How to Trade Options: Strategies, Calculators and Quick-Start Guide

Trading options requires answering these questions: Which direction will a stock move, how far will it go and when will it happen? Here's our options trading guide.

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So, you want to trade options. These financial instruments are complicated, and buying or selling them can yield big profits (or big losses), but they're not impossible to learn about.
Below, we've put together as close to a comprehensive options trading guide as we can manage, with explanations of key concepts, a guide to getting started, an overview of a few strategies, some calculators and more.

What is options trading?

Options are contracts that give their holder the right to buy or sell a stock at a certain price by a certain date. Options trading means buying or selling these contracts, which have prices themselves, to try to make a profit.
For example, say you want to buy a stock that costs $100. If you think the stock is going to double to $200 within the next year, you could pay a small amount — likely less than $2 per contract — to buy an option to buy 100 shares of the stock for $12,000. (Options contracts typically control 100 shares of the underlying stock.) If the stock does go to $200, you could exercise or resell the option and make around $7,800 per contract (minus any trading fees).
Trading stock options can be complex — even more so than stock trading. When you buy a stock, you just decide how many shares you want, and your broker fills the order at the prevailing market price or a limit price you set. Options trading requires an understanding of advanced strategies, often involve large blocks of shares and large amounts of money, and the process for opening an options trading account includes a few more steps than opening a typical investment account.
Brokerage firms
Charles Schwab
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on Charles Schwab's website

E*TRADE
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on E*TRADE's website

Vanguard
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on Vanguard's website

Fidelity
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on Fidelity's website

» Is options trading better than stocks? Learn about the differences between stocks and options
“You can use options to speculate and to gamble, but the reality is ... the best use of options is to protect your downside,” says Randy Frederick, former managing director of trading and derivatives with the Schwab Center for Financial Research."Options are one way to generate income when the markets aren’t going up.”
According to the Options Clearing Corporation, there were 15.3 billion options contracts traded in 2025, up 24.3% compared with the previous year.
Key terms to understand options trading
Option contract
An instrument that lets investors bet on which direction they think a stock price is headed. A contract typically controls 100 shares of the underlying stock.
Call
Contract that gives you the right to buy a stock at a predetermined price before an expiration date.
Put
Contract that gives you the right to sell shares at a stated price before an expiration date.
Strike price
Predetermined price for a stock specified in an option contract.
Premium
A small amount of money paid by the buyer of an option contract to the seller/writer.
Exercise
An option buyer's right to buy the underlying stock (for calls) or sell it (for puts) at the strike price, on or before the expiration date. A buyer does not have to exercise an option if it would be unprofitable for them to do so.
Selling/writing options
Collecting a premium from a buyer, and agreeing to sell them a stock (for calls) or buy a stock from them (for puts) at the strike price on or before the expiration date, if they exercise the option.
American-style contract
Can exercise at any point up to the expiration date. Common for options on stocks and ETFs.
European-style contract
Can only exercise on the expiration date. Common for options on indexes.
Covered call
Selling a call option on a stock you own at least 100 shares of.
Cash-secured put
Selling a put option on a stock when you have at least enough free cash to buy 100 shares of the stock at the option's strike price.

