32 lines
2.1 KiB
Plaintext
32 lines
2.1 KiB
Plaintext
196 • The Intelligent Option Investor
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the company is taken out. Just keep in mind that the buyout premium is
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30 percent over the last price, not 30 percent over the price at which you
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decided to make your investment. If you buy 20 percent OTM call options
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and the stock decreases by 10 percent before a 30 percent premium buyout
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is announced, you will end up with nothing, as shown in the following
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timeline:
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$12-Strike Options Bought When the Stock Is Trading for $10
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• Stock falls to $9.
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• Buyout is announced at 30 percent above last price—$11.70.
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• 12-strike call owner’s profit = $0.
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However, there is absolutely no assurance that an acguirer will pay some-
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thing for a prospective acguiree. Depending on how keen the acquirer is to get
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its hands on the assets of the target, it may actually allow the target company
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to go bankrupt and then buy its assets at $0.30 on the dollar or whatever. It is
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precisely this uncertainty that makes it unwise to commit too much capital to
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an idea involving a bad company—even if you think it may be taken out.
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Portfolio Management
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I like to think of intelligent option investing as a meal. In our investment
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meal, the underlying instrument—the stock—should, in most cases, form
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the main course.
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People have different ideas about diversification in a securities portfolio
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and about the maximum percentage of a portfolio that should be allocated to
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a specific idea. Clearly, most people are more comfortable allocating a greater
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percentage of their portfolio to higher-confidence ideas, but this is normal-
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ly framed in terms of relative levels (i.e., for some people, a high-conviction
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idea will make up 5 percent of their portfolio and a lower-conviction one
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2.5 percent; for others, a high-conviction idea will make up 20 percent of their
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portfolio and a lower-conviction one 5 percent). Rather than addressing what
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size of investment meal is best to eat, let’s think about the meal’s composition.
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Considering the underlying stock as the main course, I consider the
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leverage as sauces and side dishes. ITM options positions are the main |