The Intelligent Investor’s Guide to Option Pricing  •  65
It is clear from the large area of the exposure range bordered by the 
BSM probability cone that this option will be fairly expensive.
Let’s now look at an option struck at the same price on the same un-
derlying equity but with only one year until expiration:
Advanced Building Corp. (ABC)
5/18/2012 5/20/2013 249 499 749 999
100
90
80
70
60
50
40
30
20
Date/Day Count
Stock Price
GREEN
Consistent with our expectations, shortening the time to expiration 
to 365 days from 730 days does indeed change the likelihood as calculated 
by the BSM of a call option going above $60 from quite likely to just barely 
likely. Again, this can be confirmed visually by noting the much smaller 
area of the exposure range bounded by the BSM probability cone in the 
case of the one-year option versus the two-year one.
Indeed, even without drawing two diagrams, we can see that the 
chance of this stock rising above $60 decreases the fewer days until expira-
tion simply because the outline of the BSM probability cone cuts diagonal-
ly through the exposure range. As the cone’s outline gets closer to the edge 
of the exposure range and finally falls below it, the perceived chance falls 
to 16 percent and then lower. We would expect, just by virtue of the cone’s 
shape, that options would lose value with the passage of time.
This effect has a special name in the options world—time decay. Time 
decay means that even if neither a stock’s price nor its volatility change very 
much over the duration of an option contract, the value of that option will