188  •   The Intelligent Option Investor
such a way that such a loss of capital becomes just a cost of doing business 
that will be made up for in another investment down the line.
For each of the strategies mentioned in this chapter, I present 
a stylized graphic representing the Black-Scholes-Merton model 
(BSM) cone and the option’s range of exposure plus best- and worst-
case valuation scenarios. These are two of the required inputs for an 
intelligent option investing strategy—an intelligently determined valu-
ation range and the mechanically determined BSM forecast range. I will 
also provide a summary of the relative pricing of upside and downside 
exposure vis-à-vis an intelligent valuation range (e.g., “Upside expo-
sure is undervalued”), the steps taken to execute the strategy, and its 
potential risks and return.
After this summary section, I provide textual discussions of tenor se-
lection, strike price selection, portfolio management (i.e., rolling, exercise, 
etc.), and any miscellaneous items of interest to note. Understanding the 
strategies well and knowing how to use the tools at your disposal to tilt 
the balance of risk and reward in your favor are the hallmark and pinnacle 
of intelligent option investing. Intelligent option investors gain exposure 
when the market underestimates the likelihood of a valuation that the in-
vestor believes is a rational outcome. In graphic terms, this means that ei-
ther one or both of the investor’s best- and worst-case valuation scenarios 
lie outside the BSM cone.
Simple (one-option) strategies to gain exposure include
•	Long calls
•	Long puts
Complex (multioption) strategies to gain exposure include
•	Long strangles
•	Long straddles
Jargon introduced in this chapter includes the following:
Roll
Ratio(ing)