Add training workflow, datasets, and runbook
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166 • The Intelligent Option Investor
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And herein lies the painful lesson learned by many a soul in the
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financial markets: leverage cuts both ways. The profits happily roll in dur-
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ing the good times, but the losses inexorably crash down during bad times.
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Levered Investment Using Options
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Discussing option-based investing leverage is much easier if we focus on
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the perspective of gaining exposure. Because most people are more com-
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fortable thinking about the long side of investing, let’s look at an example
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of gaining upside exposure on a company.
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Let’s assume we see a $50 per share stock that we believe is worth $85 (in
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this example, I am assuming that we only have a point estimate of the intrinsic
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value of the company so as to simplify the following diagram—normally, it is
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much more helpful to think about fair value ranges, as explained in Part II of
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this book and demonstrate in the online example). We are willing to buy the
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share all the way up to a price of $68 (implying a 25 percent return if bought
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at $68 and sold at $85) and can get call options struck at $65 per share for only
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$1.50. Graphically, this prospective investment looks like this:
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Fair Value Estimate
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5/18/2012 5/20/2013 249 499 749 999
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-
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10
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20
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30
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40
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50
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60
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70
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80
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90
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EBP = $66.50
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Date/Day Count
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Advanced Building Corp. (ABC)
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Stock Price
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GREEN
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