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Appendix A
Choose Your Battles 
WiselY
I discuss specific option investment strategies in great detail in Part III 
of this book. However, after reading Chapters 2 and 3, you should have a 
good understanding of how options are priced, so it is a good time to see 
in what circumstances the Black-Scholes-Merton model (BSM) works best 
and where it works worst. An intelligent investor looks to avoid the condi-
tions where the BSM works best like the plague and seek out the conditions 
where it works worst because those cases offer the best opportunities to tilt 
the risk-reward balance in the investor’s favor.
Jargon introduced in this appendix includes
Front month
Fungible
Idiosyncratic assets
Where the BSM Works Best
The following are the situations in which the BSM works best and are the 
conditions you should most avoid:
1. Short investment time horizons
2. Fungible investment assets