31 lines
1.4 KiB
Plaintext
31 lines
1.4 KiB
Plaintext
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 |