate a lot of things : )
But writing the June 380s at $16.15 looks not entirely nuts.
That would equate to an exit price of 1.64 times last known book, maybe around 1.53 times end 2023 book at a guess, presumably book will be a little higher in June meaning a lower exit multiple if the price stays high.
But frequently there is some sort of intervening price dip and I can close them early for (say) 70-80% of the maximum profit in maybe 40-60% of the elapsed time.
In absolute terms, it's a net exit price of $396.15.
That compares favourably to my wild guess of end 2024 price of maybe $390ish (post 5254)
Jim
No. of Recommendations: 1
No. of Recommendations: 5
Sold a little this AM.
Limit price of 378.19 and got taken out at $380.00.
We are retired and living off of our investments. This is my first sale out of our long term holdings of Brk B Shares. Our average cost base is $81.68.
This is in a taxable account so Ouch! but first class problem, and was meant to raise some cash for ongoing cashflow requirements. As someone else around here has been known to say, "A guy's gotta eat!" or something like that.
Cheers
No. of Recommendations: 13
This is my first sale out of our long term holdings of Brk B Shares.
Congratulations!
Our average cost base is $81.68.
Even more congratulations!
"A guy's gotta eat!" or something like that.
Sounds like you'll eat well.
I too eat from my portfolio. But, per my personality, I always overcomplicate things.
I just sold some June $385 call options for $14.56.
There are two possible outcomes:
(a) The stock price rises a lot, the option gets exercised, and I end up having sold some stock at the net benefit of $399.56 per B share. ($385 that the option buyer pays me, and the $14.56 I already collected). Though the stock could push higher for a while and I might miss an opportunity to do even better, I'm confident that even by June that will be a pretty good exit price, so I'm happy with that.
(b) Or I get to keep the $14.56. That's a "bonus" 9.5%/year rate of return on my stock, and it's cash I can then spend: a bit like an occasional dividend. This makes senses only when the stock valuation is getting decently high, so it's a rare treat.
Jim
No. of Recommendations: 0
“The stock price rises a lot, the option gets exercised, and I end up having sold some stock at the net benefit of $399.56 per B share. ($385 that the option buyer pays me, and the $14.56 I already collected).”
Forgive me, but if the option is exercised, can you choose which lots you say goodbye to and optimize taxation?
No. of Recommendations: 3
I'm not confident enough to do CC or puts, but well done ! I will be eating from my BRKB for the first time later this year.
best to all..
No. of Recommendations: 3
Forgive me, but if the option is exercised, can you choose which lots you say goodbye to and optimize taxation?
I have no idea, maybe there are some US people who know about such things.
Contractually, you merely have to deliver stock--the contract doesn't really care where it comes from, but your broker will pull it from your account using some method I can't speculate on.
If you don't own stock, [at least some] brokers will sell it short for you to make the delivery. (I think I had this happen a few times, I just bought the stock the next day to zero it out. You end up short the stock, but they also give you the cash from the exercise of the call).
If you had more than one account, I guess you could write the call in the account whose stock you were most willing to part with?
Jim
No. of Recommendations: 0
Thanks. I suppose my issue would only matter, of course, if it were done in the the taxable accounts.
I checked with Fidelity and my Level 1 option privileges are open in Both brokerage and retirement accounts, so the preference would most likely be writing covered calls in the latter. Looks like June 390 covered calls would pocket $11.85 (mid point) if a little higher price is preferred. Thanks for sharing your wisdom, as always.
No. of Recommendations: 2
This is my first sale out of our long term holdings of Brk B Shares....I will be eating from my BRKB for the first time later this year.
It sounds like a number of us are at that stage. I bought in after the stock market debacle of 2008, and have never touched the BRK in the taxable accounts. Uncle Warren has put the number 5 in front of my A share price and a 3 in front of my B share price. I always had something else to sell to live off of, but I think going forward I'll be nibbling at BRK for expenses. As Jim said, even nibbling, we can eat rather well.
No. of Recommendations: 6
Yes you can. Watch it closely. Your broker will grab shares based on your account instructions. High or low cost basis for example. You have until settlement to correct anything that you don't like. Options usually exercise Friday night at 11 PM Pacific through the CBOE. Plan to address any share lot specifics on Monday. You likely will have until end of day Tuesday, but confirm that with your broker.
No. of Recommendations: 0
Just sold some June 400 covered calls in my Roth IRA-$9.00/ contract.
