No. of Recommendations: 13
The 12.9%/year for the next 10.5 months is common to both outcomes, so we can ignore that...
Not really. That return includes the disappearance of the in-the-money portion of the premium, something you get as cash only in the event that the stock price is high and the option expires. The constant portion is only the relatively low rate of time value erosion.
A better view is to appreciate that are four entirely mutually exclusive situations for what could happen between now and next June. You can't mix them.
The first two involve no options: just waiting for a moment to pounce with your cash, which the post assumes is what you're doing now.
(1) You sit on cash waiting for a good re-entry, but you never see a number you like, so you end up with nothing but the interest on the cash. Around 3%/year rate, depending on what you hold and how rates change.
(2) You see a price you like some time before then and you buy Berkshire shares. You have your ~3%/year interest on cash till whenever that happens. By definition you get a price you're happy with, but it might be more or less than $448.15. As the months go by, that particular number will become a more aggressive and less likely target. It's 1.45 times current book, gradually dropping to maybe 1.31-1.36 times book next June.
The second two outcomes are the two mentioned in my post
(3) You sit on cash the whole time. Berkshire stays above $480 during the stretch that it might get exercised, so the options expire worthless. You're still in cash at the end, but you've made exactly 9.34%/year higher return than situation (1).
(4) The option is exercised, so you end up having bought the stock at a net entry price of $448.15. This usually happens not that long before expiry, but could happen any time. You get the ~3%/year interest on your cash pile till then. Quite similar to outcome (2), but probably a slightly higher chance of it happening as it doesn't require any price dip at all to happen.
The starting assumption is that you *want* a re-entry, so (4) is better than (2), as it is more likely to get you the stock. The outcomes are otherwise quite similar.
And if you don't get the stock, then (3) is far preferable to (1).
Jim
