I wrote about the introduction of Berkshire Hathaway options on the CBOE on Wednesday. Now that more details are available and trading has begun, it is interesting to take a brief look at how these option contracts may be utilized by the speculator or investor.
Given that each option contract conveys a right to buy or sell 100 Class B shares, it is perhaps less likely that a very small speculator will find these instruments to be attractive. Other than options that have near term expiration and are far out of the money, even purchasing a single call or a put would require a significant cash outlay. For example, the call option with a $2,800 strike price expiring on September 19 closed yesterday at $200. This would imply a cost of $20,000 for one option contract. However, call option expiring on July 18 with a $3,100 strike price closed at $10 would require an outlay of only $1,000. Those taking bearish speculative positions by purchasing puts would face similar scenarios in terms of required cash outlays.
Perhaps a more productive use of Berkshire options would involve a larger investor who would like to increase his or her exposure to Berkshire Hathaway. Such an investor could sell a put option with a $2,800 strike price expiring on December 19 and collect $215 per share, or $21,500 for each option contract. If Berkshire Hathaway B shares are selling under $2,800 at option expiration, the shares would be put to the seller of the option. However, given the fact that the option sale yielded $215/share, the effective cost to the purchaser would be slightly below $2,585 per B share: $2,800 less the $215 option premium and income it generates over the next six months. Of course, if the price of Berkshire Hathaway B shares is above $2,800 at option expiration, the option will simply expire but the seller of the put will retain the $215/share.
One obvious reality from the first day of option trading is that the market is thin and bid/ask spreads are very large. Options, like any other financial instrument, can and will be misused by speculators who will later regret their decisions. However, the market may also provide an opportunity for those seeking to gain exposure to Berkshire Hathaway at lower prices. Obviously, this does not come without the very real risk of some major material event taking place between the time the option is written and the date of expiration which could result in a severe decline in share price (and perhaps even intrinsic value) and would result in large losses. In my opinion, the most sensible way to gain exposure to a stock an investor wishes to own is to simply purchase the stock.
Update on Friday, June 19 @ 11:00pm: As pointed out by some readers, I neglected to mention the fact that a writer of a put has margin requirements to consider as well. There could be opportunity costs associated with maintaining the margin requirement. In any event, as I mentioned in the article, my opinion is that the most straight forward way to obtain ownership in Berkshire is to simply buy the shares.
Disclosure: The author owns shares of Berkshire Hathaway.