Chapter 26: Buying Options and Treasury Bills 415 
1. Assume that each underlying stock can advance or decline in accordance with its 
volatility over a fixed time period (30, 60, or 90 days). 
2. Estimate the call prices after the advance, or put prices after the decline. 
3. Rank all potential purchases by the highest reward opportunity. 
The user of this strategy need only be interested in those option purchases that 
provide the highest reward opportunity under this ranking method. In the previous 
chapters on option buying, it was mentioned that one might want to look at the 
risk/reward ratios of his potential option purchases in order to have a more conser­
vative list. However, that is not necessary in the Treasury bill/option strategy, since 
the overall risk has already been limited. A ranking of option purchases via the fore­
going criteria will generally give a list of at- or slightly out-of-the-money options. 
These are not necessarily "underpriced" options; although if an option is truly under­
priced, it will have a better chance of ranking higher on the selection list than one 
that is "overpriced." 
A list of potential option purchases that is constructed with criteria similar to 
those outlined above is available from many data services and brokerage firms. The 
strategist who is willing to select his option purchases in this manner will find that he 
does not have to spend a great deal of time on the selection process. The reader 
should note that this type of option purchase ranking completely ignores the outlook 
for the underlying stock. If one would rather make his purchases based on an outlook 
for the underlying stock - preferably a technical outlook - he will be forced to spend 
more time on his selection process. Although this may be appealing to some 
investors, it will probably yield worse results in the long run than the previously 
described unbiased approach to option purchases, unless the strategist is extremely 
adept at stock selection. 
KEEPING THE RISK LEVEL EQUAL 
The second function that the strategist has to perform in this Treasury bill/option 
strategy is to keep his risk level approximately equal at all times. 
Example: An investor starts the strategy with $90,000 in Treasury bills (T-bills) and 
$10,000 in option purchases. After some time has passed, the option purchases may 
have worked out well and perhaps he now has $90,000 in T-bills plus $30,000 worth 
of options, plus interest from the T-bills. Obviously, he no longer has 90% of his 
money in fixed-income securities and 10% in option purchases. The ratio is now 75% 
in T-bills and 25% in option purchases. This is too risky a ratio, and the strategist 
must consequently sell some of his options and buy T-bills with the proceeds. Since 
his total assets are $120,000 currently, he must sell out $18,000 of options to bring his