184  •   The Intelligent Option Investor
combination of stock and ITM call options but also perhaps buying a few 
OTM call options as well. As the investment ages and more data about the 
company’s operations come in, if this information leads me to be more 
bullish about the prospects of the stock, I may again increase my leverage 
using OTM call options—especially when I see implied volatility trading at 
a particularly low level or if the stock price itself is depressed because of a 
generally weak market. 
I used to be of the opinion that if you are confident in your valuation 
and your valuation implies a big enough unlevered return, it is irrational 
not to get exposure to that investment with as much leverage as possible. 
A few large and painful losses of capital have convinced me that where-
as levering up on high-conviction investments is theoretically a rational 
investment regime, practically, it is a sucker’s game that is more likely to 
deplete your investment capital than it is to allow you to hit home runs.
Y ounger investors, who still have a long investing career ahead of 
them and plenty of time to make up for mistakes early on, probably can 
feel more comfortable using more leverage, but as you grow closer to the 
time when you need to use your investments (e.g., paying for retirement, 
kids’ college expenses, or whatever), using lower leverage is better.
Looking back at the preceding tables, one row in one table in particular 
should stand out to you. This is the last row of the last table, where the leverage is 
−1.8/2.6. To me, this is a very attractive leverage ratio because of the asymmetry 
in the risk-reward balance. This position is levered, but the leverage is lopsided 
in the investor’s favor, so the investor stands to win more than he or she loses. 
This asymmetry is the key to successful investing—not only from a 
leverage standpoint but also from an economic standpoint as well. I believe 
an intelligent, valuation-centric method for investing in companies such as 
the ones outlined in this book that allow investors an edge up by allowing 
them to identify cases in which the valuation simply does not line up with 
the market price. This in itself presents an asymmetrical profit opportunity, 
and the real job of an intelligent investor is to find as large an asymmetry 
as possible and courageously invest in that company. If you can also tailor 
your leverage such that your payout is asymmetrical in your favor as well, 
this only adds potential for outsized returns, in my opinion.
The other reason that the −1.8/2.6 leverage ratio investment interests 
me is because of the similarity it has to the portfolio of Warren Buffett’s