Sell Covered Calls on Berkshire Hathaway & Its 9 Strongest Stocks for Options Premiums Income?
Owners of BRK.B and stocks owned by Warren Buffett can sell covered calls stock options to enhance dividend income with options premiums.
By Donald E. L. Johnson
Cautious Speculator
Berkshire Hathaway’s class B shares (BRK.B) are correcting along with the 9 strongest stocks in its portfolio.
BRK.B and seven of its 9 nine strongest mega cap stocks still have bullish point and figure charts.
Owners of Berkshire Hathaway class B stocks can generate options premium income by selling puts or covered calls.
Warren Buffett’s Berkshire Hathaway Saturday reported weaker earnings and slowing net cash flow. Those weak fundamentals will make it harder for the stock to stand up to this bear market.
Today, BRK.B and nine of the strongest stocks in the portfolio were mixed while the markets were slightly higher after the recent big declines. The weak snap backs from those declines is not encouraging for bulls.
These one-year charts show BRK.B and its portfolio’s strongest stocks are dipping with the markets.
A StockCharts Technical Rating (SCTR) of 60 and higher is considered a buy ranking. BRK.B’s 54 SCTR is a pretty good hold ranking. That BRK.B’s SCTR is a hold shows that the market is not as optimistic about the stock as Warren Buffett was in his annual letter to shareholders.
But seven of the nine stocks, including BRK.B, still have bullish price objectives on point and figure charts, according to StockCharts.com.
On Saturday I wrote about selling cash secured puts options on BRK.B for discounts and options premium income. I’ve written almost 100 articles about selling covered calls and puts.
For owners that are neutral to moderately bullish on BRK.B and its strongest stocks, there is an opportunity to sell BRK.B covered calls options for premium income.
For example, say a BRK.B investor owns 100 shares of the stock that he purchased at a much lower price. He’s willing to risk having the stock called but wants to minimize that risk while generating a steady stream of selling BRK.B covered calls every 18 days.
Selling shorter term covered calls yields higher options premiums returns than selling longer duration options. And shorter duration options give options trades more visibility and control of risks of having their stocks called than selling longer duration options.
The strategy would be to sell BRK.B 3.17.18 expiration (17 days) $317.50 strike calls for about $0.82 per share on a 100-share options contract. That would be about the mid point between the option’s bid and ask prices. It would yield about 5.1% annualized if that trade or one like it on BRK.B or another equity was done every 17 days for 12 months. BRK.B closed Monday at $304.66, up $0.64.
An options trader who wants a higher ARoR and is willing to buy the calls back at a loss or have the stock sold (called) at the strike price could sell the calls at a lower strike price and delta and a higher probability that on March 17 the option would expire out of the money (OTM) and worthless.
The delta on the $317.50 strike is 0.14. That indicates that the probability that the stock will be called at the strike is about 14%. The OTM probability is about 87.14%. Both indicators say that there is a relatively low risk that the covered calls on the above trade will be exercised, or called (sold).
Another strategy would be to buy or own one or more of the Warren Buffett stocks shown in the P&F charts above and sell covered calls for a high AROR.
American Express (AXP) is correcting. An options trader could buy AXP for $173.30, or $17,330 per options contract. The he could sell AXP 3.17.23 $175 strike (delta .36, OTM probability 56%) calls for about $3.40 per share, or an annual return on risk of about 38%. If the options expire worthless, the options trader would pocket $3,400 $340 per 100-share contract. Should the stock be called, the investor would take a capital gain or loss plus the capital gain.
If the stock is about to be called, the trader can buy back the option at a loss. When the investor wants to sell the stock at the strike and take profits, paying the capital gains taxes is the cost of investing. People who trade frequently figure that paying capital gains taxes is like being taxed on their business profits or wages, and it’s better to make enough to pay taxes than to not make enough to pay taxes.
Options traders who are active in the markets are likely to incur losses on some trades that will offset some of their gains on their tax returns.
LINKs:
Home Page. See my more than 90 articles on options trading, stocks and watch lists. If you read several of these articles, you’ll learn how my strategies are meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.
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Scott corrected my assertion that a gain on AXP could be $3,400 on a 100-share call option. It should be $340, and I'll fix the error. Thanks.