164  •   The Intelligent Option Investor
because of their lack of appreciation for the fact that the sword of lever -
age cuts both ways. Certainly an option investor cannot be considered an 
intelligent investor without having an understanding and a deep sense 
of respect for the simultaneous power and danger that leverage conveys.
New jargon introduced in this chapter includes the following:
Lambda
Notional exposure
Investment Leverage
Commit the following definition to memory:
Investment leverage is the boosting of investment returns calcu-
lated as a percentage by altering the amount of one’s own capital 
at risk in a single investment.
Investment leverage is inextricably linked to borrowing money—this 
is what I mean by the phrase “altering the amount of one’s own capital at 
risk. ” In this way, it is very similar to financial leverage. In fact, in my mind, 
the difference between financial and investment leverage is that a company 
uses financial leverage to fund projects that will produce goods or provide 
services, whereas in the case of investing leverage, it is used not to produce 
goods or services but to amplify the effects of a speculative position.
Frequently people think of investing leverage as simply borrowing 
money to invest. However, as I mentioned earlier, you can invest in options 
for a lifetime and never explicitly borrow money in the process. I believe 
that the preceding definition is broad enough to handle both the case of 
investment leverage generated through explicit borrowing and the case of 
leverage generated by options.
Let’s take a look at a few example investments—unlevered, levered 
using debt, and levered using options.
Unlevered Investment
Let’s say that you buy a stock for exactly $50 per share, expecting that its intrinsic 
value is closer to $85 per share. Over the next year, the stock increases by $5, 
or 10 percent in value. Y our unrealized percentage gain on this investment is