Outskirts of Shrewd'm / Living Abroad
No. of Recommendations: 1
in a taxable account. IF you are an American, and IF, you were ignorant enough to believe that IF Buffett wouldn't buyback brkb at 440 it was unlikely to break 500 by June, you are in the same position as me! I expect to buyback the calls I'm short in June and take the loss. By selling puts 5 % below the stock market price, IF, the puts expire worthless, the gains will offset the loss in the calls. That's how one idiot old time brkbhead thinks. Since brkb options are not very liquid I rarely disclose exact months and or strikes. Brother mungo aka Jim and I have discussed these option issues for decades, apparently no one in brkville has any interest so I won't elaborate. Good luck all.
No. of Recommendations: 1
I haven't seen much mention of collars here during periods like this where the stock may be overvalued and the market is in a state of rather extreme uncertainty. You own the underlying, buy a put and sell a call. You can also manipulate this such that you only owe long term capital gains should the trade work out and you don't have to deal with the tax implications of selling your stock.
For example, you own BRK.B right now, current price $495/share. You can buy the March '26 $490 put for $27 (ish) and sell the March '26 $540 call for maybe slightly more than that. Ultimately, you can put that trade on for a small credit and you can still capture up to $45 or 9.1% worth of upside with max 1% downside should the market crash.
The is a -very- slight risk that BRK rallies extremely hard and your short calls are exercised.
No. of Recommendations: 0
For example, you own BRK.B right now, current price $495/share. You can buy the March '26 $490 put for $27 (ish) and sell the March '26 $540 call for maybe slightly more than that. Ultimately, you can put that trade on for a small credit and you can still capture up to $45 or 9.1% worth of upside with max 1% downside should the market crash.
I don't quite see how this trade works. If you buy the March '26 490 put at $27 and you sell the March '26 540 call at $27 (let's say roughly zero credit or debit), then come March '26, if the stock price is:
420 - put is worth $70, call is worthless, you earn $70 when you sell that put.
450 - put is $40, call is zero, you earn $40 when you sell that put.
490 - put is $0, call is $0, all expire worthless, you're roughly even.
540 - put is 0, call is 0, all expire worthless, you're roughly even.
600 - put is 0, call is $60, you buy that call back at a total loss of $60.
If you look at the profile of this trade, it is essentially a bearish trade where you only gain if the stock goes down to 490 or lower in March of 2026. So it's a kind of hedge on a big drop, while giving up any gains above 540 in return. And 540 is only about 9% higher than current price, so there is some probability of being there in a year. Is this what you intend on doing with this trade?
You can also manipulate this such that you only owe long term capital gains should the trade work out and you don't have to deal with the tax implications of selling your stock.
If you do not sell the stock (i.e. are not assigned an exercise), then the gains on the short call are ALWAYS considered to be short-term gains. The same applies to a short put.
There is a -very- slight risk that BRK rallies extremely hard and your short calls are exercised.
It would be quite unusual for those calls to be exercised anytime before the end date. That's because it doesn't make economic sense - it would be better to sell the call rather than exercise it because then you gain the intrinsic value plus the small remaining time value (and even one day before expiry there is some time value). However, it does happen rarely (very rarely, I can count on one hand how many times it has happened to me over the last ~40 years of trading options). I was delighted a few months ago when someone exercised some of my options early and vaporized all of the time value in them.
No. of Recommendations: 2
In a collar, you also own the underlying stock. You are correct about the tax treatment of sold options, my mistake.
So in these scenarios:
"420 - put is worth $70, call is worthless, you earn $70 when you sell that put." - Yes, the put is worth $70, so you have a $43 long-term gain on that put. The call expires worthless, and you have a $27 short-term gain on the sold call.
"450 - put is $40, call is zero, you earn $40 when you sell that put." - You have a $13 long-term gain on the long put, $27 short-term gain on the sold call.
"490 - put is $0, call is $0, all expire worthless, you're roughly even." - correct
"540 - put is 0, call is 0, all expire worthless, you're roughly even." - the put/call expire worthless and the gain/loss balance out, but your Berkshire stock has appreciated from 495 to 540.
"600 - put is 0, call is $60, you buy that call back at a total loss of $60." - You lose $60 on the options play, but your Berkshire stock has appreciated $105 from $495 to $600.
It's a hedging strategy for a year where Berkshire is arguably overvalued and the market is arugably more dangerous than usual. But yeah, you'd have to tell yourself you are happy with capping your upside at 9%. But you've also capped your downside at 1% in case things get and stay really nasty for awhile.
(Sorry, I am unsure how to "quote" your responses to switch it to italics)
