Options Trading Strategies

Learn Options Trading Strategies

Stock Options Trading

Options trading is trading assets that offer you the right to purchase or sell a certain investment on a specified date at a specific price. Options are traded on the stock market and can be used primarily for speculation. With stocks, options allow investors to purchase shares before the company has been publicly announced or listed. These options may become worthless if the company does not perform well enough or is declared bankrupt and liquidated. Speculators could also choose to sell a call option that they believe will increase in value within a certain time frame or a put option that they believe will decrease in value within that time frame.

While it is more complicated than stock trading, options may enable you to earn significantly higher returns if the security’s price rises. The security’s price must go above the strike price, and the option expires. Otherwise, you will be locked into an agreement to purchase or sell the security at a certain price. The seller of an option makes money if the buyer purchases an option that does not rise in value and is left without a return.

Free Options Trading Practice Test Online

Option Trading Question and Answers

Investors can make predictions about the direction of the stock market as a whole or specific instruments, such as stocks or bonds, through the use of options trading.

In general, betting on rising prices is done by trading call options, whereas betting on dropping prices is done by trading put options. Investors who purchase options can purchase or sell a minimum of 100 shares of stock or other assets. However, if a deal doesn’t turn a profit, there is no requirement to exercise options. If an investor chooses not to exercise their options, the only money they will lose is the premium they paid to purchase the contracts. Consequently, trading options can be inexpensive to speculate on various asset types.

An option contract known as a binary option is one in which the payout solely depends on the answer to a yes-or-no question. Typically, a binary option concerns whether the price of a certain asset will increase above or decrease below a predetermined amount.

Options trading is the trading of instruments that grant the right to buy or sell a specific security at a specific price and date. A contract known as an option is one that is connected to an underlying asset, such as a stock or other property.

When you want to keep risk to a minimum, options may be better.

When you want to keep risk to a minimum, options may be better.

A contract that grants the buyer the right, but not the responsibility, to purchase or sell a specific currency at a particular exchange rate on or before a set date is known as a currency option (also known as a forex option).

Equity Options 4:00 p.m.
ET ETF & ETN Options 4:00 p.m. ET
Index Options 4:00 p.m. ET
World Currency Options 4:00 p.m. ET

If the underlying stock remains below the strike price, the call option writer will profit. The trader makes money if the price remains above the strike price after writing a put option. The maximum amount that an option writer can benefit from by writing an option is the premium they receive (which represents the option buyer’s cost).

Trading options is not gambling but rather a way to lower your risk if you know how to do it or can follow and learn from a trader like myself.

The “majority of Islamic scholars” believe that margin trading, day trading, options, and futures are forbidden by sharia.

You can learn the subject for free through online resources, such as YouTube, where you can discover hundreds of videos about options trading. However, the best way to learn how to trade options is to observe and learn from professional traders as they go about their daily business.

  • Open an options trading account
    You must first establish your competence before you can begin trading options. Creating an options trading account demands more funds than opening a brokerage account for stock trading. 
  • Decide which options to purchase or sell 
    To review, a call option is a contract that grants you the right, but not the responsibility, to purchase a stock at a certain price within a specified time frame (referred to as the striking price). The right to sell shares at a certain price before the contract’s expiration is provided by a put option, but it does not obligate you.
  • Ascertain the option strike price. An option is only still useful after it has been purchased if the stock price ends the option’s expiration period “in the money.” In other words, either higher or lower than the strike price. (It is above the strike for call options and below the strike for put options.) You should purchase an option with a strike price that corresponds to where you think the stock will be at the end of the option’s term. 
  • Establish the option’s time frame 
    Each options contract has an expiration period, which designates the final day on which the option may be exercised. When you call up an option chain, the options available are your only options.

The maximum loss is limited to the premium paid to purchase the call, and the maximum potential profit is boundless, making it a relatively low-risk strategy. However, as was already mentioned, the likelihood of the trade being extremely profitable is often quite low.

The delta is the theoretical estimate of an option’s potential value change in response to a $1 move UP or DOWN in the underlying security. Delta values range from -1 to +1, with 0 denoting an option in which the premium scarcely fluctuates in response to changes in the underlying stock price.

You can request options trading approval by logging into your account at tdameritrade.com. Make sure My Profile is selected under Client Services. You may view your approval status for trading options under the General page.