How to get started trading options in four steps


1. Open an options trading account

Before you can start trading options, you’ll have to prove you know what you’re doing. Compared with opening a brokerage account for stock trading, opening an options trading account requires larger amounts of capital. And, given the complexity of predicting multiple moving parts, brokers need to know a bit more about a potential investor before giving them a permission slip to start trading options. Wendy Moyers, a certified financial planner at Chevy Chase Trust in Bethesda, Maryland, says people who know the market well, and have time to watch it, are better suited to options trading than busy, beginner investors.
"It’s definitely more complicated, and you have to be on top of it all throughout the trading day," she says.
🤓 Nerdy Tip
Paper trading allows you to practice advanced trading strategies, like options trading, with fake cash before you risk real money. Here are the brokerages that offer free paper trading accounts.
Brokerage firms screen potential options traders to assess their trading experience, their understanding of the risks and their financial preparedness. These details will be documented in an options trading agreement used to request approval from your prospective broker.
You’ll need to provide your:
  • Investment objectives. This usually includes income, growth, capital preservation or speculation.
  • Trading experience. The broker will want to know your knowledge of investing, how long you’ve been trading stocks or options, how many trades you make per year and the size of your trades.
  • Personal financial information. Have on hand your liquid net worth (or investments easily sold for cash), annual income, total net worth and employment information.
  • The types of options you want to trade. For instance, calls or puts, and whether you want to buy and resell or write (originate) options, "covered" or "naked." The seller or writer of options has an obligation to deliver the underlying stock if the option is exercised. If the writer also owns the underlying stock, the option position is covered. If the option position is left unprotected, it's naked.
Based on your answers, the broker typically assigns you an initial trading level based on the level of risk (typically 1 to 5, with 1 being the lowest risk and 5 being the highest). This is your key to placing certain types of options trades.
Screening should go both ways. The broker you choose to trade options with is your most important investing partner. Finding the broker that offers the tools, research, guidance and support you need is especially important for investors who are new to options trading.
» Ready to get started? See our list of the best brokers for options trading

2. Pick which options to buy or sell

As a refresher, a call option is a contract that gives you the right, but not the obligation, to buy a stock at a predetermined price — called the strike price — within a certain time period. (Learn all about call options.) A put option gives you the right, but not the obligation, to sell shares at a stated price before the contract expires. (Learn all about put options.)
Which direction you expect the underlying stock to move determines what type of options contract you might take on:
If you think the stock price will move up: buy a call option or sell a put option.
If you think the stock price will stay stable: sell a call option or sell a put option.
If you think the stock price will go down: buy a put option or sell a call option.
Frederick says to think of options like an insurance policy: You don’t get car insurance hoping that you crash your car. You get car insurance because no matter how careful you are, sometimes crashes happen.
"You buy options hoping you don’t need them,” he says.
Nerdy Perspective
When I first tried trading options, it was a humbling experience. What I didn't anticipate was how hard it would be to time volatility correctly, and how actively I had to monitor my positions. This isn't meant to deter readers from trading options; I could and should have learned more ahead of time. Rather, just a reminder to always know what you're getting into before putting money on the line. One way to do that is to try out brokers with options trading simulators (paper trading) as a good place to start. Or, if you're like me and would rather be outside enjoying life than glued to a screen monitoring trade positions, go with a diversified portfolio, and leave the derivatives to the pros.
Profile photo of Chris Davis

Chris Davis

NerdWallet Editor


3. Predict the option strike price

When buying an option, it remains valuable only if the stock price closes the option’s expiration period “in the money.” That means either above or below the strike price. (For call options, it’s above the strike; for put options, it’s below the strike.) You’ll want to buy an option with a strike price that reflects where you predict the stock will be during the option’s lifetime.
You can’t choose just any strike price. Option quotes, technically called an option chain or matrix, contain a range of available strike prices. The increments between strike prices are standardized across the industry — for example, $1, $2.50, $5, $10 — and are based on the stock price.
The price you pay for an option, called the premium, has two components: intrinsic value and time value. Intrinsic value is the difference between the strike price and the share price, if the stock price is above the strike. Time value is whatever is left, and factors in how volatile the stock is, the time to expiration and interest rates, among other elements. For example, suppose you have a $100 call option while the stock costs $110. Let’s assume the option’s premium is $15. The intrinsic value is $10 ($110 minus $100), while time value is $5.
This leads us to the final choice you need to make before buying an options contract.

