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The Intelligent Option Investor: Applying Value Investing to the World of Options by Erik Kobayashi-Solomon

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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 mispriced (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 position 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 exposure. This is possible because the investor ...

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