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... but from the other side, this time.

Currently down from 1045 billion at its high point yesterday (and ever), to 1002 billion a few minutes ago, 1004 billion as I type.

Those puts everyone has been writing about should be doing well, if they have strike prices close to where the stock was trading yesterday.

A little more volatility and maybe nervousness, maybe a good time to write some puts?

dtb

A little more volatility and maybe nervousness, maybe a good time to write some puts?
Why should nervousness and the eventually resulting selling pressure be a reason to write puts?

Why should nervousness and the eventually resulting selling pressure be a reason to write puts?


Their a reason for people to want to buy puts, as protection, to protect themselves against a further fall in the value of the shares they own, as a sort of floor price. The more people want to buy them, the more they will pay for them, and the higher price I can get for selling them ('writing') this insurance.

dtb

Those puts everyone has been writing about should be doing well, if they have strike prices close to where the stock was trading yesterday.

I didn't want strike prices close to where the stock was trading yesterday. I used the November 410 puts, purchased for $1.40 - $1.60/share. Sold some today at $2 and $2.15 but still have most of them. There was even a day this week where Berkshire closed up on the day and the puts were up as well!

Their a reason for people to want to buy puts, as protection, to protect themselves against a further fall in the value of the shares they own, as a sort of floor price.

Sorry, typo. I meant "there is a reason for people to buy puts, as protection,..."

dtb

Their a reason for people to want to buy puts, as protection, to protect themselves against a further fall in the value of the shares they own, as a sort of floor price. The more people want to buy them, the more they will pay for them, and the higher price I can get for selling them ('writing') this insurance.

Yes. My question actually was a try to find out more about what you think about Berkshire's price:

Does your writing puts mean you think yesterday's weakness is short-lived, that the currently historically unusually high valuation of Berkshire is permanent and here to stay (As otherwise you probably wouldn't agree to eventually having to buy Berkshire at those valuations)?

DTB, as always I was to quick to press "Send": You agreeing to eventually buy Berkshire at current levels seems to be in contrast to you having sold nearly all shares (if I remember correctly) when Berkshire was lower. That's why I am curious about your thinking behind it.

Why should nervousness and the eventually resulting selling pressure be a reason to write puts?

Another reason is that, as the price slides, the puts that would get you a below-average entry price on the stock if assigned become remunerative enough to make both outcomes nice. i.e., a reasonable rate of "interest" return if not assigned, and a good entry price on the stock if assigned.

An entry of (say) $390 or lower would be very nice, but at the moment the puts that get you that net entry price have a nugatory return if they simply expire. A bit more panic, a bit more price falling, and it would make sense again, as it did August 5.

Jim

Does your writing puts mean you think yesterday's weakness is short-lived, that the currently historically unusually high valuation of Berkshire is permanent and here to stay (As otherwise you probably wouldn't agree to eventually having to buy Berkshire at those valuations)?

...

You agreeing to eventually buy Berkshire at current levels seems to be in contrast to you having sold nearly all shares (if I remember correctly) when Berkshire was lower. That's why I am curious about your thinking behind it.


You are correct - I sold all my shares at about $425-430, bought a small amount back when they briefly went back down close to $415, and sold them again at $430, and haven't done anything as they rose as high as the $480s. I sold some June 2025 $420 puts yesterday (when the shares were at $465), hoping to get a good price because of the brief anxiety attack of Mr Market (as witnessed by the implied volatility of those options which had increased to over 20%.)

My thinking is along the lines of Jim's arguments, that I would be happy to buy shares at $420, and I'm getting paid about $11 whether I buy them or not. If the price stays high for the next 9 months, I keep my $11 and am jealous of the people who had the sense to just hold onto their shares. If the price drops to $420, then I own (a small number of) shares, at a price basis of $409. Of course, no investment is win/win; with put options, you always have to also consider the possibility that you are in effect picking up nickels in front of a steamroller. If the shares go down to $300, I won't be so happy about being forced to buy them in June at $409, when I could buy them for $300. This is where the price comes into play; if I can only get a 'nugatory*' return, then I am better to avoid the possibility of a really bad return like that one.

I think the interesting question is to ask "What can be considered nugatory?" One simple way of getting an idea of whether the premium I obtain from writing the puts is adequate, is to consider the implied volatility, which mathematically is just the standard deviation of share values that would make the Black-Scholes equation balance at the current premium. This is not a very satisfactory way of thinking, for a value investor, and there are other ways of judging whether the premium is adequate - I would be interested to hear how others address this question.