An option chain’s columns are arranged in the following order: strike, symbol, last, change, bid, ask, volume, and open interest. The underlying stock has a symbol, and so does each option contract. Different options symbols are used for options contracts on the same stock with various expiration dates.

Although not equally, the price of the option is directly impacted by changes in the stock price. It is more likely for the price of a call option to increase and the price of a put option to decrease as the price of a stock increases.

Options trading dates back to 332 BC when a man by the name of Thales made a fortune by purchasing the rights to purchase olives before a harvest. Options then reappeared during the 1636 tulip mania, when they were heavily purchased to speculate on the skyrocketing price of tulips.

It is undoubtedly feasible to make enough money trading options, but only if you have very little in the way of living expenditures, for example, if you are young and single or have a lot of capital available.

An option contract known as a binary option is one in which the payout solely depends on the answer to a yes-or-no question. Typically, a binary option concerns whether the price of a certain asset will increase above or decrease below a predetermined amount.

Equity Options:
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ET ETF Options:
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ET Index Options:
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The simplest approach to determine which securities offer options is to contact your broker directly, which is especially simple if you use an online broker. Many of these platforms allow you to check up on the options on a stock, if any, using an options chain or series feature.

You are not required to disclose anything on your tax return when you purchase an open-market option. However, it would help if you recorded the gain or loss on Schedule D of your Form 1040 when you sell an option or the stock you obtained by exercising it.

Make sure My Profile is selected under Client Services. You may view your approval status for trading options under the General page. Selecting the linked text will take you to the application and choices agreement form if you need to submit an application for approval. You are now prepared to start trading options once you have received your approval.

That transaction is known as a day trade when you buy and sell (or sell and buy) the same security in a margin account on the same day. Day trading in any security, including options, is subject to regulation.

Implied Volatility (IV) uses an option price to ascertain and compute the future volatility of the option’s underlying stock, which is what the current market is discussing. Implied volatility is one of the six key components in options pricing models.

Investors can actually buy options contracts and go long either calls or puts thanks to level two trades.

Options trading is possible when using a Webull paper trading account. You can buy and sell a specific asset at a predetermined price through these trades. Even when trading with a demo account at Webull, many stock options are available.

Day trading in any security, including options, is subject to the regulation. In general, day trading with cash is not permitted.

Technically, if your broker permits, you can trade with a start capital of just $100. However, if your approach is not thoroughly thought out, it will never be successful.

  • Select “Account.” On the desktop version’s home screen, you’ll see an “Account” link after you log into your Robinhood brokerage account. On a mobile device, tap the head-and-shoulders icon in the lower right corner of the screen to reach the account section. 
  • Select “Settings.” On the desktop version, there are a link labeled settings at the bottom of the Account drop-down menu. You must select the settings option for mobile by clicking the three horizontal bars in the top right corner of your screen. 
  • Determine whether there are any options. Your account must be somewhat active, and you must have shown that you have some trading experience to trade options on Robinhood. If you qualify for options, a link labeled “Options Trading” will appear at the bottom of the menu on the left side of your desktop or mobile device, respectively. Go to this link.
  • Click “Enable.” Click “Enable” if choices are present on your account. You can be questioned on several topics to confirm your day trading experience. If yes, respond to the inquiries to finish your request.

Options traders who want to succeed need to maintain discipline. The discipline includes:

  • Conducting in
  • depth research.
  • Spotting opportunities.
  • Putting up the ideal trade.
  • Developing and adhering to a strategy.
  • Creating goals.
  • Developing an exit strategy.

P&L = [Difference between the price of the premium at purchase and sale] Lot dimensions and lot count. 1500 less all required fees. For long put options that are squared off before expiration, the P&L calculation is the same.

Giving affirmative replies in your application is essential if you want to be authorized for options level 2 on Fidelity. The likelihood of approval is higher for investors with extensive expertise in trading stocks and options. A strong tolerance for risk may also affect your eligibility.

Make sure My Profile is selected under Client Services. You may view your approval status for trading options under the General page. Selecting the linked text will take you to the application and choices agreement form if you need to apply for approval. You are now prepared to start trading options once you have received your approval.

