Mixing Exposure  •  235
Collars are just a combination of the other two overlay strategies and so are 
easiest left to the end.
Long Diagonal
GREEN
RED
Downside: Overvalued
Upside: Undervalued
Execute: Sell an ATM put option (short put) and simultaneously 
buy an OTM call option (long call)
Risk: Sum of put’s strike price and net premium paid for call
Reward: Unlimited
Margin: Amount equal to put’s strike price
The Gist
Other than the blank space in the middle of the diagram and the disparity 
between the lengths of the tenors, the preceding diagram looks very much like 
the risk-return profile diagram for a long stock—accepting downside exposure 
in return for gaining upside exposure. As you can see from the diagram, the 
range of exposure for the short put lies well within the Black-Scholes-Merton 
model (BSM) cone, but the range of exposure for the long call is well outside 
the cone. It is often possible to find short-put–long-call combinations that al-
low for an immediate net credit when setting up this investment.