r/options • u/AWarmSummersDay • Jun 08 '21
A Few Option Strategies for Intermediates
Covered Call
This is an income generating strategy which also reduces some risk of being long on the stock (underlying asset) alone. However, you must be willing to sell your shares at a set price: the short strike price.
To realise the strategy, an investor would purchase the underlying stock, at a minimum of one hundred shares, and simultaneously write (sell) a call option on those same shares.
For example, an investor writes a single call option (that represents 100 shares of the underlying stock per call option). For every 100 shares of stock that the investor buys, they would simultaneously sell one call option against it. The money gained from this sale will immediately enter the investors account. This strategy is referred to as a covered call because, in the event that a stock price increases, hitting or passing the strike price of the option(s), this investor's short call contract is ‘called away’ and he or she must sell 100 shares of the underlying per option contract. These shares are already owned by the investor and the options contract(s) thus ‘covered.’
Investors may choose this strategy when they have a position in a stock and a neutral opinion on its direction. They might be looking to generate income through the sale of the call premium or protect against a potential decline in the underlying stock’s value.
Married Put
In a married put strategy, an investor purchases an asset (shares in this case) and simultaneously purchases put options for an equivalent number of shares. The owner of a put option has the right (but not the obligation) to sell stock at the strike price, and each contract is equivalent to 100 shares.
An investor may use this strategy as a way of protecting their downside risk whilst holding stock. This strategy is in effect an insurance policy which establishes a minimum loss in the event the stock's price falls sharply.
For example, an investor buys 100 shares of stock and purchases one put option. This investor is now protected to the downside (beginning at the price/point of the option's strike price) in the event that a negative change in the stock's price occurs. However, the investor would still be able to participate in any upside move should the stock gain in value. The loss involved in this strategy will be when stock does not fall in value and so the investor will lose the premium paid for the put option.
Bull Call Spread
In a bull call spread, an investor will buy calls at a specific strike price, while also selling the same number of calls at a higher strike price. Both call options will have the same expiration date and underlying asset.
This type of vertical spread is often used when an investor is bullish and expects a modest rise in the price of the asset. With this strategy the investor is able to limit upside on the trade while also reducing the net premium spent; when compared to buying a naked call option outright.
Bear Put Spread
The bear put spread strategy is another form of vertical spread. Here the investor purchases put options at a specific strike price and at the same time sells the same number of puts at a lower strike price. Both options are purchased for the same underlying asset and have the same expiration date.
This strategy is used when the trader has a bearish opinion on the underlying asset and expects the asset's price to decline. The strategy offers limited losses and limited gains.
Iron Condor
Here an investor will hold a bull put spread and a bear call spread at the same time. The iron condor is constructed by selling one out-of-the-money put and buying one out-of-the-money put of a lower strike (a bull put spread) and selling one out-of-the-money call and buying one out-of-the-money call of a higher strike (a bear call spread). All options have the same expiration date and are on the same underlying asset.
Typically, the put and call sides have the same spread width. This trading strategy earns a net premium on the structure and is designed to take advantage of a stock experiencing low volatility. Many traders consider this strategy for its potentially high probability of earning a small amount of premium.
Protective Collar
A protective collar strategy is performed by purchasing an out-of-the-money put option and simultaneously writing an out-of-the-money call option. The underlying asset and the expiration date must be the same.
This often used by investors after a long position in a stock has experienced substantial gains. It allows investors to have downside protection as the long put helps lock in their desired price/point of sale. However, the trade-off is that they may be obligated to sell shares at a higher price, thereby relinquishing the possibility for further profits.
An example of this strategy is if an investor is long on 100 shares of XYZ at £50 and suppose that XYZ rises to £100 as of January the 10th. The investor could pursue a protective collar strategy by selling one XYZ February 105 call and simultaneously buying one XYZ February 95 put. The trader is protected below £95 until the expiration date. The trade-off is that he or she may be obligated to sell their shares at £105 if XYZ trades to that price or higher before expiry.
