154  •   The Intelligent Option Investor
One important thing to note is that although we are using the delta 
figure to get an idea of the probability that the market is assigning to a certain 
stock price outcome, we are also using deltas for options that nearly no one 
ever trades. Most option volume is centered around the 50-delta mark and a 
10 to 20 percentage point band around it (i.e., from 30- to 40-delta to 60- to 
70-delta). It is doubtful to me that these thinly traded options contain much 
real information about market projections of future stock prices.
Another problem with using the deltas to get an idea about market 
projections is that we are limited in the length of time we can project out 
to only the number of strikes available. For this example, I chose an impor-
tant tech company with a very liquid stock, so it has plenty of expirations 
and many strikes available so that we can get a granular look at deltas. 
However, what if we were looking at Mueller Water’s option chain and try-
ing to figure out what the market is saying?
2.5
5
7.5
10
Last
C5.30
C2.80
0.55
C0.00
Change Bid Ask Impl. Bid Vol. Impl. Ask Vol. Delta AUG 16 ´13
2.5
5
7.5
10
NOV 15 ´13
2.5
5
7.5
10
12.5
FEB 21 ´14
DescriptionCall
5.20 5.50 N/A 340.099% 0.9978
0.9978
0.7330
0.1316
0.9347
0.8524
0.6103
0.1516
0.9933
0.9190
0.6070
0.2566
0.1024
142.171%
46.039%
76.652%
N/A
N/A
2.95
0.55
0.10
2.70
0.500.00
5.20 5.50
3.00
0.90
0.20
2.80
0.80
0.10
5.505.10
3.102.85
1.151.05
0.400.30
0.200.05
39.708%
N/A
N/A
36.722%
N/A
38.754%
38.318%
39.127%
36.347%
36.336%
163.282%
75.219%
42.610%
45.215%
122.894%
64.543%
42.697%
44.728%
50.218%
C5.30
C2.80
C0.85
C0.10
C5.30
C1.10
C0.35
C0.10
3.00 +0.15
Here you can see that we only have three expirations: 26, 117, and 
215 days from when these data were taken. In addition, there are hardly 
any strikes that are reasonably close to our crucial 84-delta, 50-delta, and 
16-delta strikes, which means that we have to do a lot of extrapolation to 
try to figure out where the market’s idea of the BSM cone lies.
To get a better picture of what the market is saying, I recommend 
looking at options that are the most heavily traded and assuming that the 
implied volatility on these strikes gives true information about the mar -
ket’s assumptions about the future price range of a stock. Using the im-
plied volatility on heavily traded contracts as the true forward volatility 
expected by the market allows us to create a theoretical BSM cone that we