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training_data/curated/text/4fa04102902bb1ad4b91d47cbc1cd1cc2d30c56c9b7de3e014298447a79930ff.txt

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+Finding Mispriced Options    • 161
+On the upside, we can see that our likely case valuation is $43 per share, 
+whereas the BSM’s most likely value is a bit less than $35—a difference of 
+more than 20 percent. This is the area on the graph labeled “ A. ” The BSM 
+prices options based on the likelihood of the stock hitting a certain price 
+level. The BSM considers the $43 price level to be relatively unlikely, whereas 
+I consider it relatively likely. As such, I believe that options that allow me to 
+gain exposure to the upside potential of Oracle—call options—are underval-
+ued. In keeping with the age-old rule of investing to buy low, I will want to 
+gain exposure to Oracle’s upside by buying low-priced call options.
+On the downside, I notice that there is a fairly large discrepancy 
+between my worst-case valuation ($30) and the lower leg of the BSM cone 
+(approximately $24)—this is the region of the graph labeled “B, ” and the 
+separation between the two values is again (just by chance) about 20 percent. 
+The BSM is pricing options granting exposure to the downside—put 
+options—struck at $24 as if they were fairly likely to occur; something that 
+is fairly likely to occur will be priced expensively by the BSM. My analysis, 
+on the other hand, makes me think that the BSM’s valuation outcome is  
+very unlikely. The discrepancy implies that I believe the put options to be 
+overvalued—the BSM sees a $24 valuation as likely, with expensive options, 
+whereas I see it as unlikely, with nearly valueless options. In this case, we 
+should consider the other half of the age-old investing maxim and sell high.
+In a graphic representation, this strategy might look like this:
+6/21/201612/24/20156/27/201512/29/20147/2/20141/3/20147/7/20131/8/20137/12/2012
+Date
+Oracle (ORCL)
+Price per Share
+60
+Best Case
+Likely Case
+Worst Case
+40
+50
+30
+10
+20
+Downside
+Upside
+-
+$52
+$43
+$30
+GREEN
+RED