36 lines
1.6 KiB
Plaintext
36 lines
1.6 KiB
Plaintext
Understanding and Managing Leverage • 177
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or $800 per contract, which would allow us to buy six contracts in all for
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$4,800. There is only $0.01 worth of time value (= $15.00 + $8.00 − $22.99)
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on these options because they are so far ITM. This means that we are pay-
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ing $1 per contract worth of time value that is never recoverable, so we
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shall treat it as a realized loss. If we were to graph our potential profit and
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loss profile using this option, assuming that we are analyzing the position
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just as the 540-day options expire, we would get the following
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3:
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Net Gain (Loss) - Levered
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0246810 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(10,000)
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(5,000)
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-
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5,000
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10,000
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Unrealized Gain
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Unrealized Loss
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Cash Value
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Realized Loss
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15,000
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20,000
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The most obvious differences from the diagram of the unlevered po-
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sition are (1) that the net gain/loss line is kinked at the strike price and
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(2) that we will realize a total loss of invested capital—$4,800 in all—if
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Intel’s stock price closes at $15 or below. The kinked line demonstrates the
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meaning of the first point made earlier regarding option-based investment
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leverage—an asymmetrical return profile for profits and losses. Note that
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this kinked line is just the hockey-stick representation of option profit and
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loss at expiration that one sees in every book about options except this
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one. Although I don’t believe that hockey-stick diagrams are terribly useful
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for understanding individual option transactions, at a portfolio level, they
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do represent the effect of leverage very well. This black line represents a |