Delta is favorable for call options and negative for put options. This is because a rise in stock price is advantageous for call options but disadvantageous for put options. If the delta is positive, you are long the market; if it is negative, you are short the market.

The trading of binary options is permitted and lawful in the United States, but only on regulated U.S. exchanges. They have designated contract markets, these exchanges (DCMs). Some binary options are traded on DCMs that are regulated by the CFTC or SEC, or they are listed on exchanges that are registered with those agencies.

Binary options traders “gamble” on whether the price of an asset will be above or below a specific threshold at a given moment. Although day traders also try to predict price direction, their gains and losses are influenced by things like entrance price, exit price, trade size, and money management strategies.

Be mindful that you could lose your entire investment and sometimes much more. The full premium you pay as an option holder is at risk.

  • They might offer better cost-effectiveness. 
  • They might carry less risk than stocks.
  • They could result in larger percentage returns. 
  • They provide a variety of tactical options.

Sell to close signifies placing an options order to close a position. The trader will terminate the position by selling the options contract they already hold.

A debit spread, also known as a net debit spread, is an options strategy that entails the concurrent purchase and sale of options of the same class with differing strike prices, resulting in a net cash outflow for the investor, or “debit.” The trading account experiences a net debit as a result.

Options of the type known as “puts” gain value as a stock declines. With a put, the owner of a particular stock can lock in a predetermined selling price, and put sellers agree to purchase the shares at that price.

The two main stock derivatives traded on an exchange are futures and options. These are agreements between two parties for the future exchange of stock assets at a defined price. These contracts attempt to mitigate the market risks associated with stock market trading by fixing the price in advance.

The projected volatility of stock throughout the option’s life is represented by implied volatility. Option premiums respond correctly when expectations alter. The market’s estimate of the direction of the share price and the supply and demand of the underlying options directly impact implied volatility.

The initial option trades that investors are permitted to execute are covered positions, such as covered calls and cash-secured puts. In a covered call, the investor sells a call option in opposition to the stock they already own.

The total number of futures contracts market participants owned at the close of trade is known as open interest. It serves as a gauge for assessing market mood and the tenacity of price patterns.

The current market value of an option contract is known as an option premium. Thus, it is the money the seller (writer) of an option contract receives from the opposite side.

The cost at which an options contract can be executed is the special price. In other words, if an option buyer decides to exercise their right, this price will be the one at which they will buy or sell the underlying asset.

You most frequently refer to the option’s mark price in your position statement. However, this might not be the true “price.” Both buyers and sellers exchange the product known as options. Buyers place a bid at the price they are prepared to pay.

SPX and VIX Options Trading nearly all day long.

You can trade during pre-market and after-hours sessions if you use extended-hours trading. Pre-market will be accessible beginning at 7 AM ET, 2.5 hours earlier. Trading after hours continues for 4 hours, ending at 8 PM ET. That translates to an additional six and a half hours of trade daily.

The disadvantage of options trading is that if you buy puts and calls, your winning percentage will probably be about 50%, which is significantly lower than the winning percentage of a conventional long-term stock investing strategy.

Once earnings are announced, after-hours traders can advance on options. They can sell a security before it drops too low or buys one before its price rises the next morning.

Webull’s option system functions similarly to those of other brokerages. To begin trading options, you must first open an account and receive approval.

The primary distinction between options and stocks is that although options are contracts with other investors that allow you to wager on the direction you believe a stock price will take, stocks represent ownership shares in certain firms.

Stop investors frequently use limit orders to contain losses or safeguard profits if the contract’s price moves against them. You can establish a stop price with a buy-stop limit order higher than the options contract’s current price.

Ponzi scam Golden Option Trading operates in the forex market. The organization offers traders the chance to make between $100 and $500. For you to reach this number, you only need to use 30 minutes to an hour.
Since these claims are unrealistic and no business in the market is capable of making such large profits, they can only be made by scam businesses. Ironically, the corporation asserts that it is secure and that investors need not be concerned.

For novice investors, options trading may sound hazardous or complicated, so they frequently steer clear. However, some fundamental options methods might assist a rookie investor in hedging market risk and protecting their downside.

The Greeks are a collection of formulae you can use to estimate various elements that could have an impact on the cost of an options contract. With that knowledge, you may choose which options to trade and when to do so with more knowledge.