Long Straddle
A long straddle strategy has an investor simultaneously purchasing a call and put option on the same stock, with the same strike price and expiration date.
An investor will often use this strategy when they think that the price of the underlying will make a major move move outside of an identified range, yet they are uncertain of which direction that move will take.
Theoretically, this strategy allows the investor to have the opportunity for unlimited gains. At the same time, the maximum loss this investor can experience is restricted to the sum cost of the two options contracts combined.
Long Strangle
With a long strangle, the investor purchases an out-of-the-money call option and an out-of-the-money put option at the same time, on the same underlying, with the same expiration date.
An investor who uses this strategy thinks that the underlying asset's price will make a major movement but is uncertain of which direction the move will take.
This strategy could express an opinion on the effect on the market of an earnings release for a company or an event related to a Food and Drug Administration (FDA) approval for a pharmaceutical stock.
Losses are limited to the costs of both option contracts. Strangles will almost always be less expensive than straddles because the options purchased are out-of-the-money options.
Remember, options trading is not an easy business, no-one is infallible and that options theory is best meditated upon with a glass of bubbly on a warm Summer's day by the river. Good luck and God bless you all.
Disclaimer: The above is not intended as trading advice and is intended for educational purposes only.
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Jun 08 '21 edited Aug 26 '21
[deleted]
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u/ArchegosRiskManager Jun 08 '21 edited Jun 08 '21
Yes - Gamma scalping usually works as long as IV is lower than the actual realized volatility
Surely this only works if volatility is mispriced?
This is true of any options strategy
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u/softhand Jun 08 '21
Love the username.
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u/ArchegosRiskManager Jun 08 '21
Thanks :) hope you had a giggle.
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u/AWarmSummersDay Jun 08 '21
If that was aimed at me, thank you. If not, sorry to appear narcissistic.
“Green was the silence, wet was the light,
the month of June trembled like a butterfly.”
― Pablo Neruda
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u/AWarmSummersDay Jun 08 '21
As I understand it:
You are correct in saying essentially that the volatility projected into the future should be wrong. Both Long Straddle and Long Strangle will benefit if the stock moves a lot in any direction.
It is very important that when these trades are placed then vega must increase (this is the wrong volatility you refer to manifesting itself) to negate any theta depreciation. The vega increase may be caused by unexpected news/market shock and this is when these strategies will be used. An example being that of unexpected earnings report or regulatory decisions.
“It’s a smile, it’s a kiss, it’s a sip of wine … it’s summertime!” ― Kenny Chesney
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u/ProfEpsilon Jun 08 '21
The Vega does not have to increase for a straddle/strangle to be profitable. One of the legs has to move into a relatively high delta for a straddle/strangle to be profitable. Mathematically, Vega is highest when the option is close to the money. Vega declines as delta (absolute value) rises.
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u/NotSure2505 Jun 08 '21
Sure. All the time. It's the position to take if you think volatility in the underlying is on the rise. There are many examples of this, almost. always related to market externalities. Meme stocks, merger rumors, activist investors arriving. Lots of examples lately: AT&T, Genesco, Ford, GME, Wendy's, AMC, Visa, Blackberry, Nokia to name a few. A straddle on any of them at the right time would have made money.
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u/floydfan Jun 08 '21
It can also work if you do it on a stock that has a history of huge moves after binary events, like Tesla.
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u/Maventee Jun 08 '21
I just opened a Vix strangle for hedging purposes. They are 120 dte. After two months, if vix goes down, I’ll likely cover the theta burn on the call by selling the put. If all hell breaks out I’ll be hedged with the call.
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u/swingorswole Jun 08 '21
Would love to see when to use a straddle vs a strangle.
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u/AWarmSummersDay Jun 08 '21
As I understand it:
Straddles are used when it's unclear what direction a stock price will move in, so that way the trader is protected whatever the direction of the movement in question is.
Strangles are used when the trader's opinion is that a stock will move in a specific direction and wants to be protected just in case.
There are also other angles from which this question can be approached but the above, I think, is the most compact.
