Risk and the Intelligent Option Investor   • 267
Let’s assume that the present market value of the shares is $16 per 
share. This share price assumes a growth in FCFO of 8 percent per year for 
the next 5 years and 5 percent per year in perpetuity after that—roughly  
equal to what we consider our most likely operational performance 
scenario. We see the possibility of faster growth but realize that this faster 
growth is unlikely—the valuation layer associated with this faster growth 
is the $18 to $20 level. We also see the possibility of a slowdown, and the 
valuation layer associated with this worst-case growth rate is the $11 to 
$13 level.
Now let’s assume that because of some market shock, the price of the 
shares falls to the $10 range. At the same time, let’s assume that the likely 
economic scenario, even after the stock price fall, is still the same as before—
most likely around $16 per share; the best case is $20 per share, and the worst 
case is $11 per share. Let’s also say that you can sell a put option, struck at 
$10, for $1 per share—giving you an effective buy price of $9 per share.
In this instance, the valuation risk is indeed small as long as we are 
correct about the relative levels of our valuation layers. Certainly, in this 
type of scenario, it is easier to commit capital to your investment idea than 
it would be, say, to sell puts struck at $16 for $0.75 per share!
Thinking of stock prices in this way, it is clear that when the market 
price of a stock is within a valuation layer that implies unrealistic economic 
assumptions, you will more than likely be able to use a combination of 
stocks and options to tilt the balance of risk and reward in your own 
favor—the very definition of intelligent option investing.
Intelligent Option Investing
In my experience, most stocks are mostly fairly priced most of the time. 
There may be scenarios at one tail or the other that might be inappropriately 
priced by the option market (and, by extension, by the stock market), but 
by and large, it is difficult to find profoundly mispriced assets—an asset 
whose market price is significantly different from its most likely valuation 
layer.
Opportunities tend to be most compelling when the short-term pic-
ture is the most uncertain. Short-term uncertainties make investing boldly