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Chapter 11
Mixing ExposurE
Mixing exposure uses combinations of gaining and accepting exposure, 
employing strategies that we already discussed to create what amounts to 
sort of a short-term synthetic position in a stock (either long or short). 
These strategies, nicknamed “diagonals” can be extremely attractive and 
extremely financially rewarding in cases where stocks are significantly mis-
priced (in which case, exposure to one direction is overvalued, whereas the 
other is extremely undervalued). 
Frequently, using one of these strategies, an investor can enter a po-
sition in a levered out-of-the-money (OTM) option for what, over time, 
becomes zero cost (or can even net a cash inflow) and zero downside expo-
sure. This is possible because the investor uses the sale of one shorter-tenor 
at-the-money (ATM) option to subsidize the purchase of another longer-
tenor OTM one. Once the sold option expires, another can be sold again, 
and whatever profit is realized from that sale goes to further subsidize the 
position.
This strategy works well because of a couple of rules of option pricing 
that we have already discussed:
1. ATM options are more expensive than OTM options of the same 
tenor.
2. Short-tenor options are worth less than long-tenor options, but 
the value per day is higher for the short-tenor options.