172  •   The Intelligent Option Investor
the option’s value. Although everyone (especially fly-by-night investment 
newsletter editors) likes to tout their percentage returns, we know from 
our earlier investigations of leverage that percentage returns are only part 
of the story of successful investing. Let’s see why using the three invest-
ments I mentioned earlier—an ITM call struck at $20, an OTM call struck 
at $39, and a long stock position at $31. 
I believe that there is a good chance that this stock is worth north of 
$40—in the $43 range, to be precise (my worst-case valuation was $30, and 
my best-case valuation was in the mid-$50 range). If I am right, and if this 
stock hits the $43 mark just as my options expire,
2 what do I stand to gain 
from each of these investments?
Let’s take a look. 
Spent Gross Profit Net Profit Percent Profit
$39-strike call 0.18 4.00 3.82 2,122
$20-strike call 11.50 23.00 11.50 100
Shares 31.25 43.00 11.75 38
This table means that in the case of the $20-strike call, we spent 
$11.50 to win gross proceeds of $23.00 (= $43 − $20) and a profit net of 
investment of $11.50. Netting $11.50 on an $11.50 investment generates a 
percentage profit of 100 percent.
Looking at this chart, the first thing you are liable to notice is the 
“Percent Profit” column. That 2,122 percent return looks like something 
you might see advertised on an option tout service, doesn’t it? Y es, that 
percentage return is wonderful, until you realize that the absolute value 
of your dollar winnings will not allow you to buy a latte at Starbuck’s. 
Likewise, the 100 percent return on the $20-strike options looks heads and 
shoulders better than the measly 38 percent on the shares, until you again 
realize that the latter is still giving you more money by a quarter.
Recall the definition of leverage as a way of “boosting investment re-
turns calculated as a percentage, ” and recall that in my previous discussion 
of financial leverage, I mentioned that the absolute dollar value is always 
highest in the unlevered case. The fact is that many people get excited about 
stratospheric percentage returns, but stratospheric percentage returns only