No. of Recommendations: 1
I just sold some June $385 call options for $14.56.
I've never used options before. Just to confirm, if you sell June $385 call options for $14.56 the buyer pays you $1,456 (100 x $14.56) per contract?
No. of Recommendations: 8
I've never used options before. Just to confirm, if you sell June $385 call options for $14.56 the buyer pays you $1,456 (100 x $14.56) per contract?
Yup.
The owner of that option then has the ability to force you to sell them stock at $385 any day they like, up until expiry. (you have already pocketed their premium, so this is $385 more). However, in practice they will never do so so long as they can get more benefit by selling the option on the market while it still has some time value in it.
If the stock price is flat it will make a profit very slowly: you are short something that is gradually falling in price. Layered on top of that trend: If the stock price rises the contract will have a higher market value (bad for you) and vice versa.
You can buy back the contract any time you like. If the stock price dips, even for a short period, the mark-to-market profit on the call you sold can be quite high...good time to take the profit. If the stock bounces back up to high valuation levels you can do it all over again.
The calls I've written just recently are looking bad for now, because the stock is still soaring. I still expect a lower price at some point, and the ability to close them at a profit. I have the tail wind of the time value: as mentioned, if the stock price is flattish they gradually make money.
Jim
No. of Recommendations: 0
I'm an options newbie. In fact I just sold my first covered calls -- 6/21 & 9/20 at a strike price of 400.
Three immediate questions:
(1) I know that Jim says this will never happen, but if the stock gets called away will my broker just withdraw the shares from my account?
(2) Is it better to use a strike price closer to the current price or is the selection of the best strike price just driven by the option premium?
(3) (Related to the strike price question in (2))If the stock price declines - say BRKB drops to $370 - would you be better off having used the higher strike price? $370 is $15 below the $385 strike but $30 below the $400.
No. of Recommendations: 1
If you need or want to sell shares now, it may be tempting to sell call so that combined higher price will be achieved. I did that around March 2022 when the B share price was about $350. However, the benefit may not be as clear as you think. A few months after reaching $350, the price dropped to around $260. Had I have not some calls pending, I would have bought more shares at much lower prices and achieved better result.
No. of Recommendations: 1
"Had I have not some calls pending, I would have bought more shares at much lower prices and achieved better result."
Correction: Had I have sold shares instead of call, I would have more money to buy more shares at much lower prices...
No. of Recommendations: 0
Jim, very helpful post again !! I'm sure if you saw my retirement plan, you can clearly see why I am semi forced to consider this as a significant element, pre- "move"
No. of Recommendations: 10
(1) I know that Jim says this will never happen, but if the stock gets called away will my broker just withdraw the shares from my account?
Yes. Nothing for you to do. The stock disappears, the money equal to the strike price appears.
At my broker (IB), there is no fee for this. I don't know if that's true for all brokers.
(2) Is it better to use a strike price closer to the current price or is the selection of the best strike price just driven by the option premium?
The best way to think of this is to remember that there are two possible outcomes, expiry or assignment, and you don't know which you will get. The buyer of the option gets the option...hence the name!
Whenever writing any option, a good general starting point is to pick one that you're equally happy with both outcomes.
(because, sure as shootin', you'll get whichever one looks worse to Mr Market on the day he decides)
The strike price you pick determines
- the probability that you will get one outcome versus the other. Obviously a higher strike OTM call option is less likely to get exercised the higher the strike, so the more likely you'll get to keep the premium
- the higher strike ones have smaller premiums. Not as much money to keep if it expires.
I tend to pick options that are relatively close to the current price. The premium is a LOT higher, and I'm not scared of the stock getting called away. Don't be.
Remember, I will be "forced" to sell it at a very good price (which I have calculated in advance, strike+premium), and I can always buy the stock back on the open market then if I like. Or on the next dip.
Since I'm getting a big premium, there's a good chance that even an exercised option will leave me in a nice profit position, if the stock price ends up between the strike and strike+premium.
(3) (Related to the strike price question in (2))If the stock price declines - say BRKB drops to $370 - would you be better off having used the higher strike price? $370 is $15 below the $385 strike but $30 below the $400.
In the event that the stock price declines, all that really matters is that you want to have made a lot of money, so you would want to be owning an option that was at the money and long dated. (out of the money by zero = the stock price) That's simply because you'd have received a really big time premium which you will get to keep if the stock price falls and stays lower.
