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+264  •   The Intelligent Option Investor
+Market risk is a factor that investors in levered instruments must 
+always keep in mind. Even an ITM call long-term equity anticipated 
+security (LEAPS) in the summer of 2007 might have become a short-tenor 
+out-of-the-money (OTM) call by the fall of 2008 after the Lehman shock 
+because of the sharp decline in stock prices in the interim. Unexpected 
+things can and do happen. A portfolio constructed oblivious to this fact is 
+a dangerous thing.
+As long as market fluctuations only cause unrealized losses, market 
+risk is manageable. But if a levered loss must be realized, either because of 
+an option expiration or in order to fund another position, it has the poten-
+tial to materially reduce your available investment capital. Y ou cannot ma-
+terially reduce your investment capital too many times before running out.
+A Lehman shock is a worst-case scenario, and some investors live 
+their entire lives without experiencing such severe and material market 
+risk. In most cases, rather than representing a material threat, market risk 
+represents a wonderful opportunity to an intelligent investor.
+Most human decision makers in the market are looking at either 
+technical indicators—which are short term by nature—or some sort of 
+multiple value (e.g., price-to-something ratio). These kinds of measures are 
+wonderful for brokers because they encourage brokerage clients to make 
+frequent trades and thus pay the brokerages frequent fees. 
+The reaction of short-term traders is also wonderful for intelligent 
+investors. This is so because a market reaction that might look sensible or 
+rational to someone with an investment time horizon measured in days or 
+months will often look completely ridiculous to an investor with a longer-
+term perspective. For example, let’s say that a company announces that its 
+earnings will be lower next quarter because of a delay in the release of a 
+new product. Investors who are estimating a short-term value for the stock 
+based on an earnings multiple will sell the stock when they see that earn-
+ings will likely fall. Technical traders see that the stock has broken through 
+some line of “resistance” or that one moving average has crossed another 
+moving average, so they sell it as well. Perhaps an algorithmic trading 
+engine recognizes the sharp drop and places a series of sell orders that are 
+covered almost as soon as they are filled. In the meantime, someone who 
+has held the stock for a while and has a gain on it gets protective of this gain 
+and decides to buy a put option to protect his or her gains.