Advice when selling covered calls, in or out of the money?

[DesertCat]

I don't care how you invest your own portfolio. What irks me is that you are trying to use Buffett's name to justify your techniques, when they run counter to all advice Warren E. Buffett has ever given. WEB specifically has said that trading is bad, and that Technical Analysis and charting are worse than useless. WEB would absolutely puke if he read any one of your posts.

Also, for the second time, I'm requesting that you please document for me any time in which Warren Buffett has said he uses a technique called "sweeping the change". I've spent a great deal of time studying Warren and his philosophies, and have never come across any such reference. The core principles on which his fortune has been made are simple, clear and have very little to do with covered calls or trading.

So go ahead and continue to gamble with your portfolio until that day it melts down completely. And if in your blind enthusiasm you must to encourage others to risk their portfolios similarly, go ahead. But stop trying to fool people that the hokum you espouse had anything to do with Buffett's success or is in any way used or endorsed by him.

[goodedesign]

[DesertCat]

I can't reply to your private message, the system says you aren't accepting any, so I will just reply here.

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ok.. the method i use that is EXACTLY like buffett: SWEEPING THE CHANGE

you own a stock and get paid for owning it...

each month a week or 2 b4 expiration, (here i have to know which way the stock i hold is going), then sell out of the $ calls for this month against the stock that you are buying/holding... i do this and expect NOT to be called out of THIS transaction... ...

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I'm not telling you that covered calls can never work. You earn money by taking the risk of being called out of your position. If the stock isn't volatile, you won't earn much, but you'll be safer.

I've never heard WEB say he's used covered calls in this manner. In WEB's case, he has alluded to using options to enter or exit positions when the price wasn't yet at his target. This isn't a free lunch either, because it can tie up your portfolio when other opportunities arise.

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i've studied him too, and there was a period of time that all of his portfolio stocks were flat to down, yet his net worth doubled!

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I'm not sure what period you are talking about, but you can probably attribute that to "special situations investing" or arbitrage (what I do all day long). WEB has consistantly engaged in arbitrage investments to provide portfolio growth when the market is unattractive.

In addition, most of Berkshire Hathaway is made up of privately owned businesses that contribute their excess profits to Berkshire, for example Dairy Queen annually contributes something like $100M to Berkshires net worth.

Lastly, WEB does occasionally use options. He's very aware of how they are priced (by Black Scholes) and how that model leads to pricing inefficiences. So he does pick up spare change there occasionally. He's also invested in silver and most recently, foriegn currencies, when he felt they were undervalued.

But every one of his transactions is done around the basis that he is able to estimate intrinsic value for the investment, and buys it when it's substantially undervalued. That is the basis of 99% of his wealth.

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sweeping the change: i found that in a book, i'll get back to you on what book it was.

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Once again, please do. It's like you met some guy in an alley who hissed at you and said "I've got some info on Warren Buffett for you." All of your information is wrong, it's counter to what is commonly known about WEB and his investing. I think your "mentor" like most investment charlatans was eager to attach WEB's name to his techniques to lend them legitimacy.

I've actually been to the BRK shareholder meeting, where he answers questions like this for 8 hours, and at the meeting I attended, and the dozen or so I've read transcripts from, never mentioned "sweeping the change" or covered calls.

WEB is rich because he bought low and sold high. It's as simple as that. I suggest you go to the Berkshire Hathaway website and read his shareholder letters (they go back to the mid eighties). They will not only teach you a great deal about investing, but they're also pretty entertaining. I recommend them to anyone interesting in finding out the true methods of the worlds most successful investor.

Berkshire Hathaway

[DesertCat]

Once again, I can't reply to your PM's since your account doesn't accept any, I have to reply here.

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now this is NOT advise... i bet WEB might have sold calls on KO about 3-4 days ago and gotten @ $0.15/share on as many as possible... and he will still own the stock, and he'll get .15/share. and then he'll buy MORE of KO when it's on sale ready to go up.


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Next week's $45 call options are selling for 5 cents on extremely low volume (572). Berkshire Hathaway owns 200M shares ($8B) of Coke. Even if he accounted for all of todays volume it wouldn't be worth worth the time it took for him to have that thought.

If volume wasn't a consideration, he's still taking a risk of being called out of his position. That's ok if he really wants to sell at $45, if once in a blue moon KO shoots up to say $47 on expiration, he lost 1.95. So if you want to gamble here you have to be very confident that your loss will happen less than 1/40 times. Worse case is if you think KO is worth much more and want to hold it. That risk of being optioned out now triggers capital gains taxes, which in Buffett's case would be close to $10 per share. And worse is that repeatably getting optioned out within a year would kill your long term capital gains, and force you to immediately pay much higher short term capital gains.

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earlier in the year (Mar) WEB was asked what stock he was buying... he said that there wasn't anything in the market worth buying... on the other hand... come around Aug-Sept... he had a few billion $ in cash waiting to dive back in.


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Not exactly true, he's been saying the market is too expensive for years now. Buffett actually has had over $30B in cash and cash equivilants sitting around waiting for opportunities for the last couple years. Berkshire has a net worth of over $100B. Unlike you and me, he needs to find investments liquid enough to put $10B or more to work nowadays, and it's getting pretty damn hard. It's one reason why his days of consistently beating the S&P 500 like a drum are probably over.

It's not for lack of ability, he's sharper than ever. While he's been waiting he put around $20B or so in Forex, betting against the dollar. I think he's up a couple billion on that one. A couple years ago he spent 6 months in the high yield market when it got too cheap, and made a couple billion there. Keeps him out of bars, as his partner says.

When you see his name attached to sub-billion dollar investments it's usually either Geico's investment manager (who is forced to report under Berkshire's name) or sometimes his private portfolio, which is a few hundred million he devotes to high yield and arbitrage investments to ensure he has a steady income for walking around money (Berkshire only pays him a $300k or so a year).

[goodedesign]

[DesertCat]

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not a bad days work if you ask me. and he'd most likely KNOW that he wouldn't lose his shares because he's owned coke almost before coke owned coke.

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I'm getting the strong feeling that you've only been investing for a very short while. Long Term Capital Management collapsed, losing billions of dollars because they had decades of stock and bond data in their computers that proved to them that the prices wouldn't have sudden, divergent moves and bankrupt them. Whoops.

Warren doesn't use technical indicators, because he doesn't believe anyone, esp. himself can predict short term price movements. He understands how options are priced, and in your example there is still a real risk of being optioned out of his position.

For example, if WEB had been regularly using your techniques throught his career it is a virtual statistical certaintly that much of his long term capital gains (he has some over 30 years tax deferred) would have been converted into short term, immediately taxable gains. And his net worth would be a tiny fraction of what it is today.

[DesertCat]

Also, why don't you read up on Buffett before you try to make definitive statements on him. For example he hasn't owned coke "almost before coke owned coke". He bought his first shares in the mid-eighties, so actually it's one of his newest positions. He owned Pepsi shares before that.

I highly recommend Roger Lowenstein's "Buffett: The Making of an American Capitalist".

[FatOtt]

Buffett has been a director of Coke for about 15 years now. You think maybe, if he was doing all those trades you claim he's doing, that maybe he would be filing documents with the SEC? Maybe?

p.s. - He's not doing those trades.

[GeorgeF]

FWIW selling a covered call, with a strike at $75 on a $90 stock cuts off all possibily of gain if the stock closes above $90. If the stock drops below $75, or so(*), you still loose.

(*) actually $75 - price of covered call.

You also loose use of your money until the option expires (or you sell the stock). Probably not a big deal at 2% to 4% interest rates.

[goodedesign]