Finding Mispriced Options    • 161
On the upside, we can see that our likely case valuation is $43 per share, 
whereas the BSM’s most likely value is a bit less than $35—a difference of 
more than 20 percent. This is the area on the graph labeled “ A. ” The BSM 
prices options based on the likelihood of the stock hitting a certain price 
level. The BSM considers the $43 price level to be relatively unlikely, whereas 
I consider it relatively likely. As such, I believe that options that allow me to 
gain exposure to the upside potential of Oracle—call options—are underval-
ued. In keeping with the age-old rule of investing to buy low, I will want to 
gain exposure to Oracle’s upside by buying low-priced call options.
On the downside, I notice that there is a fairly large discrepancy 
between my worst-case valuation ($30) and the lower leg of the BSM cone 
(approximately $24)—this is the region of the graph labeled “B, ” and the 
separation between the two values is again (just by chance) about 20 percent. 
The BSM is pricing options granting exposure to the downside—put 
options—struck at $24 as if they were fairly likely to occur; something that 
is fairly likely to occur will be priced expensively by the BSM. My analysis, 
on the other hand, makes me think that the BSM’s valuation outcome is  
very unlikely. The discrepancy implies that I believe the put options to be 
overvalued—the BSM sees a $24 valuation as likely, with expensive options, 
whereas I see it as unlikely, with nearly valueless options. In this case, we 
should consider the other half of the age-old investing maxim and sell high.
In a graphic representation, this strategy might look like this:
6/21/201612/24/20156/27/201512/29/20147/2/20141/3/20147/7/20131/8/20137/12/2012
Date
Oracle (ORCL)
Price per Share
60
Best Case
Likely Case
Worst Case
40
50
30
10
20
Downside
Upside
-
$52
$43
$30
GREEN
RED