Regards, DTB

*a lovely word; "trifling, of no value; invalid, futile," c. 1600, from Latin nugatorius "worthless, trifling, futile," from nugator "jester, trifler, braggart," from nugatus, past participle of nugari "to trifle, jest, play the fool," from nugæ "jokes, jests, trifles,", Online Etymology Dictionary.

DTB, thank you for explaining. Now I understand better. Never having thought about selling puts I made the mistake to automatically think you'd write puts with a strike around the current price of $470 or so, which I saw to be in contrast to your previous selling at lower levels.

Thanks to your detailed explanation (strike $420) now I understand the thinking behind it, that it's identical to writing calls at a much higher strike than the current level ("Premium is small, but if executed at that strike it's ok for me"), with the real question being then whether it's worth the relatively small premium.

Thank you.

Of course, no investment is win/win; with put options, you always have to also consider the possibility that you are in effect picking up nickels in front of a steamroller. If the shares go down to $300, I won't be so happy about being forced to buy them in June at $409, when I could buy them for $300. This is where the price comes into play; if I can only get a 'nugatory*' return, then I am better to avoid the possibility of a really bad return like that one.

Though that makes good sense when considering any given put trade in any short/finite time period, personally I'm not one to apply that reasoning to Berkshire. Since the low prices never last all that long, neither does the bad feeling, so there is no real reason for the bad feeling at all. Cheap BRK would be great for backing up the truck, so the only "risk" is writing so many puts that you can't buy even more at the bottom.

I find it difficult to picture a situation that the value of a share doesn't keep rising in any given 6-12 month period. It might be hard to measure well, but (a) the cash does roll in and (b) the firm seems to be more or less proof from large permanent losses, as a rule. The squiggles in any line representing fair value are generally all about the measurement method, not the actual value.

Jim

I'm not one to apply that reasoning to Berkshire. Since the low prices never last all that long, neither does the bad feeling, so there is no real reason for the bad feeling at all. Cheap BRK would be great for backing up the truck, so the only "risk" is writing so many puts that you can't buy even more at the bottom.

I find it difficult to picture a situation that the value of a share doesn't keep rising in any given 6-12 month period.


I do, too. But the risk I'm worried about is not whether $409 is an acceptable price to pay for Berkshire B shares - I'm ok with that. But to me, the risk is that I may have to pay $409 for them in June, when they are available for $300, so I am paying $109 per share more than I needed to pay. The fact that they may still be a good investment at $409 doesn't change the fact that I am paying more than I would have paid under the alternate scenario of just watching and waiting.

But to me, the risk is that I may have to pay $409 for them in June, when they are available for $300, so I am paying $109 per share more than I needed to pay.


$300 in June is possible, but a bit unlikely. If we assume trend book value increase continues then known Q1 bv may be $296 and Q2 should be over $300 as a guess by end of June. We have seen prices at 1x bv but it has been almost as rare as the 1.7x+ that we have seen recently.

I tend to think of it like this. I am quite happy to buy shares when the price is hovering around the median p/b or median p/iv ratio so i will tend to target my all in put sales around that mark based on expiration date. The june contracts you sold for all in at $409 seem to follow that logic as median price based on trend book should be in the $410-$420 range in the March to July timeframe next year.

So what if the price drops lower than that? Value is still increasing at a fairly constant clip as you said and it’s reasonable to think forward returns from purchases around median p/b will track the long term increase of bv and iv of 11-12% (maybe a small haircut for safety). Those feel like acceptable long run returns to me.

And if the price drops to $300 one can always try to juice the returns a bit with some DITM leaps. If you care to dabble in the dark arts and alleviate some of the buying too early fomo.

Or if it’s the long time horizon between now and June that has you worried, sell an earlier expiration contract like December or January. I say whatever allows you to sleep at night is the best course of action regardless of what everyone else is doing.

Jeff

$300 in June is possible, but a bit unlikely. If we assume trend book value increase continues then known Q1 bv may be $296 and Q2 should be over $300 as a guess by end of June. We have seen prices at 1x bv but it has been almost as rare as the 1.7x+ that we have seen recently.

