34 lines
1.3 KiB
Plaintext
34 lines
1.3 KiB
Plaintext
Gaining Exposure • 193
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On the rare occasion in which we find a company that has a valuation
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range that is far different from the present market price (either tight
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or wide), I would rather commit more capital to the idea, and for me,
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committing more capital to a single idea means using less leverage. In other
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words, I would prefer to buy an ITM call and lever at a reasonable rate (e.g.,
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the −1.8 × /2.6 × level we saw in the Intel example earlier). Graphically, my
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approach would look like this:
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Advanced Building Corp. (ABC)
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110
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100
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90
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80
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70
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60
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50
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40
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30
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20
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5/18/2012 5/20/2013 249 499 749 999
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Date/Day Count
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Stock Price
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GREEN
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ORANGE
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Here I have bought a deep ITM call option LEAPS that gives me lev-
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erage of about −1.5/2.0. I have maximized my tenor and minimized my
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leverage ratio with the ITM call. This structure will allow me to profit as
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long as the stock goes up by the time my option expires, even if the stock
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price does not hit a certain OTM strike price.
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In the more common situation, in which we find a company that is
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probably about fairly valued in most scenarios but that has an outlying
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valuation scenario or two that doesn’t seem to be priced in properly by
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the market, I will commit less capital to the idea but use more leverage.
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Graphically, my approach would look more like this: |