No. of Recommendations: 3
With BRK-B at $318 selling (for the 1st time ever) covered calls gets tempting for me. Looking at Jan & Jun 2024:
Jan'24:
360: $7.2
380: $2.9
400: $1.0
Jun'24:
360: $14
380: $8
400: $4.2
As for tax reasons it's very important for me that my shares won't be called away I intended to adhere to Gator's advice: "Whatever strike price you get zeroed in on, choose one a little higher. You won't give up much in premium but you reduce the probability of triggering an event."
My thoughts: For calls roughly 1 year out without Gator's advice I'd look for a 20% higher strike than the $318 we are currently => $380. So with that advice it's at least $400 instead. In that case I can forget about Jan'24 completely as for $1 I am not willing to take even the slightest risk for the shares to be called away, $2.9 for the 380's is not impressive either, but the 360's are too risky.
So Jun'24 looks the way to go. $8 for 380's would be ok, but with Gator's great advice and more than 1 year out: too risky. The 400's seem to be borderline just interesting, but half the return only of the 380's?
What are the thoughts of our experienced "covered calls" sellers?
P. S. : I have to add that while I know that over years little differences make a big difference I really don't care about +-1% yearly return of my portfolio. Does that simply means selling covered calls is not for me?
No. of Recommendations: 1
Good point, hclasvegas! Brought me to think a bit more about it:
If buying back the calls is required the loss would be much higher than the premium, right? It would destroy the premiums not just from this one, but from several times writing covered calls. So a strike price should be chosen which makes such really EXTREMELY unlikely, otherwise it could easily end as a loss producing exercise.
Looking at a longer term chart it seems every few years Berkshire moves up quite a lot in one strong move within just a few months, often 20%. So if writing calls is repeated continously, independent of the stock being cheap or expensive, every few years calls with strike prices not much higher than 20% above the current price WILL be executed (or one has to incur the huge loss of buying the calls back). To be on the safe side a strike price of 30% above current price is required --- but that comes with a completely uninteresting premium.
My conclusion:
A) Writing calls is interesting and really profitable ONLY when Berkshire's Price-value relation is so high that a strike 20% higher than current price has a super-high probability of the shares not being called.
B) Because Jim noticed that with rare exceptions Berkshire's Price/PeakBV is always 1.2x - 1.55x, that can be translated into a Price/PeakBV threshold of 1.3x (1.3 x 120% = 1.56x).
In other words: Writing calls with 20% higher strike price seems to be extremely safe if Price/PeakBV >= 1.3 --- provided those calls expire soon, say in less than a year, as with every year BV rises on average say 10% and a rise in price therefore gets continously more likely.
Final thought: With Price/PeakBV currently at 1.37 it seems to be as safe as possible to now write Current Price +20% calls = $380 ones which expire in Jan'24 (or equally safe to write $400 ones which expire in Jun'24; premium of $4.2 instead of $2.9 for the former ones).
Thoughts?
