Finding Mispriced Options    • 155
can extend indefinitely into the future and that is probably a lot closer to 
representing actual market expectations for the forward volatility (and, by 
extension, the range of future prices for a stock). Once we have this BSM 
cone—with its high-low ranges spelled out for us—we can compare it with 
the best- and worst-case valuations we derived as part of the company 
analysis process.
Let’s look at this process in the next section, where I spell out, step by 
step, how to compare an intelligent valuation range with that implied by 
the option market.
Note: Data used for Oracle graphing example:
Expiration Date Lower Middle Upper
7/25/2013 29.10 31.86 32.75
8/16/2013 22.00 32.00 33.50
9/20/2013 19.00 32.00 35.00
12/20/2013 20.00 32.50 37.00
1/17/2014 19.00 32.50 37.20
1/16/2015 23.00 32.30 42.00
Here I have eyeballed (and sometimes done a quick extrapolation) to try 
to get the price that is closest to the 84-delta, 50-delta, and 16-delta marks, 
respectively. Of course, you could calculate these more carefully and get 
exact numbers, but the point of this is to get a general idea of how likely the 
market thinks a particular future stock price is going to be.
Comparing an Intelligent Valuation  
Range with a BSM Range
The point of this book is to teach you how to be an intelligent option investor 
and not how to do stochastic calculus or how to program a computer to 
calculate the BSM. As such, I’m not going to explain how to mathematically 
derive the BSM cone. Instead, on my website I have an application that will 
allow you to plug in a few numbers and create a graphic representation of a 
BSM cone and carry out the comparison process described in this section. 
The only thing you need to know is what numbers to plug into this web 
application!