The price in the underlying asset at which investors can decide to execute or sell the contract without suffering a loss is the break-even price in options trading.

Brokerages use the phrase “buy to open” to denote the creation of a fresh (opening) long call or put position in options. A new options investor should buy to open if they wish to purchase a call or put.

A bull and bear spread combination known as a butterfly spread is an options strategy. These neutral techniques have capped gains and losses as well as fixed risks. Butterfly spreads are the most profitable if the underlying asset doesn’t change before the option expires.

An agreement between a buyer and a seller to buy a specific stock at a specific price up until a specified expiration date is known as a call option. The right to exercise the call and buy the stocks belongs to the call’s buyer, not the other way around.

The projected volatility of stock throughout the option’s life is represented by implied volatility. Option premiums respond correctly when expectations alter. The market’s estimate of the direction of the share price and the supply and demand of the underlying options directly impact implied volatility.

Level 3 option approval grants access to trading spreads and the associated margin trading. By having access to margin trading, traders can establish positions whose worth surpasses the value of their entire account, leaving the broker to make up the difference in the event of an excess loss.

The Top 10 Options Trading Books:

  1.  Option Volatility & Pricing: Advanced Trading Strategies and Techniques (Second Edition) by Sheldon Natenberg 
  2. The Options Playbook (Expanded Second Edition) by Brian Overby 
  3. Options as a Strategic Investment (Fifth Edition) by Lawrence G. McMillan 
  4. Trading Options For Dummies by (Fourth Edition) Joe Duarte 
  5. Options Trading: The Bible (4-in-1) by Carl J. Merrill
  6. The Option Trader Handbook (Second Edition): Strategies and Trade Adjustments by George Jabbour and Philip Budwick 
  7. The 3 Best Option Trading Strategies for Beginners: The Ultimate Guide by Freeman Publications
  8. Trading Option Greeks (Second Edition): How Time, Volatility, and Other Pricing Factors Drive Profits by Dan Passarelli 
  9. Understanding Options (Second Edition) by Michael Sincere 
  10. The Annual $25,000 Options Trading Challenge (Second Edition) by Nishant Pant

Selling put and call options that are out of the money is the most effective options strategy. This options strategy has a high probability of profit – you can also use credit spreads to reduce risk. This tactic, when used effectively, has a potential return of about 40% every year.

The “sweet spot” for most options trading techniques is 30 to 90 days. You are rewarded with immediate earnings if your prediction is accurate and the underlying price goes in the direction you predicted. You are not required to wait until the position expires if it doesn’t work out.

Option premiums are always negative. If the premium is negative, it means that the trader is ready to pay you to purchase the option.

There are notable exceptions to the rule that most options on futures expire at the end of the market on the last trading day. Options that expire in the morning are typically written on future contracts with the same expiration date and time.

  •  Identify stocks that are unlikely to trade over the strike price. The underlying stock must not go above the option’s strike price for you to make the most money (premium) from the contracts you create. Writing options on equities that are unlikely to change or that will move in your favor is the ideal strategy here. For instance, you want to write a put option if you think a stock will increase in value or remain stable. You will write a call option if you believe a stock will decline or remain stable. If you are right, the option will expire worthlessly, and the premium paid to you will be yours to keep. 
  • Write options outside the underlying stock’s current market price. The options you write that expire worthlessly are what provide consistent returns. When writing puts, choose a strike price below the stock’s current market price to improve your chances of success. The strike price of a call option should be higher than the underlying stock’s current market value when writing one. 
  • When drafting call options, safeguard yourself if the option’s strike price is surpassed. You may experience losses and the potential duty to deliver shares to the option buyer if the stock reaches or surpasses the strike price. A “covered call” is a way to protect yourself by purchasing an equivalent quantity of shares for each call option you write. You can sell the shares and keep the premium if the price falls. In the event of a price increase, you have two options: hold the stock and exercise the option, or keep the premium and allow the stock to be called away. Writing covered calls on stocks you already own is one tactic. As long as you still possess the stock, you can do this repeatedly as each option you write expires.

The chances of the trade being extremely profitable are normally not great.

Option margin is used as collateral to secure a position, whereas margin is utilized as leverage to improve buying power. When opening a new account, traders must obtain authorization for options trading.