The *amount* by which the stock is lower than the strike doesn't really matter in any other way, in the case that the price is in fact lower and stays there. A lower strike does presumably have a greater chance that the stock will rise back up and beyond the strike if you don't close the position during the dip.
For anybody trying these things, don't get too scared. There is a market for them. You can buy the option back to close the position any time you like. If the stock soars, your option will go into a mark-to-market loss but (a) remember the stock you own is going up! and (b) you're still making a bit of money each day as the time value evaporates. If the stock is called away, you can buy the stock back if you like.
I am not a big believer in covered calls as an "all the time" thing, because it makes no sense when a stock is cheap or fairly valued--writing a call on top of an existing position is a fundamentally bearish move, though not necessarily VERY bearish. When the valuation level is getting a bit rich, I think it makes some sense. In effect, I know I would sell some stock if the price went up to X. Some folks are willing to pay me in advance, pretty well, to commit to doing what I would do anyway.
Jim
No. of Recommendations: 2
Thanks for the bit of education , Jim. I'm sure that others will benefit as well.
I will say that I enjoyed collecting the option premiums! And, I'm fine with the $400 strike price. Obviously covered calls are a great way to "lighten up" when the stock price is already on the high side.
No. of Recommendations: 2
Thank you for this option talk. Again, I've never used options.
But, a covered call seems to make sense in my situation. I would be happy to lighten my existing shares at $385.39.
So, can someone please double check my work before I submit an order? Kinda scary the first time!
Action: Sell To Open
Quantity: 1 (1 for each 100 shares I want to sell)
Call
Expiration: Jun 21 2024
Strike: $385.00
Order Type: Market
Time in Force: Day
Route: Auto
Right now they're selling for $15.30, so the way I see it I'm selling BRK.B at $400.30, about 4% higher than my target of $385.39.
I guess the downside is BRK.B moves past $400.30 and my shares get called and I end up with cash and then the share price never touches $400.30 again for me to repurchase them?
No. of Recommendations: 0
you can always buy the calls back before the stock is called from you IF it moves higher. good luck. Hopefully you aren't doing 20-30 plus at a time ?
No. of Recommendations: 11
Order Type: Market
I strongly advise to set Market Type to "Limit" and enter the least you are willing to accept for that option.
Otherwise you are letting someone else decide how much you receive, and that could be an absurdly low amount.
No. of Recommendations: 2
Right, *NEVER* do an options trade at the market.
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.
I rarely do covered calls, but the common recommendation is "next strike up, next month out". So they'd do the 385 for Feb or Mar, not June.
FWIW, I am treating this not so much as a "covered call" per se, but as a way to slightly put on some reverse leverage, after selling some DITM long-dated calls that put on positive leverage. Taking off leverage because the P/B is getting high.
No. of Recommendations: 1
Hopefully you aren't doing 20-30 plus at a time?
Can you explain more about how many people should be doing and why?
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
No. of Recommendations: 0
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.
On the flip side of the coin when BRK is at lower valuations, have there been situations where you've found put buying (rather than selling) on BRK to be advantageous over buying DITM calls or simply buying stock outright?
No. of Recommendations: 8
On the flip side of the coin when BRK is at lower valuations, have there been situations where you've found put buying (rather than selling) on BRK to be advantageous over buying DITM calls or simply buying stock outright?
No, I haven't been tempted by buying puts against Berkshire or other individual stocks. That's buying insurance against the possibility of a price drop, but I always welcome a price drop for Berkshire. It's pretty rare that I don't have some dry powder somewhere, even if I have to fumble behind the cushions on the couch.
I generally wouldn't see it as a very good wager, since Berkshire's price is so stable, generally speaking. I have made some money buying puts against other things (and lost some too), but it's pretty rare that I have conviction about an imminent large price drop. For a purchased put to work out, the price drop has to be reasonably big, and within the time frame that you have targeted.
I have bought a lot of puts as disaster insurance over the years, though not lately. e.g., when an index feels high and toppy, I buy a few puts at various long dated low strikes while they're cheap. I generally lose money on those on average. But the advantage is that on the rare occasion that it really pays off, it pays off precisely the day that you would like to have some extra cash to go shopping. If you include the returns from the things I've bought on those days that I would not otherwise have had the ready cash for, the puts I've purchased don't look so bad.
Reading your question, is it possible you meant put writing when the price is low?
Jim
No. of Recommendations: 0
Reading your question, is it possible you meant put writing when the price is low?
