Appendix A: Choose Your Battles Wisely   • 277
very little money to buy a cheap call. It may happen that the money we 
receive for selling the put actually may be greater than the money we 
pay for the call, so we actually get paid a net fee when we make this 
transaction!
We can sell the put confidently because we know that our worst-case 
valuation is $70 per share; as long as we are confident in our valuation—a 
topic covered in Part II of this book—we need not worry about the price 
declining. We do not mind spending money on the call because we think 
that the chance is very good that at expiration or before the call will be 
worth much, much more than we paid for it.
Truly, the realization that the BSM is pricing options on inefficiently 
priced stocks as if they were efficiently priced is the most profound and 
compelling source of profits for intelligent investors. Furthermore, finding 
grossly mispriced stocks and exploiting the mispricing using options rep-
resents the most compelling method for tilting the risk-reward equation in 
our direction.
The wonderful thing about investing is that it does not require you to 
swing at all the pitches. Individual investors have a great advantage in that 
they may swing at only the pitches they know they can hit. The process of 
intelligent investing is simply one of finding the right pitches, and intel-
ligent option investing simply uses an extremely powerful bat to hit that 
sweet pitch.
Bimodal Outcomes
Some companies are speculative by nature—for instance, a drug company 
doing cancer research. The company has nothing but some intangible as-
sets (the ideas of the scientists working there) and a great deal of costs 
(the salaries going to those scientists, the payments going to patent attor -
neys, and the considerable costs of paying for clinical trials). If the research 
proves fruitful, the company’s value is great—let’s say $500 per share. If 
the clinical trials show low efficacy or dangerous side effects, however, the 
company’s worth goes to virtually nil. What’s more, it may take years before 
it is clear which of these alternatives is true.