Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 2
This is a continuation of the previous thread on HSY, now a few days old so I'm not sure that people are still following it.
The implied interest on Jan 16 2026 LEAPS looks interesting, i.e. very low, see below. If I screwed something up I'm sure I'll be told about it:
At the time of writing, Nov 2 2023, HSY is at 190 and for reference VIX at 16.2.
Jan 16 2026 strike 95 call: bid 95.50 ask 99.90, guess a fill near middle at 97.70
Paralleling Engr27 explanation of implied interest in another thread:
190-97.70= 92.30 is the amount "borrowed" to control a share
To exercise the call (at expiration) would cost 95
So 92.30 is borrowed and 95 is repaid in 806 days
(95/92.30)^(365/806)= 1.013, so the implied annual interest rate is 1.3%
Here's another way to get the same result:
You'll need $95 in cash to buy at the strike at expiration, so set aside $95 now (assume for simplicity that you get no interest on it).
The Ask plus the Strike, 97.70+95=192.70, is the cash needed to control those shares using options through Jan 2026.
The cash needed for simply buying a share now is 190, so you're paying an extra 192.70-190=2.70 to control those shares through Jan 2026 using options.
Why are you paying more?
You're paying 2.70 more because you're effectively borrowing $92.30 upfront and keeping it for 806 days, and this has a cost i.e. $2.70.
What's the effective annualized interest rate associated with this cost?
You're borrowing 92.30 for 806 days and paying 2.70 for that privelege.
So you're paying 2.70/92.30=0.029 or 2.92% total interest over the 806 days.
Annualizing this yields (1+0.029)^(365/806)-1= 0.013 or 1.3% implied annual interest rate, which agrees with the above.
No. of Recommendations: 1
By buying a call instead of stock you are also foregoing the dividend. For the Jan 2026 call, you are foregoing 9 quarterly payments. The current quarterly dividend is 1.19% and Hershey usually has a 10% dividend growth CAGR.
Taking the after tax impact of foregone dividends gives me an option cost of 6% and an implied borrow interest rate of 5.5%. Your results may vary based on your tax rate on dividends.
This is still a very low interest rate, as you can currently own close to that on very safe treasury money market funds.
No. of Recommendations: 1
There is hardly any open interest on that flavor. My guess is you couldn't get filled at that price level. I don't disagree with your calcs though.
No. of Recommendations: 1
Good point about the dividends. Also that you'll be in that ballpark with treasuries, so again conclusion of a low implied interest rate.
As far as a fill, it's hard to say. FWIW, I've seen my filled trade, in the general vicinity of the ask, show up as a blip from zero to nonzero open interest for DITM calls on BRK, perhaps the market maker would be as sweet for Heshey?
I checked the 10-K. Hershey does hedge its commodity prices, as well hedging against currency rates (it is international). To the extent that they hedge well, the rise in cocoa prices may be ameliorated (at least in the relatvely short-term, climate change is a different issue). This trade may be depend on how much you believe in the sweet and salty snack business (although they are diversifying somewhat too). Nestle (NSRGY) doesn't seem to have options available.
No. of Recommendations: 3
There is hardly any open interest on that flavor. My guess is you couldn't get filled at that price level.
Open interest doesn't matter. The counterparty is a marker maker's computer. You will get a fill at the ask, no problem. Probably even a bit below the ask. Use a limit order!!!!
There have been times when my option holding has been the only open interest of that option.
I don't disagree with your calcs though.
My calculation spreadsheet that I have been using for several years agrees. 1.31%
The 95 is -50% ITM with about 1.9X leverage. Breakeven is only 1.4% up.
I never could understand the bit about (foregone) dividends and how that would or not affect your decision, though. Read some discussions with Jim about that way back when.
They impact the time value and therefore the required break-even point. With 6 dividends of $1.192 the BE move goes from +1.4% to +5.2%.
But that's if you are deciding between buying the stock or the option. If you are just looking at the option (buy or not), then you are just making a straight bet: that the price go up by 1.4% by expiration.
I mostly do options on BRK, so no need to consider dividends. Makes it easy.
