[Options] When the Going Gets Rough, Head to the Berkshires

Sean McLaughlin
September 28, 2022

...Berkshire "B" shares, to be precise.

One of JC's favorite trades when volatility is spiking and bearish sentiment seems a little overdone on the downside is to either buy stock in Berkshire Hathaway $BRK.B or even better -- sell some naked puts to fade the fear.

During our morning meeting today, JC was feeling that the time was right to pull the trigger on this idea again.

Selling naked puts is the move for us today, but we have to be aware that earnings are on the horizon in early November -- which may be accounting for some of the extra premium in November monthly expiration options.

As you can see from this chart, $BRK.B has undercut a significant level ever so slightly, but if this move is false, the whipsaw back up should be swift:

Of course, if the move is not swift, but the recent lows continue to hold, then we'll still be able to profit thanks to the steady erosion of the put option premium as time passes.

Here's the Play:

We're selling November 260 puts naked (unhedged) for approximately $6.90 per contract. This position has theoretically unlimited risk, and therefore our broker will require us to post approximately $5k of margin per contract we sell.

Our risk management on this trade will be two-fold:

  • Any $BRK/B close below our strike price ($260) is our signal that we're either early or wrong, either way, we'll want to close the trade down and book the likely, but manageable, loss.
  • If we're still in our position on the eve of November 4th's earnings announcement, we'll exit the trade -- win or lose -- to avoid the binary event risk of a large gap moving against our position.

Meanwhile, we'll look to close the position for a profit when we can buy it back for half of what we collected today. So in our case, we'll leave a GTC limit order to buy it back at $3.40. We're looking for a high-percentage win in the case recent lows hold for a bit. We're not interested in hanging on through earnings to collect every last nickel in the trade. Let another masochist do that!

If you have any questions on this trade, please send them here.

ASO subscribers who missed last week’s live video Jam Session where we review activity in our options portfolio from the past week can catch it here.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.



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