Buffett/Berkshire - general news

[Matthew Lembo]

interesting, how does one get paid for a standing limit order? By selling puts?

[gfp]

2 minutes ago, Maxwave28 said:

interesting, how does one get paid for a standing limit order? By selling puts?

 

Yes, by selling puts over and over (don't go out too far on time to expiry, just enough to collect an acceptable premium).

[Matthew Lembo]

Thank you. 
what do you think is an acceptable premium?

 

Sorry for the basic questions, haven’t ever considered this strategy before. 

[gfp]

I'll have to defer to @boilermaker75 on his strategies for selecting the specific contracts to sell.  I don't usually sell puts but I also don't leave unexecuted out of the money limit orders in place.  Boilermaker has made a profitable consistent operation out of harvesting these premiums on stocks he would be happy to own (and immediately start selling calls against if he wanted to be lighter on them).

 

By acceptable premium, I mean don't do it for 10 cents or something and pay a commission on top of that.   "acceptable premium" will vary with the amount of time, price and volatility risk you are taking on.  I'm not a big fan of selling long dated puts on individual stocks unless there is a specific strategy that involves it.  I would stick to weeklies out to 2 months max.

[Dynamic]

Yes, I've used boilermaker's approach a number of times to enter long term positions and also to juice returns on one merger arbitrage so far. In that case I was assigned then sold short duration calls to get further premium and potentially another bite.

 

In most cases something over 18% annualized, or more typically well over 20% is where I start to get interested, so long as I'm a willing buyer at the effective entry price (strike minus premium plus commission). I usually go for one to four weeks duration, must often 1 to 2. Boilermaker seems to really like weeks with fewer trading days than normal.

 

Occasionally I've rolled my puts to different strikes or expiration dates or both but mostly I let them run to expiry.

[Matthew Lembo]

20% makes sense to me. Thanks for the input. 
 

I’ve always struggled with the fact that selling outs exposes one to black swan events for little premium. 
 

Is that a fair analysis? 

[sholland]

55 minutes ago, Maxwave28 said:

20% makes sense to me. Thanks for the input. 
 

I’ve always struggled with the fact that selling outs exposes one to black swan events for little premium. 
 

Is that a fair analysis? 

conventional wisdom says only sell puts on stocks you want to buy anyways. When Buffett owned part of BNSF he sold $70 puts. I am obliged to pass on this tale of caution from Charlie Munger:

I knew a guy who had $5 million and owned his house free and clear. But he wanted to make a bit more money to support his spending, so at the peak of the internet bubble he was selling puts on internet stocks. He lost all of his money and his house and now works in a restaurant.

[Munger_Disciple]

1 hour ago, Maxwave28 said:

20% makes sense to me. Thanks for the input. 
 

I’ve always struggled with the fact that selling outs exposes one to black swan events for little premium. 
 

Is that a fair analysis? 

 

Its like picking up pennies in front of a steamroller. As long you make it, you keep the pennies. Plus it adds hidden leverage & a potential liability that comes due at usually the most inconvenient time. You can win a few pennies many times which tend to get wiped out with one big loss. 

 

IIRC many smart people blew up (example: Victor Niderhoffer blew up twice) with variations of this put writing strategy.

Edited July 5, 2023 by Munger_Disciple

[Blugolds]

Also always the risk that you sell puts at a price you'd like to own the stock, and then the stock takes off on you, you made the premium on the puts but lost on the run up. Thats happened to me a couple times. There are worse problem to have, but I've missed out on quite a bit over the years because I was being "greedy" waiting for just a little better entry price that never came. 

 

Always think of that quote by Buffett that you should spend the majority of your energy making the right pick of a partner to marry and not worrying too much if you overpaid for the ring. Price you pay matters..but focus more on what you are buying because if its something that you want to hold, .50-$1 or a couple bucks isnt gonna matter 5-10yrs from now. 

 

That being said, when BRK starts to get priced attractively I do sell puts. Looking back through the years some I have been assigned and it went great, and some were not assigned and in hindsight, I would have been much better off if they would have! 

