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+The Intelligent Investor’s Guide to Option Pricing  •  61
+volatility of 20 percent per year for this stock. Visually, our assumptions 
+yield the following:
+Advanced Building Corp. (ABC)
+5/18/2012 5/20/2013 249 499 749 999
+100
+90
+80
+70
+60
+50
+40
+30
+20
+Date/Day Count
+Stock Price
+GREEN
+A forward volatility of 20 percent per year suggests that after 
+three years, the most likely range for the stock’s price according to the 
+BSM will be around $41 on the low side to around $82 on the high 
+side. Furthermore, we can tell from our investigations in Chapter 2 that 
+this option will be worth something, but probably not much—about the 
+same as or maybe a little more than the one-year, $60 strike call option 
+we saw in Chapter 2.
+4
+Now let’s increase our assumption for volatility over the life of the 
+contract to 40 percent per year. Increasing the volatility means that the 
+BSM probability cone becomes wider at each point. In simple terms, what 
+we are saying is that it is likely for there to be many more large swings in 
+price over the term of the option, so the range of the possible outcomes 
+is wider.
+Here is what the graph looks like if we double our assumptions 
+regarding implied volatility from 20 to 40 percent: