28  •   The Intelligent Option Investor
5/18/2012
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20
40
60
80
100
120
140
160
180
200
5/20/2013 249 499
Date/Day Count
Stock Price
749 999
BE 1
BE 2
RED
RED
There are a few important things to notice. First, notice how much shorter 
the time frame is—we have moved from a 500-day time exposure to a two-week 
exposure. In general, a floor trader has no idea of what the long-term value of a 
stock should be, so he or she tries to protect himself or herself from large moves 
by limiting his or her time exposure as much as possible. Second, look at how 
little price exposure the trader is accepting! He or she is attempting to control his 
or her price risk by making several simultaneous option trades (which, by the 
way, puts the trader in a worse position in terms of breakeven points) that end up 
canceling out most of his or her risk exposure to underlying moves of the stock.
With this position, the trader is speculating that over the next short 
time period, this stock’s market price will remain close to $50 per share; 
what basis the trader has for this belief is beyond me. In my mind, winning 
this sort of bet is no better than going to Atlantic City and betting that the 
marble on the roulette wheel will land on red—completely random and 
with only about a 50 percent chance of success.
3
It is amazing to me that, after reading books, subscribing to newslet-
ters, and listening to TV pundits advocating positions such as this, inves-
tors continue to have any interest in option investing whatsoever!
With the preceding explanation, you have a good foundation in the 
concept of options, their inherent directionality, and their peerless flex-
ibility. We will revisit these themes again in Part III of this book when we 
investigate the specifics of how to set up specific option investments.
However, before we do that, any option investor must have a good 
sense of how options are priced in the open market. We cover the topic of 
option pricing in Chapter 2.