Implied interest rate for LEAP options

A

Alexpung

let's say I want to hold onto something like BRK.B for some years. Would it be a good idea to make a synthetic forward by longing call and shorting put two years out?

What is the implied interest going to be like and how many MM out there making the market?

Which strike should I pick if I want to do this?
Thanks.
 
Listed goes out to Jan 2020 - anything further you would need a broker who can access flex/cflex. Most any MM who does brk.b who is on a flex terminal will quote it. The listed sticker for the 200 synthetic is about $16.00. So with stock at 202(rounding a bit) the two year swap would cost around $5.00(rounding and calling the listed exactly two years. So you are paying about 450bps over the swap. Strike for the synthetic doesn't really make any difference unless you are gonna split strikes. I can call our broker after 11PM Chicago and get you a live quote, but I really wouldn't sweat the actual swap rate - real interest rate not implied, because your gonna pay more in b/a spread both way than the real carry. One caveat is what I'm quoting is retail - a real institutional broker will do it for swap plus some small markup during market hours, but then it won't be listed and OCC guaranteed unless you insist and all the players agree.
 
1. yes that makes sense, but it would be better to just by the stock
2. implied interest will be very similar to the 2 yr treasury
3. ATM... easiest

edit 1. you will likely be charged an amount of margin roughly the same as the stock anyway, depending on your broker... so... why bother? I assume to basically be long leveraged? So you would borrow money and invest it in Berkshire... I think Warren B would not approve of that type of investing.

also, you will have to trade in both call and put and open the position on a wide bid/ask spread... at least wider than the stock... so that's another cost to add...
 
ajacobson said:
LThe listed sticker for the 200 synthetic is about $16.00. So with stock at 202(rounding a bit) the two year swap would cost around $5.00(rounding and calling the listed exactly two years. So you are paying about 450bps over the swap.
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That's cutting some corners ;). I think you mean about 45 bps above swap right? 450 is a bit steep.

If I look at the closing prices now... it's about 13.50 on the 200 strike Jan'20. The 210 is 2.25, so Forward is 212.25... with spot at 202(ish) that's about 2.6% a year in interest paid... Currently the 2yr treasury is 2.20%.

That's all at midpoints though. I don't know how wide the options are quoted normally... but you're right in that the spread adds another x%... maybe another 15bps (about 30 cents above mid point both in call and put)?
 
JackRab said:
1. yes that makes sense, but it would be better to just by the stock
2. implied interest will be very similar to the 2 yr treasury
3. ATM... easiest

edit 1. you will likely be charged an amount of margin roughly the same as the stock anyway, depending on your broker... so... why bother? I assume to basically be long leveraged? So you would borrow money and invest it in Berkshire... I think Warren B would not approve of that type of investing.

also, you will have to trade in both call and put and open the position on a wide bid/ask spread... at least wider than the stock... so that's another cost to add...
More...

Thanks for answering.

Currently I do my funding selling SPX boxes, I am looking at this possibility and see if I can save some money. Not sure which option is cheaper.

Yes I long leveraged 2x as the portfolio is still small and I expect to contribute like 20% of the liquidation value per year.
 
ajacobson said:
Listed goes out to Jan 2020 - anything further you would need a broker who can access flex/cflex. Most any MM who does brk.b who is on a flex terminal will quote it. The listed sticker for the 200 synthetic is about $16.00. So with stock at 202(rounding a bit) the two year swap would cost around $5.00(rounding and calling the listed exactly two years. So you are paying about 450bps over the swap. Strike for the synthetic doesn't really make any difference unless you are gonna split strikes. I can call our broker after 11PM Chicago and get you a live quote, but I really wouldn't sweat the actual swap rate - real interest rate not implied, because your gonna pay more in b/a spread both way than the real carry. One caveat is what I'm quoting is retail - a real institutional broker will do it for swap plus some small markup during market hours, but then it won't be listed and OCC guaranteed unless you insist and all the players agree.
More...

Thanks for answering.


I am retail (obviously) so it is pretty much not possible to get the swap rate. I am currently holding the stock and funding via 3 month SPX box. Perhaps I should just keep it this way?
 
You could also trade the future... but that's likely even less liquid.

You should also be aware, that if Berkshire does decide to pay a dividend, you will be on the losing end of that... since your options will be discounted to the ex-dividend price. Not that it seems likely that they are going to pay a dividend... but better to be aware of that.
 
JackRab said:
You could also trade the future... but that's likely even less liquid.

You should also be aware, that if Berkshire does decide to pay a dividend, you will be on the losing end of that... since your options will be discounted to the ex-dividend price. Not that it seems likely that they are going to pay a dividend... but better to be aware of that.
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Yes I am aware of that, thanks.
 
Alexpung said:
Thanks for answering.


I am retail (obviously) so it is pretty much not possible to get the swap rate. I am currently holding the stock and funding via 3 month SPX box. Perhaps I should just keep it this way?
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Hmm... 3 month treasury is at about 1.6%, what did you pay in that SPX box? 1.8?... Short rates are very likely to rise to above 2%. I would take the longer dated one to be honest... you don't have to refinance every 3 months, so your transaction costs are lower and you will likely be ending up paying almost the same % for 3-month options in 6 months time.

That said... I'm against leveraged investing in the stock market, so don't do this just because I'm explaining stuff...
 
JackRab said:
That said... I'm against leveraged investing in the stock market, so don't do this just because I'm explaining stuff...
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Why may I ask? Buffett leverages using insurance floats to get his returns, so why not us mom and pop retail using options?
 
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