No. of Recommendations: 2
Below is a worked example for BRK using numbers from mid-morning Sept 15 2025 with BRK at 490 (VIX at 15):
Jan 15 2027 (487 days) strike 250 BRK call: bid 255 ask 257 mid 256
Jan 15 2027 (487 days) strike 490 BRK put: bid 30.80 ask 32.10 mid 31 ish
(You don't have to choose the put date to match the call date, but I had to pick some long date, so why not)
If roll put at 1/3 the way in, then that'd be about 162 days from now.
That may be too much time for BRK to (hopefully!) rise, and then it could potentially run away from the put strike, i.e. you'd not be as well hedged with the existing put.
So, roll perhaps every 60 days, which is about 12% of the way in. Time decay of long dated puts at 12% in might be in the 15% or so range (very roughly, details depend on numbers at the time, but the point is that it won't be large).
For a long term strategy you'd want to roll the call too, say about 1/3 of the way in or about 487/3 = 162 days (about every 5 to 6 months).
The cost of the put per day is 31/487= 0.063 or about 6 cents per day.
Checking the cost per day of a a shorter dated put, picked arbitrarily:
March 20 2026 (186 days) strike 490 put, bid 19.35 ask 19.65 mid 19.50
Cost per day of shorter dated is 19.50/186= 0.104 or ten cents per day.
The cost per day of the shorter dated put is considerably more than the longer dated put.
This is often true but it's folklore and not a law (I've seen it violated), so best to check both.
Summary:
With BRK at 490 and a 250 strike call, you spend $256 ($25,600 per contract).
You're controlling $490 priced shares using a $256 call, so you "save" 490-256= $234
You spend $31 dollars of this for the ATM put, so now you've got $201 in 'savings'.
201/234= 0.86 or 86%, so you've still got 86% of the 'savings' that you started with without buying the hedge.
But now you're also hedged quite well.
So transaction costs, time decay costs, etc have a pretty big 'savings account' to draw down against.
Perhaps you put the 86% in T-bills and get some risk free premium to fund theta decay etc.
What am I missing?
