The Intelligent Investor’s Guide to Option Pricing  •  73
With this happy news story, our call options went from nearly 
worthless to worth quite a bit—the increase in volatility amplified the 
rising stock price and allowed us to profit from changes to two drivers of 
option pricing.
There is an important follow-up to this happy story that is well worth 
keeping in the back of your mind when you are thinking about investing 
in possible takeover targets using options. That is, our BSM cone widened 
a great deal when the announcement was made because the market be-
lieved that there might be a higher counteroffer or that the deal would fall 
through. If instead the announcement from DuPont was that it had made 
a friendly approach to the ABC board of directors and that its offer had 
already been accepted, uncertainty surrounding the future of ABC would 
fall to zero (i.e., the market would know that barring any antitrust con-
cerns, DuPont would close on this deal when it said it would). In this case, 
implied volatility would simply fall away, and the call option’s value would 
become the intrinsic value (in other words, there is no potential or time 
value left in the option). The situation would look like this:
20
30
40 Stock Price
50
60
70
Agricultural Boron Co. (ABC)
80
GREEN
We would still make $5 worth of intrinsic value on an invested base 
that must have been very small (let’s say $0.50 or so), but were the situation 
to remain uncertain, we would make much more.