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+The Intelligent Investor’s Guide to Option Pricing  •  51
+5/18/2012
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+5/20/2013 249 499 999749
+Advanced Building Corp. (ABC)
+Date/Day Count
+Stock Price
+GREEN
+Notice that because this call option is struck at $70, the upside po-
+tential we have gained lies completely outside the cone of values the BSM 
+sees as reasonably likely. This option, according to the BSM, is something 
+like the bet that a seven-year-old might make with another seven-year-
+old: “If you can [insert practically impossible action here], I’ll pay you a 
+zillion dollars. ” The action is so risky or impossible that in order to entice 
+his or her classmate to take the bet, the darer must offer a phenomenal 
+return.
+Off the playground and into the world of high finance, the way to 
+offer someone a phenomenal return is to set the price of a risky asset very 
+low. Following this logic, we can guess that the price for this option should 
+be very low. In fact, we can quantify this “very low” a bit more by thinking 
+about the probabilities surrounding this call option investment.
+Remembering back to the contention in Chapter 2 that the lines of 
+the BSM cone represent around a 16 percent probability of occurrence, 
+we can see that the range of exposure lies outside this, so the chance of 
+the stock making it into this range is lower than 16 percent. Let’s say that 
+the range of exposure sits at just the 5 percent probability level. What this 
+means is that if you can find 20 identical investments like this and invest in 
+all of them, only one will pay off (1/20 = 5 percent).