Stocks are a more popular entry point into the stock market than options for novice investors, especially those with a long-term goal, as they are simpler, typically have lower expenses, and allow for a hands-off approach.

A margin account often enables traders to trade stocks and other financial instruments like futures and options (if authorized and accessible with that broker). The margin increases the possibility for profit and loss of the trader’s capital. A margin charge or interest is applied to borrowed money when trading equities.

Most options brokers give trading levels between 1 and 5, where 1 is the lowest and 5 is the highest. A trader with a low trading level will have a limited selection of tactics available, whereas a trader with a high level will have virtually unlimited trading options.

Options Trading Books

Options trading may be appealing to investors since it is relatively low risk. However, options trading is sometimes disregarded by ambitious investors. This is due to the complex nature of options trading and the lack of education from experienced traders. Plenty of excellent books are available to help you become a more intelligent and well-researched investor. These are some of the top options trading books:

  • Options as a Strategic Investment by Lawrence G. McMillan
  • Option Volatility and Pricing by Sheldon Natenberg
  • The Option Trader’s Hedge Fund by Mark Sebastian, Dennis A. Chen
  • Fundamentals of Futures and Options Markets by John Hull
  • Options Trading Crash Course by Frank Richmond
  • The Options Playbook by Brian Overby

Before investing your money, it is important to understand as much as possible about options trading. Whether you’re a beginner or a professional trader, there’s a book on our list that will help you improve your capabilities.

Options Trading vs Swing Trading

Options and swing trading may be profitable if executed properly, but there are key distinctions before selecting which is best for you.

Options trading is a form of speculation that gives you the option to buy a financial asset at a certain date and price. For this privilege, you pay either a flat fee or a small commission. After the option’s expiration date, you may exercise your option to buy the stock at the agreed-upon price. If the stock price at this point is higher than the option price, however, you could lose money.

Swing trading differs in that it involves buying stocks and then selling them a few weeks later. This practice can give you higher returns than options trading without taking too much market risk. The challenge with swing trading is picking which stocks will yield higher returns. 

As a result, it’s important to research which stocks have performed well in the past and how they respond in various market environments. Whether you choose options or swing trading depends on your goals, resources, and risk tolerance.

Binance Options Trading

Binance Options are a simple type of traditional options intended to improve users’ trading experience while decreasing the entrance barrier for retail investors. Market participants trade Binance Options because they provide a low-risk, low-cost trading alternative. They can also be used strategically to benefit from the growth of a Binance product or a specific cryptocurrency. Binance Options, in contrast to traditional options, have a shorter period ranging from 5 minutes to 1-day expirations.

Commodity Trading Options

Commodity options are contracts in which commodities serve as the underliers. It works similarly to stock options in that it gives the owner the right to purchase or sell the underlying commodities at a strike price on a future date. Commodity options recently gained popularity and have become the most popular options among traders. The reason is that they enable investors to participate in the commodity markets without taking too many risks.

It would be best if you carefully consider your strategies before entering into contracts. We recommend you to use and trade with a reputable futures broker who can guide you every step of the way. Trading suggestions also help you take advantage of market information and indicators and alert you of significant changes in price trends.

Level 1 Options Trading

The Level 1 options trades include covered calls and cash-secured puts. These are best for beginners because they require no margin. Most people use Level 1 options trades to generate income. Level 1 is a stock trading screen that provides real-time quotes for the national best bid and offers in securities. These quotes are available on broker websites, financial news, and media portals like Morningstar and Yahoo! Finance. Level 1 options trades are a good way to limit the risk of your portfolio. They allow you to be more aggressive when you are out of the market. This can be useful for traders working on a limited amount of capital.

Traders utilize options signals for various reasons, depending on their long-term objectives and temperament. Options signals are generally utilized by traders looking to protect their profits, reduce risks, and avoid emotions. Options signals are classified into two categories. The call and put options. A call option gives you the right to purchase, while a put option gives you the right to sell. It’s essential to note that these contracts represent the right to purchase, not the responsibility. It’s crucial to remember that options are considered losing assets. The contracts worsen as they approach their expiry date.

