Appendix A: Choose Your Battles Wisely   • 281
generally the volumes are light because the people in the option 
markets generally are not willing to wait longer than 60 days for 
their “investment” to work out. Because the time to expiration for 
most option contracts is so short, the difference between the BSM’s 
expected price based on a 5 percent risk-free rate and an expected 
price based on a 10 percent equity return is small, so no one real-
izes that it’s there (as seen on the first diagram).
2. The market makers are generally able to hedge out what little ex-
posure they have to the price appreciation of LEAPS. They don’t 
care about the price of the underlying security, only about the size 
of the bid-ask spread, and they always price the bid-ask spread on 
LEAPS in as advantageous a way as they can. Also, the career of an 
equity option trader on the desk of a broker-dealer can change a 
great deal in a single year. As discussed in Part II, market makers 
are not incentivized in such a way that they would ever care what 
happened over the life of a LEAPS.
Congratulations. After reading Part I of this book and this appendix, 
you have a better understanding of the implications of option investing 
for fundamental investors than most people working on Wall Street. 
There are many more nuances to options that I discuss in Part III of this 
book—especially regarding leverage and the sensitivity of options to input 
changes—but for now, simply understanding how the BSM works puts you 
at a great advantage over other market participants.