200  •   The Intelligent Option Investor
After you enter a position and some time passes, it becomes clearer 
what valuation scenario the company is tending toward. In some cases, 
a bit of information will come out that is critical to your valuation of the 
company on which other market participants may not be focused. Obvi-
ously, if a bit of information comes out that has a big, positive or negative 
impact on your assessment of the company’s value, you should adjust your 
position size accordingly. If you believe the impact is positive, it makes 
sense to build to a position by increasing your shares owned and/or by 
adding “spice” to that meal by adjusting your target leverage level. If the 
impact is negative, it makes sense to start by reducing leverage (or you 
can think of it as increasing the proportion of cash supporting a particular 
position), even if this reduction means realizing a loss. If the impact of the 
news is so negative that the investment is no longer attractive from a risk-
reward perspective, I believe that it should be closed and the lumps taken 
sooner rather than later. Considering what we know about prospect theory, 
this is psychologically a difficult thing to do, but in my experience, waiting 
to close a position in which you no longer have confidence seldom does 
you any good.
Obviously, the risk/reward equation of an investment is also influ-
enced by a stock’s market price. If the market price starts scraping against 
the upper edge of your valuation range, again, it is time to reduce leverage 
and/or close the position.
If your options are in danger of expiring before a stock has reached 
your fair value estimate, you may roll your position by selling your option 
position and using the proceeds to buy another option position at a more 
distant tenor. At this time, you must again think about your target leverage 
and adjust the strikes of your options accordingly. If the price of the stock 
has decreased over the life of the option contract, this will mean that you 
realize a loss, which is not an easy thing to do psychologically, but consid-
ering the limitations imposed by time for all option investments, this is an 
unavoidable situation in this case.
One of the reasons I dislike investing in non-LEAPS call options is 
that rolling means that not only do we have to pay another set of bro-
ker and exchange fees, but we also must pay both sides of the bid-ask 
spread. Keeping in mind how wide the bid-ask spread can be with options 
and what an enormous drag this can be on returns, you should carefully