 

Bought quite a bit of BRK back in 2020 for instance, I would call it a significant amount, all >$200 and >$300k. Also sold quite a few puts..but should have just been buying > $200. Rather than selling puts in $5-$10 increments dreaming of getting BRK for $150 or less. 

 

Like @gfp said, I keep it tight, usually weeklies → 1 month or so depending on the situation and I wouldnt say I do it regularly. 

[bizaro86]

I've done it a few times on BRK (once in spring 2020 which is probably my biggest mistake by $ value ever). I was fine to buy BRK during covid lows at the prices assigned, but there were so many better bargains I sold all the BRK, realized large losses, and reinvested elsewhere. That worked out better than keeping the BRK but not nearly as good as not writing the puts to begin with.

 

That said, I still do so occasionally, although more often with stocks that have more "controversy" around them, as the premiums/implied volatility is higher. JOE is one I've made money selling puts in the last year, for example, and I would have been fine getting assigned at the $40 strike.

[boilermaker75]

@gfp Exactly, only on companies I would not mind owning, or already own. If I don’t want to own the stock I am put to it is because it got me to a larger position than I wanted or put me on margin (always slightly). I then write covered calls till assigned.

 

@Dynamic Exactly, what I look for is about a 20% return and as short a duration as possible. Typically, 1 day to 4 weeks to expiration.

 

@Munger_Disciple. I am not picking up pennies in front of a steamroller. 99% of my put writing has been on a small universe of stocks, mainly BRK, WFC, and BAC. There are exceptions, risk arbitrage opportunities as Dynamic mentioned. During BRK’s purchase of BN I was writing a lot of puts on BN. During Sam Zell’s purchase of the Tribune CO I was writing a lot of puts on the Tribune. Recently I was writing a lot of puts on MSGE. 

 

Edit:I think writing puts is the best way to do risk arbitrage because there is no timing uncertainty, you pick the expiration date..

 

@Blugolds11 That is the downside, not getting a position and the stock taking off. Surprisingly this has only happened to me once. Many years ago when MCD was trading in the $90-100 range I was trying to acquire some for LTBH. I made some put premiums but never got my position in MCD

Edited July 5, 2023 by boilermaker75

[Munger_Disciple]

5 hours ago, boilermaker75 said:

@gfp Exactly, only on companies I would not mind owning, or already own. If I don’t want to own the stock I am put to it is because it got me to a larger position than I wanted or put me on margin (always slightly). I then write covered calls till assigned.

 

@Dynamic Exactly, what I look for is about a 20% return and as short a duration as possible. Typically, 1 day to 4 weeks to expiration.

 

@Munger_Disciple. I am not picking up pennies in front of a steamroller. 99% of my put writing has been on a small universe of stocks, mainly BRK, WFC, and BAC. There are exceptions, risk arbitrage opportunities as Dynamic mentioned. During BRK’s purchase of BN I was writing a lot of puts on BN. During Sam Zell’s purchase of the Tribune CO I was writing a lot of puts on the Tribune. Recently I was writing a lot of puts on MSGE. 

 

Edit:I think writing puts is the best way to do risk arbitrage because there is no timing uncertainty, you pick the expiration date..

 

@Blugolds11 That is the downside, not getting a position and the stock taking off. Surprisingly this has only happened to me once. Many years ago when MCD was trading in the $90-100 range I was trying to acquire some for LTBH. I made some put premiums but never got my position in MCD

 

@boilermaker75 If I understand your strategy correctly, you are writing short dated, cash secured puts on a few stocks like BAC, WFC & BRK. So you are effectively trying to earn a decent short term profit on idle cash in excess of ST T-Bills. If you get these stocks put to you, what do you do?  Hold them (if so how long) or sell them immediately and take a loss? 

[Ulti]

brief interview with Chris Davis

 

https://webreprints.djreprints.com/2396947.html

 

[Spooky]

Thanks for sharing, I hope the board and new guard will be able to protect what Warren and Charlie have built.

