170  •   The Intelligent Option Investor
Because investment leverage comes about by changing the amount 
of your own capital that is at risk vis-à-vis the total size of the investment, 
you can imagine that moneyness has a large influence on lambda. Let’s 
take a look at how investment leverage changes for in-the-money (ITM), 
at-the-money (ATM), and out-of-the-money (OTM) options. The stock 
underlying the following options was trading at $31.25 when these data 
were taken, so I’m showing the $29 and $32 strikes as ATM: 
Strike Price K /S Ratio Call Price Delta Lambda
15.00 0.48 17.30 0.91 1.64
20.00 0.64 11.50 0.92 2.50 ITM
21.00 0.67 11.30 0.86 2.38
22.00 0.70 9.60 0.89 2.90
… 
…
…
…
…
29.00 0.93 3.40 0.68 6.25
30.00 0.96 2.74 0.61 6.96 ATM
31.00 0.99 2.16 0.54 7.81
…
…
…
…
…
39.00 1.25 0.18 0.09 15.63
40.00 1.28 0.13 0.06 14.42 OTM
41.00 1.31 0.09 0.05 17.36
When an option is deep ITM, as in the case of the $20-strike call, we 
are making a significant expenditure of our own capital compared with 
the size of the investment. Buying a call option struck at $20, we are—
as explained in the preceding section—effectively borrowing an amount 
equal to the $20 strike price. In addition to this, we are spending $11.50 in 
premium. Of this amount, $11.25 is intrinsic value, and $0.25 is time value. 
We can look at the time value portion as the prepaid interest we discussed 
in the preceding section, and we can even calculate the interest rate im-
plied by this price (this option had 189 days left before expiration, implying 
an annual interest charge of 2.4 percent, for example). This prepaid interest 
can be offset partially or fully by profit realized on the position, but it can 
never be recaptured so must be considered a sunk cost. Time value always 
decays independent of the price changes of the underlying, so although an