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The Skinny on Options: Abstract Applications

Managing by Extrinsic Value Drain

The Skinny on Options: Abstract Applications

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

As tastytraders, we like to manage different strategies in different ways. Specifically, we might target 50% of max profit on some strategies (like a Strangle or Short Put) and more like 15-25% on other strategies (like a Straddle or Calendar Spread). Interestingly, one of the reasons we do this is that the rates of “extrinsic value drain” are not equal across these strategies.

Due to lower Charm values, ATM options cling onto their extrinsic values much longer, and so we like to manage strategies that include ATM options much more aggressively.

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