I tend to think of it like this. I am quite happy to buy shares when the price is hovering around the median p/b or median p/iv ratio so i will tend to target my all in put sales around that mark based on expiration date. The june contracts you sold for all in at $409 seem to follow that logic as median price based on trend book should be in the $410-$420 range in the March to July timeframe next year.

So what if the price drops lower than that? Value is still increasing at a fairly constant clip as you said and it’s reasonable to think forward returns from purchases around median p/b will track the long term increase of bv and iv of 11-12% (maybe a small haircut for safety). Those feel like acceptable long run returns to me.


I mostly agree with all of this, but I have a different view on 2 points above:

First, while I agree that it is unlikely that Berkshire would trade below book value, if there were a major market correction, that book value would also plunge, as the stock portfolio takes a hit. So 1.2x BV might be less than $300, even if book value is currently $300, if book dropped to $250 for instance.

Second, while I certainly don't lose sleep about having to buy Berkshire at $420, less my $11 put premium, I would like to buy it for $300 even more. Say the share price does plunge to $300, and then my puts are way, way underwater, and I have to buy Berkshire shares at $420, even if they're on sale for $300. You could say that I will still do fine with a cost basis of $420, and I would agree with you, but I would do even better at $300, right? I would say that, come June, this put writing strategy, under those circumstances, would hand me a $120 loss, compared with just not having bought the put. When I try to figure out whether it is worth it to take on this risk, for $11, I have to factor in the small probability of taking this huge loss. Said another way, the maximum upside is always $11, whereas the maximum loss is $409, if the share price falls to zero. The chance of that happening in 9 months is of course minuscule, and even the chance of it going down to, say, $350, is quite low, but not negligeable any more. I won't bore you with the calculations I did to try to estimate those probabilities, but the $11 put premium is borderline, only giving me an expected value of about $1.

Everyone except you and I are probably bored to death with the subject by now, but one last point: If you don't factor in the small probability of a big downside, how on earth can you judge whether the return is adequate or nugatory? (Word of the Day). If the logic you use to justify writing the put is the same logic for any given premium $X, it must be the wrong logic. If you ignore the big downside (the steamroller that caught up to me before I could pick up that nickel), then you would always write puts, no matter what the premium, at a strike price where you are comfortable buying the stock. After all, if you like share price $Y, why not buy write puts that would let you either pocket the premium (if the option expires out of the money) or get the shares for $Y-X? Since it is illogical that writing puts is always a winning strategy, the above rationale is clearly not considering all the possibilities.

At the present BV of $279.21, the price to get to 1.35 P/B is 377.
If the next quarter BV is 300, the 1.35 P/B would be 305.


"During the past 13 years, the median P/B was 1.40."
That would be price of 420.
Or 390 if the BV did not change.


"During the past 10 years, the average Book Value Per Share Growth Rate was 11.60% per year."
That would be 287, and price at 1.40 P/B would be 402.


And if the price drops to $300 one can always try to juice the returns a bit with some DITM leaps.

I doubt that we'll see the price near $300 anytime soon.
OTOH, it was $300 in March 2023.
Then a 10% drop in Sept-Oct 2023.

Down 10% from the recent high would take it down to 435.

Everyone except you and I are probably bored to death with the subject by now, but one last point: If you don't factor in the small probability of a big downside, how on earth can you judge whether the return is adequate or nugatory?


I think that if you are not a day trader, taking a short position on BRK is a dumb risky thing to do. Puts, calls, whatever.
Not nickels. Pennies in front of a steamroller.

And if you *are* a day trader, why would you even be looking at Berkshire?

I think that if you are not a day trader, taking a short position on BRK is a dumb risky thing to do. Puts, calls, whatever.
Not nickels. Pennies in front of a steamroller.
And if you *are* a day trader, why would you even be looking at Berkshire?

Another possible perspective: Taking a short position on BRK, thanks to it moving quite reliably in a well defined Price/BV range and it therefore being more predictable, can be less risky than taking a short position on another stock, because of a very high probability that it's Price/BV after breaking out North from that range will return into it by it's price falling.

That applies only if you are not a day trader, as it might take a little time (days/weeks/months) for that "Normalisation" of Price/BV to happen.

That at least was my reasoning for buying puts.

