Gaining Exposure 	 	•	 197
sauce to make the main course more interesting and flavorful. Y ou can 
layer ITM options onto the stock to increase leverage to a level with which 
you feel comfortable. This does not have to be Buffett’s 1.8:1 leverage of 
course. Levering more lightly will provide less of a kick when a company 
performs according to your best-case scenario, but also carries less risk 
of a severe loss if the company’s performance is mediocre or worse. OTM 
option positions (and “long diagonals” to be discussed in Chapter 11) can 
be thought of as a spicy side dish to the main meal. They can be added 
opportunistically (when and if the firm in which you are investing has a 
bad quarter and its stock price drops for temporary reasons involving sen-
timent rather than substance) for extra flavor. OTM options can also be 
used as a snack to be nibbled on between proper meals. Snack, in this case, 
means a smaller sized position in firms that have a small but real upside 
potential but a greater chance that it is fairly valued as is, or in a company 
in which you don’t have the conviction in its ability to create much value 
for you, the owner. 
Another consideration regarding the appropriate level of investment 
leverage one should apply to a given position is how much operational 
and financial leverage (both are discussed in detail in Appendix B) a firm 
has. A firm that is highly levered will have a much wider valuation range 
and will be much more likely to be affected by macroeconomic considera-
tions that are out of the control of the management team and inscrutable 
to the investor. In these cases, I think the best response is to adjust one’s 
investment leverage according to the principles of “margin of safety” and 
contrarianism. 
By creating a valuation range, rather than thinking only of a single point-
estimate for the value of the firm, we have unwittingly allowed ourselves to 
become very skillful at picking appropriate margins of safety. For example, I 
recently looked at the value of a company whose stock was trading for around 
$16 per share. The company had very high operational and financial lever-
age, so my valuation range was also very large—from around $6 per share 
worst case to around $37 per share best case with a most likely value of around  
$25 per share. The margin of safety is 36 percent (=  ($25 −  $16)/ $25). 
While some might think this is a reasonable margin of safety to take a bold, 
concentrated position, I elected instead to take a small, unlevered one because 
to me, the $9 margin of safety for this stock is still not wide enough. The best