166  •   The Intelligent Option Investor
And herein lies the painful lesson learned by many a soul in the 
financial markets: leverage cuts both ways. The profits happily roll in dur-
ing the good times, but the losses inexorably crash down during bad times.
Levered Investment Using Options
Discussing option-based investing leverage is much easier if we focus on 
the perspective of gaining exposure. Because most people are more com-
fortable thinking about the long side of investing, let’s look at an example 
of gaining upside exposure on a company.
Let’s assume we see a $50 per share stock that we believe is worth $85 (in 
this example, I am assuming that we only have a point estimate of the intrinsic 
value of the company so as to simplify the following diagram—normally, it is 
much more helpful to think about fair value ranges, as explained in Part II of 
this book and demonstrate in the online example). We are willing to buy the 
share all the way up to a price of $68 (implying a 25 percent return if bought 
at $68 and sold at $85) and can get call options struck at $65 per share for only 
$1.50. Graphically, this prospective investment looks like this:
Fair Value Estimate
5/18/2012 5/20/2013 249 499 749 999
-
10
20
30
40
50
60
70
80
90
EBP = $66.50
Date/Day Count
Advanced Building Corp. (ABC)
Stock Price
GREEN