Buying: Berkshire Hathaway Shares (BRK-B) With Both Hands!

Berkshire Hathaway (BRK/B) just had a stock split. The class B shares split 50 to 1. In full disclosure: I already have a position and it is one of my largest holdings.

I see fair market value at $88/share, current price is $70/share.
I am also willing to bet the stock will be added to the S&P 500, this should cause an additional spike higher in the shares.

If you don't want to buy the shares outright and want to use leverage, here is the trade idea:

Option Risk Reversal
Sell the March 65 strike put
Buy the March 75 strike call
Debit will be around $.20 or $20 per spread
There will be a margin requirement of around $1,700 per risk reversal
Worst case scenario you own shares at a cost basis of $65.20
Best case scenario is unlimited upside profit potential

Goldcorp (GG) Longer-Term (April) 1 x 2 Put Spread

Important note: You are naked half of the puts traded so, becoming long Goldcorp (GG) shares at a cost basis of $34.00 (20% lower than today's price) is a real possibility at April expiration. The initial margin requirement is likely in the ballpark of $1,000 for every 1 x 2 put spread traded.

Buy to open @ ratio of 1: April 42.00 strike puts (GAGPP)
Sell to open @ ratio of 2: April 38.00 strike puts (GAGPC)
Limit credit: .05 (try to put this trade on for at least breakeven of a zero debit/credit)

Maximum risk = unlimited below lower breakeven of 34.00/share. This because half of the puts traded are naked.

Maximum reward = 4.05 (or $405 per 1 x 2 traded)
NOTE: A gain of the entire 4.05 is a low probability, some portion of that is what we are gunning for.

The stock price moving higher and we make a small profit in the credit (.05). The stock price declining between 2% - 20% from current prices we make some good profit. If the stock falls further than 20% by April expiration and we are still in the trade, we will be long the stock and under water in the trade.

S&P 500 ETF (SPY) Long-Term Put Butterfly

This is a long-term trade that we will likely be patient with for multiple months. It is a June Put Butterfly on the Spyder (SPY). We will profit if the market has an intermediate-term pullback. If the short-term downtrend never materializes, then we will be at risk for the cost of the trade (i.e., the total debit).

The trade details are as follows (NOTE: regular June options, NOT quarterly June options being used for this trade):

Buy to open @ ratio of 1: June 112.00 strike puts (SPYRH)
Sell to open @ ratio of 2: June 107.00 strike puts (SWGRC)
Buy to open @ ratio of 1: June 102.00 strike puts (SWGRX)
Limit debit: 0.50

Maximum risk = 0.50 (or $50 per butterfly traded)
NOTE: A loss of the entire 0.50 is a very real possibility, so trade accordingly.

Maximum reward = 4.50 (or $450 per butterfly traded)
NOTE: A gain of the entire 4.50 is a low probability

A realistic gain is probably 1.00 to 2.00 per butterfly traded.

Actual Reward-to-Risk Ratio = 8 to 1 (realistic reward-to-risk ratio = 3 to 1)

What is the difference between the actual and the realistic reward-to-risk ratios? The SPY would have to end up at exactly $107 per share on June expiration to have the maximum gain. That is a very low probability. However, there are many scenarios where we can make between 1.00-2.00 per butterfly in the trade. In option trading, you have to look at your absolute best and wost case scenarios. However, you plan your trades based on "most likely" best and worst case scenarios.

Market Update

There is an all important U.S. unemployment report this Friday. It has long been our argument that an improving number is not necessarily a positive for stock prices. It would signal that the Federal reserve would begin raising rates sooner. What would likely be best for stock prices would be a continued gradual deterioration in the unemployment number.

The current fiscal stimulus is artificially propping up the market. We got into this mess because we have spent too much and saved too little. Now we are trying to combat that with more debt. In essence, we are like an individual who bought 10 homes and can't make the payments (too much debt). Then he goes out and borrows money to improve these homes or buy more homes to attempt to improve his situation. If the housing market recovers, rents comes in and home values increase, he may make it out okay. However, if things don't improve, then he goes bankrupt and his ability to borrow in the future is ruined.

Whether you believe in what the Fed is doing or not, there is risk and reward in it. The risk with increasing the U.S. debt by trillions is that it may not be successful. Our bullish stance on commodities and precious metals is based on what they are currently doing. If the economy improves, then they will have successfully navigated the first part of the problem, but will have to combat a lower dollar and big inflation. If the economy does not improve, then the dollar would likely get slammed and commodity prices (precious metals) could move dramatically higher accordingly. This increase in money supply has, to this point in time, improved the economy and company profits which has pushed stock prices upward.

We found it quite interesting to research back how the market moved immediately following the release of the unemployment report. You can see in the chart below that there is a common theme. That theme is for the current trend and momentum to turn regardless of which direction it has been in upon the report's release. If this trend continues, then you would want to enter Friday's trading day short stocks as the trend has been up and a reversal would send us lower. There is, of course, no guarantee that will continue, but it was an interesting phenomenon in 2009