70  •   The Intelligent Option Investor
We, of course, know that it is worth less because after the announce-
ment, there is only the smallest sliver of the call’s range of exposure con-
tained within the BSM cone. 
Volatility Rise Fails to Offset Inaccurate Directional Prediction
Let’s say that we are bullish on the Antelope Bicycle Co. (ABC) and, noting 
that the volatility looks “cheap, ” buy call options on the shares. In this case, 
an investor would be expecting to make money on both the stock price and 
the implied volatility increasing—a situation that would indeed create an 
amplification of investor profits.
We buy a 10 percent OTM call on ABC that expires in 60 days when 
the stock is trading for $50.
20
25
30
35
40Stock Price 45
50
55
Antelope Bicycle Corp. (ABC)
60
GREEN
The next morning, while checking our e-mail and stock alerts, we find 
that ABC has been using a metal alloy in its crankshafts that spontaneously 
combusts after a certain number of cranks. This process has led to severe 
burn injuries to some of ABC’s riders, and the possibility of a class-action 
lawsuit is high. The market opens, and ABC’s shares crash by 10 percent. At 
the same time, the volatility on the options skyrocket from 15 to 35 percent