The Intelligent Investor’s Guide to Option Pricing  •  71
because of the added uncertainty surrounding product liability claims. 
Here is what the situation looks like now:
20
25
30
35
40Stock Price 45
50
55
Antelope Bicycle Corp. (ABC)
60
GREEN
This time we were right that ABC’s implied volatility looked too cheap, but 
because we were directionally wrong, our correct volatility prediction does us 
no good financially. The stock has fallen heavily, and even with a large increase 
in the implied volatility, our option is likely worth less than it was when we 
bought it. Also, because the option is now further OTM than it originally was, 
time decay is more pronounced. Thus, to the extent that the stock price stays at 
the new $45 level, our option’s value will slip away quickly with each passing day.
Rise in Volatility Amplifies Accurate Directional Prediction
These examples have shown cases in which changes in option pricing 
variables work to the investor’s disadvantage, but it turns out that changes 
can indeed work to an investor’s advantage as well. For instance, let’s say 
that we find a company—Agricultural Boron Co. (ABC)—that we think, 
because of its patented method of producing agricultural boron com-
pounds, is relatively undervalued. We decide to buy 10 percent OTM calls 
on it. Implied volatility is sitting at around 25 percent, but our option is far 
enough OTM that it is not very expensive.