Berkshire Hathaway has dived after a new breakout attempt past a 484.82 timely entry point and triggered a loss-cutting sell rule. Let's consider a short iron condor trade in Berkshire Hathaway stock.
Market price action continues to reflect the "buy the dip" mentality. However, those dips, while short-lived at present, can be quite extreme.
For this reason, I am choosing option chains that hold a fair bit of premium, even in a megacap company such as the Class B shares of Berkshire stock. I'm also choosing a stock that shows reflexive buying when prices dip into monthly support lines.
Berkshire Hathaway stock has been noted as "savings accounts" for many of its holders by its chairman and CEO, Warren Buffett. Today, we'll consider what this stock does from a purely technical perspective while we collect a revenue stream through another short iron condor.
When we position with short iron condors, we attempt to collect time decay while a stock forms a base on its chart or settles into a new direction.
As always, we assume that we don't know the direction. But we estimate the magnitude of the move using ATR (average true range, as measured on the monthly chart in this instance). We also gauge the implied moves that market makers have priced into the stock in the months ahead.
According to IBD Stock Checkup, Berkshire Hathaway stock holds a 65 Relative Strength Rating, down from 83 three months ago.
Warren Buffett Stocks: A December Update
Berkshire Hathaway Stock: The Trade
The short iron condor consists of two spreads: a short call spread and a short put spread. These two price spreads define a range of motion that we estimate the price action in Berkshire Hathaway stock will not exceed. Let's set up the trade as follows:
- Sell to open 1 BRKB Feb. 21 call with a 480 strike price.
- Buy to open 1 BRKB Feb., 21 485 call.
- Sell to open 1 BRKB Feb. 21 420 put.
- Buy to open 1 BRKB Feb. 21 415 put.
At the time of this writing, the credit received in Berkshire Hathaway stock totaled $1.96 per set of contracts, or $196. It serves as the maximum profit we could collect overall. With this kind of position, we collect a premium. As this premium erodes, we collect revenue.
Calculate maximum risk in the following way: the distance between strikes (here they are both the same at $5) minus the credit we collect, or $5 - $1.96 = $3.04, or $304 per set of contracts.
A Question
Why take a trade where the risk is often more than twice the size of the reward?
The answer: The probability of the short iron condor with strikes far out of the money (meaning far away from the price of the stock currently) potentially returning gains is often as much as six times more likely than the long iron condor in this specific example.
Trading on the side of probabilities, rather than the possibility of outsize gains, is how most traders who sell options as their primarily revenue generation lean on the law of large numbers. Put another way, lean toward what happens over a long period of time in the market.
Stock hunting using fundamental and price strength within The IBD Methodology is where I firmly plant myself under the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
Trade Management
Price patterns observed in Berkshire stock post earnings tend to show a rise, then a period of post-earnings price consolidation.
We are seeing this unfold as Berkshire Hathaway stock briefly extended past 490 and delivered a selling tail into the current area of what I call "congested support."
If we use the recent past as potentially foretelling the near-term future, we expect to sit in a range that is both below our near-term highs and above over near-term lows.
Due to current pricing and positioning in the option chains, we see a large group of traders positioned at the lower strikes of 420. I positioned the short put here simply because of the pricing being much more favorable to us than strikes closer to the money (closer to the stock price).
On the upside, someone seems to have positioned a ratio spread between 470 and 490. So I chose the middle of the range as the most favorable spot in the current technical formation.
Berkshire Hathaway Stock: Managing The Position
The strategy result provides three choices to exit the trade.
One, buy back the iron condor once it gets to an acceptable profit margin for you. I customarily look for a 30%-60% profit for these kinds of trades in the current environment of volatility. Two, buy back the iron condor once it hits a loss threshold as determined by personal risk. I customarily look at about 65%, although depending on my position size, I will also choose 50%.
Three, buy back the spreads into the week before expiration, if all is going well and you have decided to hold the trade closer to the end of expiration. I have had many a trade go sideways taking it down to the wire and not capturing gains, so I do not advise this in Berkshire Hathaway stock.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on X at @AnneMarieTrades
