24 lines
1.3 KiB
Plaintext
24 lines
1.3 KiB
Plaintext
233
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Chapter 11
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Mixing ExposurE
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Mixing exposure uses combinations of gaining and accepting exposure,
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employing strategies that we already discussed to create what amounts to
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sort of a short-term synthetic position in a stock (either long or short).
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These strategies, nicknamed “diagonals” can be extremely attractive and
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extremely financially rewarding in cases where stocks are significantly mis-
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priced (in which case, exposure to one direction is overvalued, whereas the
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other is extremely undervalued).
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Frequently, using one of these strategies, an investor can enter a po-
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sition in a levered out-of-the-money (OTM) option for what, over time,
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becomes zero cost (or can even net a cash inflow) and zero downside expo-
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sure. This is possible because the investor uses the sale of one shorter-tenor
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at-the-money (ATM) option to subsidize the purchase of another longer-
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tenor OTM one. Once the sold option expires, another can be sold again,
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and whatever profit is realized from that sale goes to further subsidize the
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position.
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This strategy works well because of a couple of rules of option pricing
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that we have already discussed:
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1. ATM options are more expensive than OTM options of the same
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tenor.
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2. Short-tenor options are worth less than long-tenor options, but
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the value per day is higher for the short-tenor options. |