296 •   N o t e s
2. One more bit of essential but confusing jargon when investing in 
options is related to exercise. There are actually two styles of exercise; 
one can be exercised at any time before expiration—these are termed 
American style—and the other can only be exercised at expiration—
termed European style. Confusingly, these styles have nothing to do 
about the home country of a given stock or even on what exchange 
they are traded. American-style exercise is normal for all single-stock 
options, whereas European-style exercise is normal for index futures. 
Because this book deals almost solely with single-stock options (i.e., 
options on IBM or GOOG, etc.), I will not make a big deal out of this 
distinction. There is one case related to dividend-paying stocks where 
American-style exercise is beneficial. This is discussed in Appendix C. 
Most times, exercise style is not a terribly important thing.
3. Just like going to Atlantic City, even though the nominal odds for rou-
lette are 50:50, you end up losing money in the long run because you 
have to pay—the house at Atlantic City or the broker on Wall Street—
just to play the game.
Chapter 3
1. We adjusted and annualized the prices of actual option contracts so 
that they would correspond to the probability levels we mentioned 
earlier. It would be almost impossible to find a stock trading at exactly 
$50 and with the option market predicting exactly the range of future 
price that we have shown in the diagrams. This table is provided simply 
to give you an idea of what one might pay for call options of different 
moneyness in the open market.
2. Eighty-four percent because the bottom line marks the price at which 
there is only a 16 percent chance that the stock will go any lower. If 
there is a 16 percent chance that the stock will be lower than $40 in 
one year’s time, this must mean that there is an 84 percent chance 
that the stock will be higher than $40 in one year’s time. We write 
“a little better than 84 percent chance” because you’ll notice that the 
stock price corresponding to the bottom line of the cone is around 
$42—a little higher than the strike price. The $40 mark might corre-
spond to a chance of, let’s say, 13 percent that the stock will be lower;