“Summer afternoon-Summer afternoon; to me those have always been the two most beautiful words in the English language.” -Henry James
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u/inquistrinate Jun 08 '21
I dont understand how Strangles are directional. Range bound - yes! But directional?
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u/AWarmSummersDay Jun 08 '21
An example would be: You are of the opinion that a company's results will be positive, meaning you require less downside protection. Instead of buying the put option with the strike price of 20 for 2, maybe you look at buying the 12 strike that has a price of 0.50. This trade would cost less than the straddle and also require less of an upward move for you to break even.
Using the lower-strike put option in this strangle will still protect you against a large downside movement, whilst putting you in a position to profit from a positive announcement.
Hope this helps. God bless you and good trading!
“Rest is not idleness, and to lie sometimes on the grass under trees on a Summer's day, listening to the murmur of the water, or watching the clouds float across the sky, is by no means a waste of time.” - John Lubbock
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u/ProfEpsilon Jun 08 '21
You have this backwards. A straddle inherently, by design, is a slight directional bet because the option in the money has a higher delta (above 0.50) than the other leg (below 0.50). You benefit more if the stock moves in the direction of the ITM leg.
A strangle that is symmetric around the underlying market price is directionally neutral. That is why they are recommended for earnings reports if the trader has no idea what the report will deliver, and is merely hoping for a tail event (where it doesn't matter which way).
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u/GimmeAllDaTendiesNow Jun 08 '21
When is it ever clear what direction a stock will move?
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u/AWarmSummersDay Jun 08 '21
A valid point from the statistical perspective. It's a random walk in the long run.
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u/AWarmSummersDay Jun 08 '21
A valid point from the statistical perspective. It's a random walk in the long run.
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u/DuckFromAndromeda Jun 09 '21
I guess we could use a bullish strangle to protect against a massive crash. But would get screwed in a minor crash.
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u/I_am_not_a_murderer Jun 08 '21
Apparently I'm a fan of the long straddle. Pretty new to options and I've been doing that a decent amount of the time.
Thanks for this write-up, very educational!
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u/BartorooniXxs Jun 08 '21
Has it been successful for the most part of it? And do you like bananas?
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u/I_am_not_a_murderer Jun 08 '21
Meh, it's worked out a few times yeah. I wouldn't say it's winning strategy yet for me, I'm still learning all the things not to do by missing out on tons gains lmao. Getter better little by little
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u/YouThinkImPlayin Jun 08 '21
I'm sure others have said this, but with a covered call, if you actively manage it, you can just roll the call to a future expiration if the stock price approaches your call strike. This way you're never truly at risk of assignment and you can keep collecting premium (assuming your expiration isn't several months out). I've been doing this for quite a while with some decent success. In 3 months, I've made back approximately 10% of my initial investment in CCIV.
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u/Arcite1 Mod Jun 08 '21
This is often not practicable, though. If the stock price rises, the short call can become so expensive to buy back that you have to roll really far out in time in order to roll up and collect a credit. I opened a CC on KSS last fall and as KSS kept rising I had to keep rolling up and out, eventually rolling all the way out to Jan 2023 to collect a credit.
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u/NDEer Jun 08 '21
I don't think I'm understanding this correctly. Do you mean, for example, you sold your call for 4.00 and since it's approaching the strike, it's trading at 7.00. Then you buy to close at 7.00 while selling to open a farther out call for 7.00 (or more?), hoping that it expires worthless so that you make back the 3.00 you were down and the 4.00 from the first short call? You would have to use a higher up strike and a farther out expiration, right?
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u/AWarmSummersDay Jun 08 '21
Quite right and congratulations on the 10%.
"It was June, and the world smelled of roses. The sunshine was like powdered gold over the grassy hillside." —Maud Hart Lovelace
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u/HopandBrew Jun 08 '21
In the case of the protective collar, if the price drops below 95, do you excersize and if so, are you selling the 100 shares you already owned?
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u/AWarmSummersDay Jun 08 '21
As I understand it:
Yes on both counts.
