64  •   The Intelligent Option Investor
although it is indeed possible to make money using these types of strategies, 
because multiple options must be transacted at one time (in order to control 
directional risk), and because in the course of one year many similar trades 
will need to be made, after you pay the transaction costs and assuming that 
you will not be able to consistently win these bets, the returns you stand to 
make using these strategies are low when one accounts for the risk undertaken.
Of course, because this style of option trading benefits brokers by 
allowing them to profit from the bid-ask spread and from a fee on each 
transaction, they tend to encourage clients to trade in this way. What is 
good for the goose is most definitely not good for the gander in the case of 
brokers and investors, so, in general, strategies that will benefit the investor 
relatively more than they benefit the investor’s broker—like the intelligent 
option investing we will discuss in Part III—are greatly preferable.
The two drivers that have the most profound day-to-day impact 
on option prices are the ones we have already discussed: a change in the 
strike–stock price ratio and a change in forward volatility expectations. 
However, over the life of a contract, the most consistent driver of option 
value change is time to expiration. We discuss this factor next.
Changing Time-to-Expiration Assumptions
To see why time to expiration is important to option pricing, let us leave 
our volatility assumptions fixed at 20 percent per year and assume that we 
are buying a call option struck at $60 and expiring in two years. First, let’s 
look at our base diagram—two years to 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