240  •   The Intelligent Option Investor
Notice that there is much less leverage on the long-put side than on 
the long-call side. This is a function of the volatility smile and the abnor -
mally high pricing on the far OTM put side. It turns out that the $20-strike 
puts have an implied volatility of 43.3 percent compared to an ATM im-
plied volatility of 22.0 percent.
Obviously, the lower level of leverage will make closing before expira-
tion less attractive, so it is important to select a put strike price between the 
present market price and your worst-case fair value estimate. In this way, 
if the option does expire when the stock is at that level, you will at least be 
able to realize the profit of the intrinsic value.
With these explanations of the primary mixed-exposure strategies, 
now let’s turn to overlays—where an option position is added to a stock 
position to alter the risk-return characteristics of the investor’s portfolio.
Covered Call
Contingent Upside Exposure
Contingent Downside Exposure
LIGHT GREEN
RED
LIGHT RED
Downside: Overvalued
Upside: Fairly valued or undervalued