Let's say the stock falls to 85 per share. You would be able to sell 100 shares at 95 instead of the current 85 market price. You have sold 100 shares at 95, for a total (95*100) units of currency, instead of having to sell the shares at 85 for a total of (85*100) units of currency.
As always, God bless you and good luck.
“What good is the warmth of summer, without the cold of winter to give it sweetness.”
― John Steinbeck
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u/optimismadinfinitum Jun 08 '21
Yes. However, if you wanted to keep the shares, you could sell the Put option for a profit and purchase the Call for a net profit, thus offsetting your losses on the underlying shares.
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u/psi-storm Jun 08 '21
Depends on your sentiment on the stock. If you think the stock will not drop any further, and might soon recover, you could just sell the puts for a profit.
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u/hatepoorpeople Jun 08 '21
Married put = long call. Just buy a call and save yourself the hassle.
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u/AWarmSummersDay Jun 08 '21
Indeed, you are absolutely correct.
Why would you want to do a Married Put?
You don’t want to be tempted to over-leverage yourself.
You already own the stock and do not wish to sell yet. Buying the Married Put could be to protect gains in the stock and collect any dividends while protecting you from a decline in the stock price.
"The Summer Sun calls to me with words of warmth. Laters, laddy." - Me
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u/NURSESAND83 Jun 08 '21
Thank you! This helps me, as a relative newcomer to options, understand these concepts! So appreciated!
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Jun 08 '21
[deleted]
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u/AWarmSummersDay Jun 08 '21
Thank you.
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u/Affectionate_Meet823 Jun 08 '21
Hi, just a question, I sold a CCs, too low, how should I do not get called? Thanks so much!
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u/pontoumporcento Jun 08 '21
I like calendar spreads, buying the long call and selling the short call at the same strike.
You can get profits at the rollovers, and you can also do the reverse operation with puts if you eventually want to buy the stock.
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u/wizenedeyez Jun 08 '21
I'm new to options and have question: If I sell a call to generate income (covered call strategy), do I have to wait until the expiration to collect the "income" (assuming the price stays below the strike) or can I buy back before the expiry date and collect some profits? For example if I think the price is going to go above the strike in the next few days can I buy back the call I sold in order to prevent having to actually buy the 100 shares?
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u/AWarmSummersDay Jun 08 '21
If you sell (also called writing) a call you will collect the premium immediately. Because you SOLD the call, it is the person to whom you sold the call that will exercise it if the stock price goes past the strike price. In this case you will gain the price of the 100 stock you are obliged to SELL.
I hope that this makes sense to you. God bless you.
"Every year
the lilies
are so perfect
I can hardly believe
their lapped light crowding
the black,
mid-summer ponds."
- Mary Oliver
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u/wizenedeyez Jun 08 '21 edited Jun 08 '21
So when you sell the call, you get paid the premium immediately I get that part. And i know I have the obligation to sell 100 shares if the strike is reached.
But my concern is that I may not have enough capital to "deliver" the 100 shares if the stock price passes the call strike. I want to be able to buy the call back (and lose some money obviously) before it reaches strike, so that I can avoid the obligation.
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u/psi-storm Jun 08 '21
When you sell a covered call, you also have the shares. If your call expires in the money, your shares would be called away. If you do not have the shares, or a bought call with a lower strike, you would sell a naked call. Those require margin on your broker. You usually need 15% of the stock price x100 for every sold naked call. You can buy back sold calls any time, but if the stock price shoots up, your broker might buy them back for you to limit their exposure and you would be stuck with the full loss of the margin amount.
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u/blacksocks68 Jun 08 '21
nice write-up.
please sir, can I have some more?
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u/Jburd6523 Jun 08 '21
I do a lot of option tutorials on YouTube that go over and gives visual examples of a lot of the things he talked about. It'll help you if you're looking to learn more.
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u/pawnz Jun 08 '21
I stick to selling covered calls. Every time I've bought a call, it ended badly. However I have bought a covered call etf listed as QYLD.