4. Determine the option time frame

Every options contract has an expiration period that indicates the last day you can exercise the option. Here, too, you can’t just pull a date out of thin air. Your choices are limited to the ones offered when you call up an option chain.
There are two styles of options, American and European, which differ depending on when the options contract can be exercised. Holders of an American option can exercise at any point up to the expiry date whereas holders of European options can only exercise on the day of expiry. Since American options offer more flexibility for the option buyer (and more risk for the option seller), they usually cost more than their European counterparts.
Expiration dates can range from days to months to years. Daily and weekly options tend to be the riskiest and are reserved for seasoned option traders. For long-term investors, monthly and yearly expiration dates are preferable. Longer expirations give the stock more time to move and time for your investment thesis to play out. As such, the longer the expiration period, the more expensive the option.
A longer expiration is also useful because the option can retain time value, even if the stock trades below the strike price. An option’s time value decays as expiration approaches, and options buyers don’t want to watch their purchased options decline in value, potentially expiring worthless if the stock finishes below the strike price. If a trade has gone against them, they can usually still sell any time value remaining on the option — and this is more likely if the option contract is longer.

Simple options trading examples

Even simple options trades, like buying puts or buying calls, can be difficult to explain without an example. Below we're walking through a hypothetical call option and put option purchase.

An example of buying a call

Imagine a company called XYZ Corp. with a share price of $100. If you think the price is going to rise to $120 by some future date, you could buy a call option with a strike price less than $120 (ideally a strike price no higher than $120 minus the cost of the option, so that the option remains profitable at $120).
If the stock does indeed rise above the strike price, your option is in the money. That means you can exercise it for a profit, or sell it to another options trader for a profit. If it doesn't, then your option is out-of-the-money, and you can walk away having only lost the premium you paid for the option.

An example of buying a put

Similarly, if you think XYZ's share price is going to dip to $80, you could buy a put option (giving you the right to sell shares) with a strike price above $80 (ideally a strike price no lower than $80 plus the cost of the option, so that the option remains profitable at $80).
If the stock drops below the strike price, your option is in the money and you can profit from it. Otherwise, you'd forfeit the premium and walk away.

Options trading calculators for buying puts and calls

How much money can you make (or lose) buying put and call options? We've built two calculators that can help you estimate your profits or losses from a theoretical option trade.
The first estimates the value of an option contract at a given point in time, based on the Black-Scholes options pricing formula. The second calculates your profit or loss based on your estimated purchase and resale price of an option contract.
In order to estimate your profit or loss from buying and then reselling or exercising an option, you'll need to run the options pricing calculator above twice, and punch the results into the profit/loss calculator below.
Instructions for using NerdWallet's options trading calculators
First, estimate the purchase price of the option contract by running the calculator with the underlying stock's current market price and the current number of months until the option expires. Make sure that "no" is selected in the dropdown menu about estimating the option's price at expiration.
Copy the resulting put or call price (depending on which one you're buying) and paste it into the profit/loss calculator below.
Second, estimate the sale or expiry price of the option contract by running the calculator again with the underlying stock's expected market price at resale time, and the number of months that will be left until expiration when you expect to resell the option. If you want to estimate your profit or loss from exercising the option, you can enter the stock's expected market price at expiration, and select "yes" in the dropdown menu.
You can also adjust the volatility, dividend yield and risk-free rate, if you expect these to change between purchase and sale or expiration.
Copy and paste the resulting put or call price into the profit/loss calculator below.
Third, enter your number of contracts below, and your top income tax bracket, and click "Calculate." This will display your total estimated profit or loss from your option trade, in both dollar and percentage terms, as well as your after-tax profit or loss and your taxes due or deductible losses (for option trades in a taxable brokerage account).

Why trade options?

Typically, people trade options for three reasons: hedging, speculation or profit. Deciding whether to buy or sell — or which options trading strategy to use — largely depends on your objectives.
Hedging. Options can act as a “hedge” or as a sort of insurance to potentially help minimize risk from sudden changes in the market. Purchasing a protective put on a stock you own, for example, can help combat any resulting losses from that stock suddenly dropping. Selling covered calls on a stock you own can help you generate income if the stock is trading sideways.
Speculation. Similar to stocks, options can also be used in a speculative manner. You can place a bet on how a stock will perform over time, then purchase an options contract that reflects that view. The benefit is that you don’t have to own the underlying stock to purchase the contract and, if your bet doesn’t pan out, the maximum amount of money you’ll lose is your initial investment.
Profit. Some traders also use options for more general profit earning. That is, options can play a part in their larger investment strategies. Sellers (or "writers") can make a profit off of the premiums they charge buyers. But they can also suffer a loss, or miss out on gains, because of their obligation to fulfill the contract at the strike price.
» Ready to invest? NerdWallet's best brokers for options

