52  •   The Intelligent Option Investor
Thus, if you thought that you would win $1 for each successful invest-
ment you made, you might only be willing to pay $0.04 to play the game. In 
this case, you would be wagering $0.04 twenty times in the hope of making 
$1 once—paying $0.80 total to net $0.20 for a (probabilistic) 25 percent 
return.
Now how much would you be willing to bet if the perceived chance 
of success was not 1 in 20 but rather 1 in 5? With options, we can increase 
the chance of success simply by altering the range of exposure. Let’s try this 
now by moving the strike price down to $60:
5/18/2012 5/20/2013 249 499 749
20
30
40
50
60
70
80
90
100
999
Advanced Building Corp. (ABC)
Date/Day Count
Stock Price
GREEN
After moving the strike price down, one corner of the range of 
exposure we have gained falls within the BSM probability cone. This option 
will be significantly more expensive than the $70 strike option because the 
perceived probability of the stock moving into this range is material.
If we say that the chance of this call option paying its owner $1 is 
1 in 5 rather than 1 in 20 (the range of exposure is within the 16 percent 
line, so we’re estimating it as a 20 percent chance—1 in 5, in other words), 
we should be willing to pay more to make this investment. If we expected 
to win $1 for every five tries, we should be willing to spend $0.16 per bet. 
Here we would again expect to pay $0.80 in total to net $0.20, and again 
our expected percentage return would be 25 percent.