312  •   Index
Market conditions (continued)
time-to-expiration assumptions, 64–67
and types of volatility, 59–60
volatility assumptions, 60–64
Market efficiency, 32–34, 40–43
Market makers, 147, 281
Market risk, 263–265
Matching, 302n1 (Appendix B)
Maximum return, 225
Mergers and acquisitions:
strike prices selection and, 195–196
tenor and, 191–192
Merton, Robert, 8–9
Miletus, 6–7
Mispriced assets, 274–277
Mispriced options, 143–162
deltas of, 151–155
reading option quotes, 144–151
and valuation risk, 266
and valuation vs. BSM range, 155–162
Moneyness of options:
calls, 13–14
puts, 16–17
Morningstar, 132
Most likely (term), 38
Motorola Mobility Systems, 84
Mueller Water, 148–149, 154, 158–160
Multiples-based valuation, 99–100
Mutual funds, 132–133, 136
n
Nominal GDP growth:
owners’ cash profit vs., 104–108
as structural constraint, 104
Normal distribution, 32, 36, 40, 43–45
Notional amount of position, 173
Notional exposure, 173
O
OCC (Options Clearing  
Corporation), 8
OCP (see Owners’ cash profit)
Operating assets, 110
Operating leverage (operational 
leverage):
defined, 282–284
and level of investment leverage, 
197–199
and profitability, 101
Operational details of companies,  
xiii–xiv, 110–111
Option investing:
choices in, 22–24
conditions favoring BSM, 269–273
conditions not favoring BSM, 273–281
flexibility in, 20–28
long-term strategies, 1
misconceptions about, 1
risk in, 268
shortcuts for valuation in, 93–97
stock vs., 21–22
strategies for, 142 (See also specific 
types of strategies)
structural impediments in, 131–139
three-step process, xiv
valuation in, 75
Option pricing, 29–47, 49–74
and base assumptions of BSM, 40–47
market conditions in, 59–74
predicting future stock prices from, 
32–39
and ranges of exposure, 50–56
theory of, 30–32
time vs. intrinsic value in, 56–59
Option pricing models:
base assumptions of, 40–47
history of, 8–9
operational details of companies in, 
xiii–xiv
predicting future stock prices with, 
32–39
ranges of exposure and price 
predictions from, 50–56
(See also Black-Scholes-Merton 
[BSM] model)
Option quotes, 144–151