Pros and cons of options trading

"The pros are you could make a little bit extra money on investing in the short term," Moyers says. "The con is you could lose everything, depending on how you structure your options trading."
Once you have learned the strategies and you're willing to put the time in, there are several upsides to options trading, Frederick says. For instance, you can use a covered call to help you generate income in a sideways market.
Frederick says most covered calls are sold out of the money, which generates income immediately. If the stock falls slightly, goes sideways, or rises slightly, the options will expire worthless with no further obligation, he says. If the stock rises and is above the strike price when the options expire, the stock will be called away at a profit in addition to the income gained when the options were sold.
Here are a few other benefits and drawbacks to consider:

Advantages:

  • Cheaper than stocks (sometimes). Investors can get started with options using less capital than may be required for stock trading. That’s because the premium for purchasing a contract (i.e., a bundle of stocks) can be lower than purchasing the same number of shares of a stock upfront. That said, options contracts generally control 100 shares of the underlying stock, so the cheapness argument may not apply for small-balance investors who are accustomed to buying fractional shares of stocks for a few dollars.
  • Low risk, high reward (sometimes). In an ideal world, option holders can magnify their wins by placing smart bets, but contracts can, and sometimes do, expire worthless. Although the loss will be limited to your initial investment, it’s still a net negative. Selling an option — assuming you have enough cash or shares to meet your obligations if the option is exercised — is also a relatively low-risk way to generate income (although it's very high-risk if you don't.
  • Insurance policy. If a holder purchases a contract that inversely reacts to a stock they own, this can help them hedge against potential losses should the underlying stock price drop. Writing options also allow investors to lock in a fixed purchase price (for puts) or selling price (for calls), which can feel more predictable than simply buying and selling at market price. Plus, it generates a bit of income from the premium the writer collects.

Disadvantages:

  • Educational investment. Options trading requires a certain commitment to mastering vocabulary, jargon and options strategies to trade knowledgeably. If you’re new to investing or prefer a hands-off approach, this type of trading may feel overwhelming.
  • High risk for sellers and some additional costs. Writers of contracts can expose themselves to sizable risk — such as theoretically unlimited losses — if they're writing options without enough cash or shares to meet their contract obligations. Meanwhile, holders may also be asked to set up margin accounts to trade, which come with additional fees, such as interest rates.
  • Taxes. When it comes to stocks, you can generally choose how long to hold on to an asset before selling. This allows you to be more strategic about the type of capital gains tax rate your profits will see. With options’ shorter timelines, profits you make will probably be considered short-term gains, which are taxed at a less-favorable rate. With some careful planning, though, you may be able to tap into other tax strategies, such as tax-loss harvesting, to minimize or offset your liability.

5 options trading strategies for beginners

Below is a set of five common options trading maneuvers explained by James Royal, Ph.D., an options trading expert, book author and former NerdWallet writer.

1. The long call

The long call is an options strategy where you buy a call option, or “go long.” This straightforward strategy is a wager that the underlying stock will rise above the strike price by expiration.
Example: XYZ stock trades at $50 per share, and a call at a $50 strike is available for $5 with an expiration in six months. The contract is for 100 shares, which means this call costs $500: the $5 premium x 100. Here’s the payoff profile of one long call contract.
Stock price at expiration
Long call's profit
$80
$2,500
$70
$1,500
$60
$500
$55
$0
$50
-$500
$40
-$500
$30
-$500
$20
-$500
Potential upside/downside: If the call is well-timed, the upside on a long call is theoretically infinite, until the expiration, as long as the stock moves higher. Even if the stock moves the wrong way, traders often can salvage some of the premium by selling the call before expiration. The downside is a complete loss of the premium paid — $500 in this example.
Why use it: If you’re not concerned about losing the entire premium, a long call is a way to wager on a stock rising and to earn much more profit than if you owned the stock directly. It can also be a way to limit the risk of owning the stock directly. For example, some traders might use a long call rather than owning a comparable number of shares of stock because it gives them upside while limiting their downside to just the call's cost — versus the much higher expense of owning the stock — if they worry a stock might fall in the interim.

