234  •   The Intelligent Option Investor
I provide actual market examples of these strategies in this chapter and will 
point out the effect of both these points in those examples.
Because these strategies are a mix of exposures, it makes sense 
that they are just complex (i.e., multioption) positions. I will discuss the 
following:
1. Long diagonal
2. Short diagonal
Note that the nomenclature I use here is a bit different from what others 
in the market may use. What I term a diagonal in this book is what others 
might call a “spit-strike synthetic stock. ” Since Bernie Madoff ’s infamous 
“split-strike conversion” fraud, this term doesn’t have a very good ring to 
it. For other market participants, a diagonal means simultaneously buying 
and selling options of the same type (i.e calls or puts). In this book, it means 
selling an option of one kind and buying the other kind.
I will also talk about what is known in the options world as overlays. One 
of the most useful things about options is the way that they can be grafted or 
overlain onto an existing common stock position in a way that alters the port-
folio’s overall risk-reward profile. The strategies I will review here are as follows:
1. Covered calls
2. Protective puts
3. Collars
These strategies are popular but often misunderstood ways to alter your 
portfolio’s risk-reward profile.
Coming this far in this book, you already have a good understand-
ing about how options work, so the concepts presented here will not be 
difficult, but I will discuss some nuances that will help you to evaluate 
investment choices and make sound decisions regarding the use of these 
strategies. I will refer to strike selection and tenor selection in the following 
pages, but for these, along with “The Gist” section, I’ll include an “Execu-
tion” section and a “Common Pitfalls” section.
Covered calls are an easy strategy to understand once you understand 
short puts, so I will discuss those first. Protective puts share a lot of simi-
larities with in-the-money (ITM) call options, and I will discuss those next.