We joke that when stock markets get stormy, it’s time to head over to Uncle Warren Buffett’s house to ride out the storm.
Of course, no science or extensively backtested algorithm is at play here that gives us this conviction. But time and time again, we’ve been rewarded for selling naked puts in $BRK/B when stocks slide and $VIX spikes.
If it ain’t broke…
Here’s a recent chart of $BRK/B that shows a level of support around $350 per share:
We’re going to lean against this level for our risk management purposes.
Here’s the Play:
I like selling $BRK/B November3 (weekly) 350 puts for approximately $5.00 per contract. I’m choosing this weekly expiration instead of the regular November monthly options because Berkshire is expected to announce earnings on November 3rd and I’d like to be out of my position (win or lose) before that deadline.
Our risk management is simple: If we see a $BRK/B closing price below $350 per share, putting our short puts in-the-money (ITM), that is my signal to close the trade, book the likely loss, and move on. I won’t be interested in sticking around to see if this is a false breakdown while holding a position that has the potential for unlimited losses.
Meanwhile, I’ll leave a resting good-til-canceled (GTC) limit order to buy these puts back for $2.50 per contract — half of what I collect in premium today. I want to take the “easy” profit and move on to the next trade.
In the unlikely event that we’re still in this position on the eve of expiration day which is also the day Berkshire announces earnings, I’ll close the trade down win or lose. I don’t want to be holding these short puts with their super high gamma into the binary risk event that is earnings announcements.
If you have any questions on this trade, please send them here.
If you missed last week’s video Jam Session, you can catch a replay on Stock Market TV.
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.