36 lines
1.2 KiB
Plaintext
36 lines
1.2 KiB
Plaintext
Understanding and Managing Leverage • 179
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In this example, we suffer a realized loss of 96 percent (= $4,800 ÷
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$5,000) if the stock falls 35 percent, so the equation becomes
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= − =− ×Lossleverage 96%
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35% 2.8
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(By convention, I’ll always write the loss leverage as a negative.) This
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equation just means that it takes a drop of 35 percent to realize a loss on
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96 percent of the allocation.
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The profit leverage is simply a ratio of the levered portfolio’s net profit
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to the unlevered portfolio’s net profit at the fair value estimate. For this
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example, we have
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== ×Profitleverage $4,200
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$1,472 3.0
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Let’s do the same exercise for the ATM and OTM options and see
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what fully levered portfolios with each of these options would look like
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from a risk-return perspective. If we bought as many $22-strike options as
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a $5,000 position size would allow (19 contracts in all), our profit and loss
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graph and table would look like this:
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02468 10 12 14 16 18 20 22 24
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Stock Price
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Levered Strategy Overview
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Gain (Loss) on Allocation
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26 28 30 32 34 36 38 40 42 44 46 48 50(20,000)
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-
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40,000
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60,000
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80,000
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100,000
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20,000
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Unrealized Gain
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Unrealized Loss
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Cash Value
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Net Gain (Loss) - Levered
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Realized Loss |