BRK/B’s breakout to a new all-time high in the past 2 weeks has been incredibly ferocious for a $200 billion+ market cap company:
The stock had been trading in the 110-120 range for much of the past 9 months. After the earnings report, the stock held above the 200 day moving average, and then broke out last week.
Our BRK/B position, the Mar/Jun 110 put calendar, which we discussed in last week’s Considering Our Options (below), has lost quite a bit of value as a result. We debated whether we wanted to take the trade off or wait it out given that it was June expiry. Since then, the stock has continued higher.
However, at this point, we have a very low risk way of adjusting our trade so that we dramatically increase the probability of preserving some of our premium rather than taking our loss here. We are going to target a move back into the $110-$120 range over the next few months with the following adjustment: [private]
Action: Buy to close the Mar 110 Put for $0.05, Buy to open the June 120/115 1×2 Put Spread for $0.08, total cost of $0.13
New Position: Long the BRK/B June 120/115/110 Put Fly for $1.73 cost basis (original $1.60 cost plus additional cost of $0.13 for today)
This position has a higher probability of profitability compared to the June 110 put that we owned, given the 111.73 to 118.27 profitability area for June expiry. In addition, we were able to make that adjustment with very little extra cost.
Considering Our Options – $BRK/B
In a broader market where few short-biased trades have worked, we had a nice win early in the year on BRK/B, taking it off for more than a double.
Unfortunately, our second go-around in the stock has been much less successful. We entered the following position about 2.5 weeks ago:
Trade: BRK.B ($114.37) Bought March / June 110 put calendar for $1.60
Until the end of February, the position looked like the right structure, as BRK/B held below the $115 level and the short March 110 put was decaying. However, in the past week, BRK/B has burst higher, and is making a new all-time high today:
[caption id="attachment_37172" align="alignnone" width="600"]
BRK/B daily chart, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
The stock broke above the 200 day ma on Friday, and then held above the 200 day ma after the weekend earnings report, but we still felt relatively comfortable holding on to the put calendar given the ample overhead supply between 117 and 119. However, BRK/B today has moved through all of that resistance to make a new all-time high, and our put calendar is worth about 0.75, vs. our cost basis of 1.60.
Given the ferocity of the move, and the fact that our June 110 put’s maturity is still 3 months away, we want to give the stock at least a few days to prove itself on this breakout. If the stock remains above the $119.50-$120 area for the next week, we might decide to simply take our losses. If the stock does move back below that area, we might look to restructure the position to give ourselves better odds given that our long strike is now almost 10% away.
New Trade BRK/B: Premium Buffett, February 19, 2014
Back in late January when BRK/B broke its 200 day moving average for the first time since 2012, we put on a near term bearish bet that the stock would see further weakness. We took the trade off for more than a double a short time later, detailed in the February 4th post:
BRK/B has promptly moved lower since our entry on our put spread position last week. Since the stock has now become quite oversold (with its lowest RSI reading in more than a year), and our put spread position a quick double, we’ll take the position off today. If BRK/B works its way back up to the 200 day moving average in the coming weeks, we might look to fade the strength again up there.
Action: BRK/B ($108.76) Sold to close the Mar 110/100 Put Spread at $2.75 for a $1.45 gain
Since then, BRK/B has rallied with the broader market. However, the stock did fail (at least for now) where we would expect, right around the 200 day moving average in the 114.50-115 area. That gives credence to that level as important resistance in the near term.
With today’s major reversal, we like the idea of playing for a move back down to retest those prior lows from early February over the next few weeks but likely at a less dramatic pace that it did in late Jan/early Feb.
Trade: BRK.B ($114.37) Bought March / June 110 put calendar for $1.60
-Sold Mar 110 put at .60
-Bought June 110 put for 2.20
Break-Even on Mar expiration:
-Profits are maximized at 110 on March expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
-Max risk is $1.60
Trade Rationale: This is a bearish structure that looks to take some premium risk off by selling the earnings month options. Berkshire is not typically a big earnings mover and this structure has that in mind by playing for a move back to recent lows over some time, not just on the event. (although that would be nice too!)
[/private]