No. of Recommendations: 1
Hi Jim,
Thank you for the response. I'm assuming that this is of some interest to the rest of the board (I can take it to email if that is not the case).
While I know that you have not implemented this mechanically, I am interested in trying to mechanically do this, even with the hope of eventually automating the entire thing so I get sent an email telling me what to do next (I hear Rayvt perking up with recommendations as to hardware and platforms).
The current rules are, assuming a 50/50 split between cash and BRK-B stock:
(1) Use current BRK book, smoothed by WMA, and scaled to match price (CPI adjusted on both) for ~20 years for the current trendline (call this "fair price"). Based on current calculation, that will be 415.36 until either CPI data adjusts or new book data comes out.
(2) Use multiplicative SD from trend over 20 years to set range for price around "fair price" above. That is currently 11.41%, so usual range should be between 462.77 and 367.95 (and BRK-B is currently high above that, at 476.17).
(3) Sell covered call backed by 50% BRK-B position at high range, Sell cash secured puts backed by 50% cash position at low range. Do these for 1-3 months into the future.
(4) If calls are exercised, rebuy stock to 50%, if puts are exercised, sell stock back to 50%.
(5) Rinse, recycle, repeat.
Above, you advanced the idea that the +/- 1 SD was just plucked out and there might be a range there that works better. Not sure we can "mound of toast" it without some idea of the time value of the options. My question comes from the original post for the calls and puts:
* Write a call option (covered call) backed by your stock, at the net exit price (strike + premium) that is one standard deviation above the current value of the trend line.
* Write a put option backed by your cash, at the net entry price (strike minus premium) that is one standard deviation below the current value of the trend line.
What I am finding is that currently on the call side, I cannot get to a net exit price that low. If I only use the time value of the option, I could do so, but using the full premium (including the intrinsic part of the call), the strike + premium is above the current close for all options no matter how far down in strike I go. Am I misunderstanding what the premium is? Note that for the puts, they all have an intrinsic value of 0.
You also state: Bearing in mind that I haven't done this as a mechanical system but simply as an "off the cuff" trade from time to time, what I do is this: if I think the likely price 3 months from now is below the current price, I generally write a call at the money, since that's where you get the most time value.
But that is missing the mechanical targets, and requires the jusdgement of likely price in 3 months. Perhaps we should use the "fair value" +/- SD to set the strikes, and the premium is what you get.
As always, your comments are appreciated.
--G
