The Intelligent Investor’s Guide to Option Pricing  •  51
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Advanced Building Corp. (ABC)
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GREEN
Notice that because this call option is struck at $70, the upside po-
tential we have gained lies completely outside the cone of values the BSM 
sees as reasonably likely. This option, according to the BSM, is something 
like the bet that a seven-year-old might make with another seven-year-
old: “If you can [insert practically impossible action here], I’ll pay you a 
zillion dollars. ” The action is so risky or impossible that in order to entice 
his or her classmate to take the bet, the darer must offer a phenomenal 
return.
Off the playground and into the world of high finance, the way to 
offer someone a phenomenal return is to set the price of a risky asset very 
low. Following this logic, we can guess that the price for this option should 
be very low. In fact, we can quantify this “very low” a bit more by thinking 
about the probabilities surrounding this call option investment.
Remembering back to the contention in Chapter 2 that the lines of 
the BSM cone represent around a 16 percent probability of occurrence, 
we can see that the range of exposure lies outside this, so the chance of 
the stock making it into this range is lower than 16 percent. Let’s say that 
the range of exposure sits at just the 5 percent probability level. What this 
means is that if you can find 20 identical investments like this and invest in 
all of them, only one will pay off (1/20 = 5 percent).