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Chapter 12
Risk and the intelligent 
OptiOn investOR
The preceding 11 chapters have given you a great deal of information about 
the mechanics of option investing and stock valuation. In this last chapter, 
let’s look at a subject that I have mentioned throughout this book—risk—
and see how an intelligent option investor conceives of it. 
There are many forms of risk—some of which we discussed earlier 
(e.g., the career risk of an investment business agent, solvency risk of a 
retiree looking to maintain a good quality of life, and liquidity risk of a 
parent needing to make a big payment for a child’s wedding). The two risks 
I discuss here are those that are most applicable to an owner of capital 
making potentially levered investments in complex, uncertain assets such 
as stocks. These two risks are market risk and valuation risk.
Market Risk
Market risk is unavoidable for anyone investing capital. Markets fluctuate, and 
in the short term, these fluctuations often have little to do with the long-term 
value of a given stock. Short term, it must be noted, is also relative. In words 
attributed to John Maynard Keynes, but which is more likely an anonymous 
aphorism, “The market can remain irrational longer than you can remain sol-
vent. ” Indeed, it is this observation and my own painful experience of the truth 
of it that has brought me to my appreciation for in-the-money (ITM) options 
as a way to preserve my capital and cushion the blow of timing uncertainty.