Binary Options Trading

Algorithmic Options Trading

Algorithmic options trading is a method of automating your trading using automated trading programs or online trading platforms. It merges computer programming and financial markets to perform deals at precise times. Algorithmic options trading techniques make choices easier and may assist you in making consistent market decisions over time. It is quickly gaining interest to acquire a deeper understanding of the Options trading market. The goal is to provide a trading system that will help you choose the right direction, how much to trade, and what option to trade. Algorithmic options trading helps us understand the markets in general by breaking down its complexities into smaller parts that allow one to make improved trades consistently.

Best Stocks for Options Trading 2022

Calls and puts are used in thousands of stock symbols. However, in the view of options traders, not all stocks and ETFs are created equal. Focusing on volume might help you locate the best stocks for options trading. After all, symbols with a higher transaction volume are more liquid. These are the best stocks for options trading if you’re looking for high-volume in 2022:

  • SPDR S&P 500 ETF (SPY)
  • Apple (AAPL)
  • Tesla (TSLA)
  • Invesco QQQ Trust (QQQ)
  • iShares Russell 2000 (IWM)

When did Options Trading start?

Options trading may be traced back to 332 BC, when a man named Thales purchased the right to purchase olives before harvest, making a fortune. Then, during the 1636 tulip mania, options on tulips were frequently purchased to bet on the growing price of tulips. A market for call and put options was established in London around the end of the seventeenth century. That was the first call, and put options were traded on an exchange. Russel Sage introduced unstandardized and illiquid Over Counter calls and put options trading in the United States in 1872. The establishment of the Chicago Board of Options Exchange (CBOE) and the Options Clearing Corporation (OCC) in 1973 marked the beginning of options trading as we know it today, with the introduction of standardized exchange traded call options. The CBOE also introduced put options in 1977, and since then, options trading has taken on the standardized exchange-traded style that we know now.

Can you make a living trading options?

Anyone may make a living and possibly a fortune by trading options if they have the time, dedication, and strategy. However, it is probably not for you if you don’t have the time or money to put into learning the market and trying it. Many factors can impact a trader’s success, such as your age, experience, knowledge of options trading, and more. Before making any important financial decisions, you should assess your financial position. You should also be willing to spend time learning the tools of the trade and may consider using a software platform to learn basic trading strategies.

Risk Management Options Trading

Risk management may help prevent traders’ accounts from wasting all of their money. Professional traders should develop a management system. This is the only way to ensure their potential risks do not exceed their potential gains. Traders got a large amount of cash in a short period by using good risk management and other methods. The following are some tips for developing good risk management:

  1. Set limits in place and stick to them.
  2. Manage your trades.
  3. Estimating expected profit.
  4. Know the market trend.
  5. Adopt the one percent rule.

Before entering or exiting a trade, traders should always know when they intend to enter or exit. Make your tactical strategy ahead, so you’ll know when you’ve won the fight.

Before you begin trading options, you must realize that having a small account is not a sign of weakness. Rather, it allows the options trader to make a quick profit on each trade without investing too much capital into their portfolio. If you are new to trading options, small account options trading can be an excellent way to get started. Do not be afraid to take advantage of the small account options trading system. It is often the ideal way to trade options for beginners and can be a valuable part of any trading plan.

How to get approved for Options Trading?

You must sign your broker’s options agreement to be approved for options trading. Some pre-conditions must be met before your application can be approved. Your broker will assess if options trading is appropriate for you based on the information you submit and, if so, what forms of options trading may occur in your account. Many investors begin with a level one or two approval and with covered calls, put options, and call options. A lot of brokers need a day or two to upgrade your account. They must also give certain disclosures, such as the Characteristics and Risks of Standardized Options.

Options Trading vs Forex

Forex trading and options trading are both leveraged investments. They allow investors to earn a significant return on a little investment. Both trades also have the potential to lose significant amounts of money. What is the difference between these trades?

Forex trading is a financial market in which individuals may exchange national currencies to benefit. Forex is a term for foreign exchange trading. Currency trading is done on specialized financial markets or exchanges. The market dealers make money by charging a commission for each transaction. The Forex market is the world’s biggest financial security market.

Options trading is an investment strategy that involves purchasing a financial contract; the contract price is based on the price of an underlying asset. Options may be used to hedge or profit from volatility in international markets or as a speculative investment. The options market is one of the world’s most popular and liquid trading markets.

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