Of course it's more risky than taking a long position where continuing earnings work in your favor, but that's only important for multi-year time horizons where that has a far larger effect than when trying to use an unusually high valuation to make a short/medium term profit.

Another possible perspective: Taking a short position on BRK, thanks to it moving quite reliably in a well defined Price/BV range and it therefore being more predictable, can be less risky than taking a short position on another stock, because of a very high probability that it's Price/BV after breaking out North from that range will return into it by it's price falling.

That applies only if you are not a day trader, as it might take a little time (days/weeks/months) for that "Normalisation" of Price/BV to happen.


Indeed. Agreed. It's just that it takes SO LONG to play out.

That was my reasoning in January when I closed out my Jan'26 DITM call for a 16% gain, when the P/B got to over 1.55. With BRK-B at 383.19. Who would have guessed that it would continue upward to 485 and P/B 1.75?


Here is when I re-read my quotes file for consolation:
"You can’t judge the correctness of a decision from the outcome. But good decisions fail to work all the time – just as bad ones lead to success – simply because it’s so hard to predict which alternate history will materialize.

"The correctness of a decision can't be judged from the outcome. A good decision is one that's optimal at the time it's made, when the future is by definition unknown. Thus correct decisions are often unsuccessful, and vice versa." -- Howard Marks of Oaktree Capital

it might take a little time (days/weeks/months) for that "Normalisation" of Price/BV to happen.
...
Indeed. Agreed. It's just that it takes SO LONG to play out.

Not always, though.
I bought a few BRK puts, primarily for fun, Aug 27 and 30. Mentioned in my thread "I can't believe I did that".
They are up 48.4% so far, enough profit to buy a Rolls Royce if I closed them now. (not a new one, but maybe this one https://www.beverlyhillscarclub.com/1975-rolls-roy... )

I wouldn't do that sort of wager with the whole of my portfolio, since a return of -100% is not unlikely, but I'm fine with a small position with what I think are reasonably good odds in my favour, and especially if it's not positively correlated with other stuff I've bought. When stocks go up, old Rolls Royces go down. When stocks go down, they also go down.

Jim

I love that ad.
"...currently not running, nonetheless has great potential...a perfect opportunity for enthusiasts..."

That was my reasoning in January when I closed out my Jan'26 DITM call for a 16% gain, when the P/B got to over 1.55. With BRK-B at 383.19. Who would have guessed that it would continue upward to 485 and P/B 1.75?

Very similar exit price for me on my Jan26 contracts as well but I was lucky and had a substantially higher return. I’m not immune to calculating the missed opportunity on the run up either but I’m not beating my self up about it. The long run can still play out in our favor if we trend back to typical valuations. I happened to see a five year return on one of my accounts compared to the S&P500 and I’m content with doubling the performance of the market.



"The correctness of a decision can't be judged from the outcome. A good decision is one that's optimal at the time it's made,…

This exactly. Seek successful outcomes, not bottom ticking perfection. All other roads lead to madness.

Jeff

I think that if you are not a day trader, taking a short position on BRK is a dumb risky thing to do. Puts, calls, whatever.


Selling puts is not taking a short position on Berkshire, though; it has more in common with a long position. It is saying that I am sure enough of Berkshire's future to take the risk of owning the stock at lower prices.

Another way of thinking of it is that being short puts is owning the downside, just like it would be if you owned shares, in return for the put premium, and without the upside. If you own the calls, then you get the upside, without the downside risk, which you basically rid yourself of by paying the call premium. Combining the 2 kinds of options (at the same strike price), you have the rough equivalent of just owning the stock, for the time period up until the expiry of the option, with both the upside and the downside. So when I write my puts, I am saying I am reasonably confident that the shares will not go a lot lower, but I'm not so excited about the upside in the next 9 months.

They are up 48.4% so far, enough profit to buy a Rolls Royce if I closed them now. (not a new one, but maybe this one

Maybe you have enough profit today get one that’s actually running? Who says gambling isn’t fun?

Jeff

It's a lot of fun! Very good day today, having been glued to the screen, constantly refreshing quotes for my puts, having sold a good 1/3 of them today.

I finished selling the November 410 puts today. Let'er rip!

I finished selling the November 410 puts today
After that big drop tomorrow Berkshire will probably be higher again.
Nevertheless: The markets are so nervous that I don't think it's over yet. We will see this year lower Berkshire prices than today's again.

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