Ugh, I apologize - I did mean to say put writing. (If there's scenarios where you've ever found that advantageous over buying DITM calls or buying stock when BRK is at lower prices/undervalued)
Thanks for your thoughts above on put buying though.
No. of Recommendations: 8
I did mean to say put writing.
I have done a lot of cash-backed put writing. Around 100,000 contracts over the years. Since dates and strikes are staggered very few contracts will ever get assigned in any given period, so $1 in cash can back up considerably more than $1 in puts liability without much problem, so a bit of leverage adds to the charm financially.
But only rarely have I done it with Berkshire...the premiums never seem to be particularly high. The stock is perceived (rightly) as not being very likely to make a big move.
I averaged 12%/year on them without leverage, but it was that good only because I was a bit lucky or skilled at choosing my moments. Typically the return on the puts was only something like 2% better than simply holding the stock in the same intervals, a bit like getting a dividend. And it was a lot of work.
As mentioned, I plan to get back into writing puts against Berkshire soon, as a way to make a little bit of money and simultaneously automatically get more stock at a good valuation level. But I don't expect much of a return from the process, as the entry prices that interest me right now are well below the current stock price. I won't be doing it when the stock price gets cheap again...at that point I'll be buying stock, or getting it assigned.
Jim
No. of Recommendations: 0
The owner of that option then has the ability to force you to sell them stock at $385 any day they like, up until expiry. (you have already pocketed their premium, so this is $385 more). However, in practice they will never do so so long as they can get more benefit by selling the option on the market while it still has some time value in it.
I don't understand that last sentence. Sure, whoever bought the call can sell it, but that just means the owner changed, not that the option went away. So the new owner could exercise. In fact, if an option is ITM, why would it not be exercised (other than transaction costs being more than the profit from an exercise and immediate sell, but with transaction costs being minuscule these days, it would have to be only very slightly ITM for letting it expire to make sense)?
Brian
No. of Recommendations: 6
...However, in practice they will never do so so long as they can get more benefit by selling the option on the market while it still has some time value in it.
...
I don't understand that last sentence. Sure, whoever bought the call can sell it, but that just means the owner changed, not that the option went away. So the new owner could exercise. In fact, if an option is ITM, why would it not be exercised (other than transaction costs being more than the profit from an exercise and immediate sell, but with transaction costs being minuscule these days, it would have to be only very slightly ITM for letting it expire to make sense)?
Well, first, technically it might mean that the option truly went away. Depending on the trajectory of trading in an option, the number of outstanding contracts can change. There may be no new owner.
But, ignoring that...
My reasoning also applies to the new owner of the contract.
Say it's a call option to buy XYZ at $100 a share. XYZ is trading at $105. The bid/ask on the contract is 7.50/ 7.80.
Imagine you own this contract and want to take your profit. You could exercise it and get XYZ shares for $100 which are trading at $105, realizing $5 in profit (mark to market basis, or sell the shares right away).
Or you could sell that contract today for $7.50. $7.50 profit is a whole lot more than $5 profit. Which would you do?
If you want the shares, you can simply buy them.
As the contract gets closer to expiry (or the other things that erode time value), the bid available for the contract will gradually fade away until it's no better than what you'd get exercising the contract, and at some point will become worse.
At that point, it makes sense to exercise. But as a general rule, it doesn't make sense before that.
Sometimes it will happen that someone will exercise such a contract, but is really is very rare. And when it happens, it's often a small subset of the number of contracts you're short. I'm not sure why it would happen. Dumb money? Maybe an unusual tax or regulatory situation preventing the sale of the option or changing the relative benefit?
In any case, it's very rare.
Back to your question... if an option is ITM, why would it not be exercised...
the answer is "it will"...but not until that's the best way for the holder to get their profit, which as a rule happens only close to the expiry date.
So long as there is some time value that the holder can realize, it's not their best alternative, so it usually doesn't happen.
Jim
No. of Recommendations: 1
I'm not sure why it would happen. Dumb money? Maybe an unusual tax or regulatory situation preventing the sale of the option or changing the relative benefit?
In any case, it's very rare.
It is rare. It is usually connected with the timing of a material, possibly unexpected, dividend. Or a short-squeeze on the underlying or just a material change in borrowing cost.
No. of Recommendations: 0
Maybe a tiny addendum is in order why in Jim's example the price of the option is higher than $5? Because normally nobody would sell an option which gives you the right to buy shares currently traded for $105 for only $100 from him for less than the $5 you could pocket if you'd exercise and immediately sell them.
