Buying/Selling Berkshire Hathaway The Cheap Way: Stock Options (BRK.B, BRK.A)

Admittedly, this almost feels strange.  Before this week there have not been any stock options for Berkshire Hathaway, Inc. (NYSE: BRK-A) (NYSE: BRK-B).  We received word from the CBOE that this is now no longer the case as there will be CBOE-listed stock options in the Class-B shares of Berkshire Hathaway Inc.  There will not be options on the much higher-priced A shares, but what we find interesting is that when share prices get very high or when a stock is not that liquid it seems that traders and investors alike flock to stock options to get exposure rather than using their full cash to buy the stock.

It was just yesterday that key market technician Dennis Gartman said again to sell Berkshire Hathaway.  It seems that now an investor can use stock options. Hell, maybe Mr. Gartman will buy put options now.

The initial strike prices for the puts and calls are $2800, $2900, $3000 and $3100.  The expiration cycle is March 31, but it will have introductory options expiration months of July, August, September and December.  The position limit is 25,000 contracts.  Barclays Capital will act as the Designated Primary Market Maker.  The options ticker will be BVQ when you are trying to look it up via the CBOE rather than a BRK or BRK-B ticker.

There is a more important issue than this just being a cheaper tool for investors and traders to use for speculative exposure in the stock. This will allow investors who own the underlying stock to buy downside protection via puts or will allow those investors and shareholders the ability to write covered calls for income.

There is still a chance that the stock options will get used rather than the actual stock for investing.  Imagine if you wanted to buy 100 shares of the class B stock.  Even after a 0.5% drop today to $2,814.00, you are looking at $281,400.00 before commissions.  Or just a single share of the Class-A stock, that costs you $87,300.00 for just one single share of stock. The classic case that was the best example was after VMWare came public.  The float was low and traders wanted exposure to virtualization, so they bought and sold out of the money put and call options rather than spending $8,000 to $11,000 just to trade 100 shares of common stock to play the upside or downside in the stock.  This way the traders could get exposure with a few hundred risk-based dollars.

There is also no cash dividend that Berkshire pays out, so it is not as though the ex-dividend date will be an issue for the stock and the underlying options.

Jon C. Ogg
June 19, 2009