Reflecting on my BRKB options trades. What I did right. What I did wrong. What I am going to do next.
BRKB is the symbol for Berkshire Hathaway Inc. Class B Shares. It is a holding company with a wide array of subsidiaries engaged in diverse activities. The firm’s core business segment is insurance, run primarily through Geico, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group.
Many has mentioned that it is a great company to invest in. But by the time I found out, the share price of the Class A shares is way beyond my reach. Fortunately, there is still the Class B shares. It isn’t cheap but way more doable.
At the beginning of 2022, I attended a course called Options Millionaire Intensive bootcamp (affiliate link). OMI is a 3-day live bootcamp (virtual when I attended). I learnt some interesting investing concepts and strategies. One of them is a checklist for evaluating whether a company is good.
I know this is not comprehensive analysis but I think it is a good place to start for beginner investors. Baby steps.
- Operating cashflow (OCF) of a good company should be consistently positive. A bonus if it is growing.
- Net profit margin should be positive. 10% and more to be considered good.
- Interest coverage ratio should be positive. The larger the number the better. Nil is also good. It means the company has no loans.
- The current year Price/Earning ratio (PE) should be lower than the 5-yr PE
- The current year Earning Per Share (EPS) should be higher than the 5-yr EPS
- The Value line should be higher than the current share price. This means that the company shares could be trading at a discount.
Applying the OMI Checklist to BRKB
- BRKB’s operating cashflow is positive and is growing. TTM OCF = 39,421 USD million.
- BRKB’s net profit margin % hovered around 10 and 20 for the last couple of years. TTM is 25.32%. A very comfortable margin.
- BRKB has sufficient money to service their loan interest. TTM ratio is 27.77
- BRKB’s current PE is 8.21 while 5-year PE is 21.68. This is a good sign.
- The current EPS is $39.64
- The value line is 21.68 x 39.64 = $859.40.
BRKB is a great company and its current share price is way below the value line. I would need around $33,000 to buy 100 shares of BRKB. I did not have that much capital.
The only strategy is to trade BRKB options. My plan is to buy a LEAP call option in-the-money if the implied volatility percentile is around 30%. The capital should be around 15% of a stock purchase.
BRKB Options : Poor Man’s Covered Calls
7 Mar 2022 – bought 1 call option with strike at $320 at a cost $4,850 expiring 19 Jan 2024.
8 Mar 2022 – sold 1 call option with strike at $340 for a premium of $100 expiring 18 Mar 2022.
The total cost for both BRKB options is $4,850-$100 = $4,750. I closed both options together on 15 Mar 2022 (8 days) for $5,600. Profit: $5,600-$4.750 = $850
This is a successful trade that I’m going to try and replicate.
21 Mar 2022 – bought 1 call option with strike at $350 at a cost of $4,900 expiring 19 Jan 2024.
23 March 2022 – sold 1 call option with strike price at $362.50 for a premium of $178 expiring 14 April 2022.
The total cost for both options is $4,900 – $178 = $4,722. I closed both options together on 29 March for $5,130. Profit: $5,130 – $4,722 = $408
Although I made a profit of $1,258 on my BRKB options, I wondered if I could have made more if I didn’t sell the poor man’s covered calls.
The stock market has become extremely volatile. I think the safest thing to do at this moment may be to buy a LEAP call if the premium price is reasonable and hold for a while.