[UK]

https://www.barrons.com/articles/berkshire-is-ready-for-hurricane-season-the-stakes-are-high-for-insurers-c6c1e06b

[ValueMaven]

Source on Buffett selling puts on BNSF?  First time I've heard that 

[DooDiligence]

4 minutes ago, ValueMaven said:

Source on Buffett selling puts on BNSF?  First time I've heard that 

 

Warren Buffett’s Burlington Northern Stake Tops 22% With New Options-Related Stock Buy

 

In exchange for $14.8 million up front, Berkshire agreed to buy the 2.3 million Burlington shares at $75 each at the end of January.  The buyer was paying for a form of insurance.  In exchange for the premium of almost $15 million, the buyer of the options got protection against Burlington’s shares falling below $75, which they have.   If the stock had stayed above $75, the holder of the options would not have exercised them and held onto the stock instead.

 

===

 

Warren Buffett Again Sells Puts on Burlington Northern Santa Fe, Berkshire Hathaway Filing Reveals

Edited July 6, 2023 by DooDiligence

[gfp]

Speaking of Warren and derivatives, the FT has a piece out this morning on Berkshire's use of derivatives -

https://www.ft.com/content/f6524f65-188e-4d21-a943-18f9c6a61b8d

 

(fwiw, I read it and didn't find it to be of much value.  No mention at all that Berkshire's "huge" exposures to credit default swaps were essentially contained in a de novo bond assurance operation that was primarily writing 2nd-to-pay insurance on top of primary bond insurance coverage already in place.  And no clue what the author is getting at asserting that Warren was allowed to be "creative" and "flexible" in his accounting for losses.  Sheesh.)

Edited July 6, 2023 by gfp

[ValueMaven]

Thank you @gfp -- FT article is blocked by a paywall!

[gfp]

There isn't much to it but here it is as a pdf

Buffett’s derivatives bonanza doesn’t prove that Taleb is wrong | Financial Times.pdf

[boilermaker75]

On 7/5/2023 at 1:09 PM, Munger_Disciple said:

 

@boilermaker75 If I understand your strategy correctly, you are writing short dated, cash secured puts on a few stocks like BAC, WFC & BRK. So you are effectively trying to earn a decent short term profit on idle cash in excess of ST T-Bills. If you get these stocks put to you, what do you do?  Hold them (if so how long) or sell them immediately and take a loss? 

 

@Munger_Disciple I never sell them to take a loss. I either keep them, or write covered calls. It is not only idle cash, which I usually don't have much as a percentage of my account, but also a small amount that is not cash secured. So I occasionally will go slightly on margin. Occurs about once or twice a year. With higher interest rates I have scaled back so that it is unlikely I will get margined. All my position, some I have held for decades, were entered by being put to.

[Munger_Disciple]

5 hours ago, boilermaker75 said:

 

@Munger_Disciple I never sell them to take a loss. I either keep them, or write covered calls. It is not only idle cash, which I usually don't have much as a percentage of my account, but also a small amount that is not cash secured. So I occasionally will go slightly on margin. Occurs about once or twice a year. With higher interest rates I have scaled back so that it is unlikely I will get margined. All my position, some I have held for decades, were entered by being put to.

 

If you are selling naked calls & the stock gets put, you have to buy the underlying stock on margin & carry it forward with the associated debt + added risk. It seems like naked put writing isn't all that attractive with margin rates going up. 

[boilermaker75]

17 hours ago, Munger_Disciple said:

 

If you are selling naked calls & the stock gets put, you have to buy the underlying stock on margin & carry it forward with the associated debt + added risk. It seems like naked put writing isn't all that attractive with margin rates going up. 

 

You mean naked put not call? I agree going on margin with the current margin rates is not something I am going to be doing.

[Munger_Disciple]

53 minutes ago, boilermaker75 said:

 

You mean naked put not call? I agree going on margin with the current margin rates is not something I am going to be doing.

 

Sorry that's a typo. I meant selling naked puts not calls. The main problem I see is that you will go into debt if stock gets put so it can be risky depending on the amount of leverage. With interest rates being this high, we agree that it doesn't make much sense. But even if rates were lower, one needs take into account leverage & additional risk before writing naked puts. 

[maxthetrade]

Another strategy is to buy back the put close to expiration if it's underwater or immediatly selling the underlying if it gets put to you and simultaneously selling puts with a longer expiration date and often lower strike price.  As long you're pretty certain that the price will rise sometime in the future this is a nice strategy.