2. The long put

The long put is similar to the long call, except that you’re wagering on a stock’s decline rather than its rise. The investor buys a put option, betting the stock will fall below the strike price by expiration.
Example: XYZ stock trades at $50 per share, and a put at a $50 strike is available for $5 with an expiration in six months. In total, the put costs $500: the $5 premium x 100 shares. Here’s the payoff profile of one long put contract.
Stock price at expiration
Long put's profit
$80
-$500
$70
-$500
$60
-$500
$50
-$500
$45
$0
$40
$500
$30
$1,500
$20
$2,500
Potential upside/downside: The long put is worth the most when the stock is at $0 per share, so its maximal value is the strike price x 100 x the number of contracts. In this example, that’s $5,000. Even if the stock rises, traders can still sell the put and often save some of the premium, as long as there’s some time to expiration. The maximum downside is a complete loss of the premium, or $500 here.
Why use it: A long put is a way to wager on a stock’s decline, if you can stomach the potential loss of the whole premium. If the stock declines significantly, traders will earn much more by owning puts than they would by short-selling the stock. Some traders might use a long put to limit their potential losses, compared with short-selling, where the risk is uncapped because theoretically a stock’s price could continue rising indefinitely and a stock has no expiration.

3. The short put (or cash-secured put)

The short put is the opposite of the long put, with the investor selling a put, or “going short.” This strategy wagers that the stock will stay flat or rise until the expiration, with the put expiring worthless and the put seller walking away with the whole premium. Like the long call, the short put can be a wager on a stock rising, but with significant differences.
Example: XYZ stock trades at $50 per share, and a put at a $50 strike can be sold for $5 with an expiration in six months. In total, the put is sold for $500: the $5 premium x 100 shares. The payoff profile of one short put is exactly the opposite of the long put.
Stock price at expiration
Short put's profit
$80
$500
$70
$500
$60
$500
$50
$500
$45
$0
$40
-$500
$30
-$1,500
$20
-$2,500
Potential upside/downside: Whereas a long call bets on a significant increase in a stock, a short put is a more modest bet and pays off more modestly. While the long call can return multiples of the original investment, the maximum return for a short put is the premium, or $500, which the seller receives upfront.
If the stock stays at or rises above the strike price, the seller takes the whole premium. If the stock sits below the strike price at expiration, the put seller is forced to buy the stock at the strike, realizing a loss. The maximum downside occurs if the stock falls to $0 per share. In that case, the short put would lose the strike price x 100 x the number of contracts, or $5,000.
Why use it: Investors often use short puts to generate income, selling the premium to other investors who are betting that a stock will fall. Like someone selling insurance, put sellers aim to sell the premium and not get stuck having to pay out. However, investors should sell puts sparingly, because they’re on the hook to buy shares if the stock falls below the strike at expiration. A falling stock can quickly eat up any of the premiums received from selling puts.
Sometimes investors use a short put to bet on a stock’s appreciation, especially since the trade requires no immediate outlay. But the strategy’s upside is capped, unlike a long call, and it retains more substantial downside if the stock falls.
Investors also use short puts to achieve a better buy price on a too-expensive stock, selling puts at a much lower strike price, where they’d like to buy the stock. For example, with XYZ stock at $50, an investor could sell a put with a $40 strike price for $2, then:
  • If the stock dips below the strike at expiration, the put seller is assigned the stock, with the premium offsetting the purchase price. The investor pays a net $38 per share for the stock, or the $40 strike price minus the $2 premium already received.
  • If the stock remains above the strike at expiration, the put seller keeps the cash and can try the strategy again.