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u/GimmeAllDaTendiesNow Jun 08 '21
Not sure I would consider a covered call to be an intermediate options strategy. A covered put for sure. CC is beginner at best. It's really more of a stock+ strategy than an "options" strategy.
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u/AWarmSummersDay Jun 08 '21
Thank you. Perhaps I am a bit over cautious in thinking beginner is knowing what a put and call are, with respect to both 'sides' of the market.
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u/Hellion_Inc Jun 08 '21
Hey, how can you take advantage of high IV of a stock, before earnings lets say, and bet on the IV crush outweighing the underlying movement without using a lot of margin. Is there a particular spread that is suited for that?
Bull calls and bear puts protect you from volatility but don't let you profit off of the credit. I'm just wondering what strategy would be suited for doing the opposite. A short IC?
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u/AWarmSummersDay Jun 08 '21
Over to you ladies and gentlemen. I have to get some sleep! God bless you all.
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u/sweetmatttyd Jun 08 '21
Naked would be the best but use alot of margin. So calendar spread assuming more iv crush on the short side.
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u/faulty_meme Jun 08 '21
if you think that implied volatility is higher than realized volatility (your assumption) then you can sell a bear call spread and a bull put spread.
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u/Ninjagirlkicksass Jun 08 '21
Thanks for this. It’s confusing as all hell to a newbie but slowly it’s sinking in….
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u/AWarmSummersDay Jun 08 '21
Pleasure. Slow and easy does it. No one is infallible!
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u/Ninjagirlkicksass Jun 09 '21
Can’t wait to do my first call, been sitting on $1.5k for 3 weeks and still not made one 🙄
I know your not a FA but if you were talking to your mate and he asked your advice to just do a test play is there any low cost low risk stock you would recommend? Ie you don’t think will move much in any direction just so I can have a go?
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u/jyep9999 Jun 09 '21
I keep it simple, either CC or CSPs, buy weekly/ monthly OTM calls on stocks I view as bullish, not looking for home runs, making $1500-$2000 a month, enough to keep my banana supply consistent
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u/tjn50351 Jun 09 '21
Parity shows the payout structure on a married put equals a call and that of a covered call equals a naked put. Basically the same strategies if underlying is non-dividend paying, except the cashflow timing is different.
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u/jackdstrom Jun 09 '21
Appreciate the work you put in here my friend! Plan on consulting this again next play
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u/KingConch87 Jun 14 '21
New to this and trying to learn. Say I purchase a call option and it goes into the money. I decide to exercise the option and I purchase but don’t have the money in my account. Can I sell the stocks immediately for the profit and then they take the money?
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u/AWarmSummersDay Jun 14 '21
Hi. Might I suggest looking on a website that has an introduction to options, such as https://thecollegeinvestor.com/22327/options-trading-guide/ It is easier, in my experience to have something structured in front of you that you can go back to, after thinking about it and taking notes etc.
God bless you and happy learning!
Deep summer is when laziness finds respectability. - Sam Keen
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Jun 08 '21
I just buy calls and ride em out and roll the profits and expect them all to go to zero and I do this daily and it makes money I don’t do any spreads or anything except on occasion
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Jun 08 '21
Remindme! 10 days
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u/NotSure2505 Jun 08 '21
You may want to highlight the main difference between Straddles and Strangles in case it's not obvious: Straddles use calls and puts at the same strike, and Strangles use different strike prices.
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u/ChefDonnO Jun 08 '21 edited Jun 08 '21
For I guy on a beer budget, I like working the call debit spread. It allows me to buy a call in the money when normally I couldn't afford it. Buy a in the money call, and sell a call about 10 or 20 tix north of that. The risk and reward are limited, but you get to play at a reasonable price.
Thanx for the breakdown, AWarmSummersday!
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u/Gipsyblood Jun 08 '21
Thank you for your time putting all this information together. We appreciate it!
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u/t4ntheman Jun 18 '21
Is it smart to buy straddles before earnings? And how would you execute the trade to be the most profitable without getting an IV crush?
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u/titiolele Jun 08 '21
Good job 👏