280  •   The Intelligent Option Investor
Clearly, there is not much of a difference between the BSM expected 
value (shown by the dotted line) and the dot representing a 10 percent 
upward drift in the stock. However, if we extend this analysis out for three 
years, look what happens:
5/18/2012 5/20/2013 249 499
Date/Day Count
Advanced Building Corp. (ABC)
749 999
20
30
40
50
60
70Stock Price
80
With the longer time horizon, our assumed stock price is significantly 
higher than what the BSM calculates as its expected price. If we take “assumed 
future stock price” to mean the price at which we think there is an equal chance 
that the true stock price will be above or below that mark, we can see that the 
difference, marked by the double-headed arrow in the preceding diagram, is the 
advantage we have over the option market.
3 This advantage again means that 
downside exposure will be overvalued and upside exposure will be undervalued.
How, you may ask, can this discrepancy persist? Shouldn’t someone 
figure out that these options are priced wrong and take advantage of an 
arbitrage opportunity? The two reasons why these types of opportunities 
tend to persist are
1. Most people active in the option market are trading on a very 
short-term basis. Long-term equity anticipated securities 
(LEAPS)—options with tenors of a year or more—do exist, but