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+Gaining Exposure 	 	•	 195
+by using relatively less leverage when I want to commit a significant amount 
+of capital to an idea constitute, I have found, given my risk tolerance and 
+experience, the best path for me for a general investment.
+In contrast, we all have special investment loves or wild hares or 
+whatever, and sometimes we must express ourselves with a commitment 
+of capital. For example, “If XYZ really can pull it off and come up with a 
+cure for AIDS, its stock will soar. ” In instances such as these, I would rather 
+commit less capital and express my doubt in the outcome with a smaller 
+but more highly levered bet. If, on average, my investment wild hares come 
+true every once in a while and, when they do, the options I’ve bought on 
+them pay off big enough to more than cover my realized losses on all those 
+that did not, I am net further ahead in the end.
+These rules of thumb are my own for general investments. In the spe-
+cial situation of investing in a possible takeover target, there are a few extra 
+considerations. A company is likely to be acquired in one of two situations: 
+(1) it is a sound business with customers, product lines, or geographic 
+exposure that another company wants, or (2) it is a bad business, either 
+because of management incompetence, a secular decline in the business, or 
+something else, but it has some valuable asset(s) such as intellectual prop-
+erty that a company might want to have.
+If you think that a company of the first sort may be acquired, I be-
+lieve that it is best to buy ITM call options to attempt to minimize the time 
+value spent on the investment (you could also sell puts, and I will discuss 
+this approach in Chapter 10). In this case, you want to minimize the time 
+value spent because you know that the time value you buy will drain away 
+when a takeover is announced and accepted. By buying an ITM contract, 
+you are mainly buying intrinsic value, so you lose little time value if and 
+when the takeover goes through. If you think that a company of the second 
+sort (a bad company in decline) may be acquired, I believe that it is best to 
+minimize the time value spent on the investment by not buying a lot of call 
+contracts and by buying them OTM. In this case, you want to minimize the 
+time value spent using OTM options by limiting the number of contracts 
+bought because you do not want to get stuck losing too much capital if 
+and when the bad company’s stock loses value while you are holding the 
+options. Typical buyout premiums are in the 30 percent range, so buy-
+ing call options 20 percent OTM or so should generate a decent profit if