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Reducing Size with Long Options

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Tastybite sized accounts are those with $2,500 - $25,000. Since naked positions tend to consumer a significant portion of buying power, these accounts are often limited from trading undefined risk strategies like naked puts, calls, strangles, and straddles.

One-way traders can work around these capital restraints is to buy options to define the risk. Turning a SPY short put into a put spread for example brings the average buying power from $2,500 to $450 while maintaining the same win rate.

Although buying the long options reduces the average P/L, these positions maintain very similar performance correlation and can be applied to all undefined risk trades.

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