68  •   The Intelligent Option Investor
assumption. Because these are the two biggest determinants, let’s take a 
look at some common examples in which a change in one offsets or exac-
erbates a change in the other. 
Following are a few examples of how interactions between the variables 
sometimes appear. For each of these examples, I am assuming a shorter 
investment time horizon than I usually do because most people who get hurt 
by some adverse combination of variables exacerbate their pain by trading 
short-term contracts, where the effect of time value is particularly severe.
Falling Volatility Offsets Accurate Directional Prediction
Let’s say that we are expecting Advanced Building Corp. to announce that it 
will release a new product and that we believe that this product announcement 
will generate a significant short-term boost in the stock price. We think that 
the $50 stock price could pop up to $55, so we buy some short-dated calls 
struck at $55, figuring that if the price does pop, we can sell the calls struck at 
$55 for a handsome profit. Here’s a diagram of what we are doing:
20
25
30
35
40Stock Price
45
50
55
60
Advanced Building Corp. (ABC)
65
GREEN
As you should be able to tell by this diagram, this call option should 
be pretty cheap—there is a little corner of the call option’s range of expo-
sure within the BSM cone, but not much.