Mixing Exposure  •  237
Here we can see that for a long diagonal using 79-day ATM puts 
and 594-day LEAPS that are OTM by just over 15 percent, we are 
paying a net of only $25 per contract for notional control of 100 
shares. On a per-contract basis, at the following settlement prices, 
we would generate the following profits (or losses, in the case of the 
first row):
Settlement Price ($) Dollar Profit per Contract
Percentage Return on Original 
Investment (%)
65 0 –100
66 100 300
67 200 700
68 300 1,100
69 400 1,500
70 500 1,900
71 600 2,300
72 700 2,700
73 800 3,100
74 900 3,500
75 1,000 3,900
If the stock price moves up very quickly, it might be more beneficial 
to close the position or some portion of the position before expiration. Let’s 
say that my upper-range estimate for this stock was $75. From the preced-
ing table, I can see that my profit per contract if the stock settles at my fair 
value range is $1,000. If there is enough time value on a contract when 
the stock is trading in the upper $60 range to generate a realized profit of 
$1,000, I am likely to take at least some profits at that time rather than wait-
ing for the calls to expire.
In Chapter 9, I discussed portfolio composition and likened the use 
of leverage as a side dish to a main course. This is an excellent side dish that 
can be entered into when we see a chance to supplement the main meal of 
a long stock–ITM call option position with a bit more spice. Let’s now turn 
to its bearish mirror—the short diagonal.