That right is only sold to you if you are willing to pay more than those $5 you'd get if you'd immediately exercise them for $100 and sell the shares for the current $105 market price. No free lunch.
That means the price of the option will always be higher than those $5 (as closer to expiry as less so). And that in turns means if you are the one who bought it you'd rather sell the option for those >$5 proceeds than exercise them for only $5 difference.
No. of Recommendations: 3
I sold the rest of my IRA traders today just over $389. Started selling them again at bigshan's PT of $385. Iucked the proceeds into 5.3% AY treasuries. At over 1.6 times book, I should be able to pick them up a bit cheaper. If not, I'm very happy holding my cores!
No. of Recommendations: 1
Are you using last quarter's BV or the new updated BV ?
No. of Recommendations: 3
I also sold a material amount today, tax-free. $391.45.
Probably a bad idea, but we'll see.
No. of Recommendations: 1
Wrote a few more covered call contracts this am in my Roth IRA-June 2024 405 Strike($10.10/ contract).
No. of Recommendations: 5
Probably a bad idea, but we'll see.
Well, I don't know about that.
Here's what the price/book is looking like today:
Fri Feb 2 05:13:25 PM CST 2024
From ycharts: P/B 1.618 for Feb. 2, 2024
From alphaquery: P/B 1.57
From macrotrends: P/B 1.58 February 01, 2024
It's getting up there.
I took off all my DITM calls this week, and did a covered call. I will be really surprised if that gets called and it'll be like selling BRK.B for 409.01.
I have plugged BRK into my timing strategy spreadsheet and did *not* find any reasonable set of price/action trigger points that improve on buy&hold.
No. of Recommendations: 3
but current book is unknown and growing.
No. of Recommendations: 2
“ I sold the rest of my IRA traders today just over $389. Started selling them again at bigshan's PT of $385. Iucked the proceeds into 5.3% AY treasuries. ”
I sold a little bit more yesterday at $390. Next target $395-$400 depending on how strong is the momentum I perceive. With 5.3% interest rate and selling at $390 today, you get one year price about $405 with the possibility to buyback at lower price when it happens.
No. of Recommendations: 2
My mistake. With 5.3% interest rate and selling at $390 today, you get one year price of $410.67
No. of Recommendations: 3
No. of Recommendations: 16
Interestingly, the five year chart doesn't look like the current price is extended all that much...
Hmmm.
I find charts showing valuation tend to be rather more useful than charts merely showing a price.
Here's a different look at the last five years.
www.stonewellfunds.com/BerkshireValuationFiveYears.png
That's the inflation adjusted price history overlaid with some valuation-based landmarks, such as 1.5 times last known book per share, over the last five-and-a-bit years.
Of course, we know that known book per share is about to jump upwards a bit as soon as the new year end statements are released.
But that's usually the case, so comparing the current situation to slightly out of date "known book per share" in the past isn't in any way unfair.
But, for your viewing enjoyment, here's a rough guess at what it might look like after the year end statements come out, assuming a flat stock price in the next few days for clarity:
www.stonewellfunds.com/BerkshireValuationFiveYears_forecast.png
I really should add another line for "inflation adjusted highest known buyback price to date". At least as long as Mr B stays in charge, it's hard to come to the conclusion that the stock is worth less than that number.
Anyway, I do agree that the stock is not hugely overvalued in any absolute sense, and the current rally might continue a while yet.
But it is certainly more richly valued than usual in the last 5-10-15 years, and at a level that usually leads to relatively dull returns for a while if held for 6-12-18 months.
Jim
No. of Recommendations: 4
"I find charts showing valuation tend to be rather more useful than charts merely showing a price."
Nice charts. Thanks for sharing.
"I really should add another line for "inflation adjusted highest known buyback price to date"
That would be nice. With regular repurchases going back to 2018 and irregular repurchases back to 2011, we now have a pretty good idea of the maximum P/B that Buffett will pay. We even have two months, April and May of 2022, when Buffett did not repurchase shares. The number of shares repurchased declines with increasing P/B, although with considerable scatter. So far, the maximum (price paid/beginning book for the quarter) is 1.49, and the maximum (price paid/ending book for the quarter) is 1.51. The (price paid/Buffett's conservatively estimated IV) would be slightly higher than those numbers. At present, with P/last known book at 1.62, it looks like we are slightly above the limit of what Buffett is willing to pay, although not necessarily above IV.
