Low-Risk, High-Probability Bullish Options Strategy for BRK.B

The goal of this strategy is to take advantage of a bullish outlook on BRK.B while minimizing capital requirements and managing risk effectively. Instead of purchasing 100 shares outright, which would require a significant amount of capital, this strategy employs a long-term deep in-the-money (ITM) call option (LEAPS) as a substitute for stock ownership. By selling short-term out-of-the-money (OTM) call options against it, we aim to generate consistent monthly income while benefiting from the stock’s upward movement. We implement a Poor Man’s Covered Call.

Recommended Setup

Step 1: Establish the Long LEAPS Call Position

– Purchase a long-term, deep ITM call option with an expiration date of January 16, 2026, such as the $450 strike.
– This option has a delta of approximately 0.78, meaning it behaves similarly to owning 78 shares of BRK.B per contract.
– The cost of this option is around $7,870 at a mid-market price of $78.7 per contract.
– This position provides significant upside exposure while limiting downside risk to the premium paid.

Step 2: Sell a Short-Term OTM Call for Monthly Income

– To generate additional income, sell a near-term OTM call option expiring in the next monthly cycle (e.g., March 21, 2025).
– For example, the March $520 call is 4% OTM, has a delta of approximately 0.14, and is priced around $1.30 per contract.
– Selling this call brings in $130 in premium, reducing the net cost of the LEAPS position and providing income regardless of short-term price fluctuations.

Why This Strategy Works

– The LEAPS call provides bullish exposure while keeping risk limited to the premium paid.
– The short call generates monthly income to counteract time decay (theta) in the LEAPS.
– Risk is managed effectively, as the maximum loss is capped at the cost of the LEAPS minus any premiums collected.
– Greek Profile Analysis:
  – Delta (~+0.64): The position maintains a strong bullish bias while still earning from short call premiums.
  – Theta (positive, ~$5/day): The short call’s time decay works in our favor, helping mitigate any losses from the LEAPS’ gradual decay.
  – Vega (moderately positive): The strategy benefits from slight increases in implied volatility (IV), which can help preserve LEAPS value.

Expected Return & Risk Considerations

– Monthly income generation: Each short call sale collects a premium (e.g., $130 per month), reducing the cost of the LEAPS.
– Projected returns: Over three months, this strategy could yield around 6% in call premiums alone, with additional potential upside if BRK.B appreciates.
– Maximum risk exposure: The worst-case scenario occurs if BRK.B drops significantly below $450. In this case, the most that can be lost is the initial cost of the LEAPS minus any call premiums received.

Key Metrics for Strike Selection

– Delta & Probability of Success:
  – The goal is to sell short-term calls with a delta of around 0.15–0.20, meaning there is an 80–85% chance of expiring worthless.
  – Example: The March $520 call (delta ~0.14) ensures that we collect premium without excessive risk of assignment.
– Implied Volatility & Premium Collection:
  – Short-term OTM calls typically have an IV of 17–20%, while deep ITM LEAPS have an IV of around 22%.
  – These levels indicate that we can capture decent premiums while keeping risk manageable.
– Liquidity Considerations:
  – We select strikes with tight bid-ask spreads and high open interest (OI) to ensure efficient trade execution.
  – For example, strikes around $500–$520 have OI in the thousands, ensuring robust market participation.

Month-by-Month Action Plan and Adjustments

March 2025 Expiration (Mar 21, 2025)

– If BRK.B remains below $520:
  – The short call expires worthless, and we keep the full premium.
  – The next step is to sell another short call for April, following the same selection criteria (strike ~4–5% above market price).
– If BRK.B rises above $520:
  – Before expiration, we will roll the short call up and out to April, ensuring continued upside exposure.
  – Example: Buy back the March $520 call and sell an April $540 call.
– If BRK.B drops significantly:
  – The short call expires worthless, and we reassess whether to continue selling short calls or hold off until a recovery.
  – If BRK.B falls below $470, we may consider adjusting the LEAPS position or exiting to reduce exposure.

April & May Expirations

Each month follows the same decision-making framework:
– If BRK.B stays below the short-call strike: Let the short call expire and sell another OTM call for the next cycle.
– If BRK.B moves above the short call’s strike: Roll up and out to the next month to maintain upside potential.
– If BRK.B trends downward: Consider adjusting the LEAPS position or hedging with protective puts.

Adaptive Adjustments & Risk Management

Managing Upside Moves

– If BRK.B rallies aggressively, we should roll the short call strikes higher to maintain flexibility.
– If profits meet expectations, we may consider closing the position early to lock in gains.

Managing Downside Risk

– If BRK.B declines significantly, avoid selling calls that are too close to the money.
– If BRK.B falls below $450, consider hedging or closing the LEAPS to minimize losses.

Alternative Strategies to Consider

1. Bull Put Credit Spread: Sell an April $480 put and buy an April $460 put to generate high-probability income with defined risk.
2. Cash-Secured Put (CSP): Sell a May $470 put to potentially acquire BRK.B at a discount while collecting premium.
3. Bull Call Spread: A May $500/$530 debit call spread offers limited risk but requires BRK.B to rise significantly to be profitable.

Conclusion: Why This Plan Should Work

– High probability of success (~80%+ each month) through carefully selected short calls.
– Limited downside risk with well-defined maximum loss (LEAPS cost minus premiums collected).
– Consistent income from selling monthly OTM calls.
– Efficient capital utilization, requiring only ~$7,870 instead of $50,000 for full stock ownership.
– Flexible exit strategies, allowing us to roll, adjust, or close the position based on market conditions.

By following this structured approach, we can achieve steady, low-risk returns over the next 1–3 months while maintaining a bullish stance on BRK.B.