4. The covered call

The covered call starts to get fancy because it has two parts. The investor must first own the underlying stock and then sell a call on the stock. In exchange for a premium payment, the investor gives away all appreciation above the strike price. This strategy wagers that the stock will stay flat or go just slightly down until expiration, allowing the call seller to pocket the premium and keep the stock.
If the stock sits below the strike price at expiration, the call seller keeps the stock and can write a new covered call. If the stock rises above the strike, the investor must deliver the shares to the call buyer, selling them at the strike price.
One critical point: For each 100 shares of stock, the investor sells at most one call; otherwise, the investor would be short “naked” calls, with exposure to potentially uncapped losses if the stock rose. Nevertheless, covered calls transform an unattractive options strategy — naked calls — into a safer and still potentially effective one, and it’s a favorite among investors looking for income.
Example: XYZ stock trades at $50 per share, and a call at a $50 strike can be sold for $5 with an expiration in six months. In total, the call is sold for $500: the $5 premium x 100 shares. The investor buys or already owns 100 shares of XYZ.
Stock price at expiration
Call's profit
Stock's profit
Total profit
$80
-$2,500
$3,000
$500
$70
-$1,500
$2,000
$500
$60
-$500
$1,000
$500
$55
$0
$500
$500
$50
$500
$0
$500
$45
$500
-$500
$0
$40
$500
-$1,000
-$500
$30
$500
-$2,000
-$1,500
$20
$500
-$3,000
-$2,500
Potential upside/downside: The maximum upside of the covered call is the premium, or $500, if the stock remains at or just below the strike price at expiration. As the stock rises above the strike price, the call option becomes more costly, offsetting most stock gains and capping upside. Because upside is capped, call sellers might lose a stock profit that they otherwise would have made by not setting up a covered call, but they don’t lose any new capital. Meantime, the potential downside is a total loss of the stock’s value, less the $500 premium, or $4,500.
Why use it: The covered call is a favorite of investors looking to generate income with limited risk while expecting the stock to remain flat or slightly down until the option’s expiration.
Investors can also use a covered call to receive a better sell price for a stock, selling calls at an attractive higher strike price, at which they’d be happy to sell the stock. For example, with XYZ stock at $50, an investor could sell a call with a $60 strike price for $2, then:
  • If the stock rises above the strike at expiration, the call seller must sell the stock at the strike price, with the premium as a bonus. The investor receives a net $62 per share for the stock, or the $60 strike price plus the $2 premium already received.
  • If the stock remains below the strike at expiration, the call seller keeps the cash and can try the strategy again.

5. The married put

Like the covered call, the married put is a little more sophisticated than a basic options trade. It combines a long put with owning the underlying stock, “marrying” the two. For each 100 shares of stock, the investor buys one put. This strategy allows an investor to continue owning a stock for potential appreciation while hedging the position if the stock falls. It works similarly to buying insurance, with an owner paying a premium for protection against a decline in the asset.
Example: XYZ stock trades at $50 per share, and a put at a $50 strike is available for $5 with an expiration in six months. In total, the put costs $500: the $5 premium x 100 shares. The investor already owns 100 shares of XYZ.
Stock price at expiration
Put's profit
Stock's profit
Total profit
$80
-$500
$3,000
$2,500
$70
-$500
$2,000
$1,500
$60
-$500
$1,000
$500
$55
-$500
$500
$0
$50
-$500
$0
-$500
$45
$0
-$500
-$500
$40
$500
-$1,000
-$500
$30
$1,500
-$2,000
-$500
$20
$2,500
-$3,000
-$500
Potential upside/downside: The upside depends on whether the stock goes up or not. If the married put allowed the investor to continue owning a stock that rose, the maximum gain is potentially infinite, minus the premium of the long put. The put pays off if the stock falls, generally matching any declines and offsetting the loss on the stock minus the premium, capping downside at $500. The investor hedges losses and can continue holding the stock for potential appreciation after expiration.
Why use it: It’s a hedge. Investors use a married put if they’re looking for continued stock appreciation or are trying to protect gains they’ve already made while waiting for more.

Naked sales and zero-day options: Not for beginners

In addition to the five strategies explained above by Dr. James Royal, we wanted to mention some strategies that are not appropriate for beginners due to their high risk levels.
Naked option sales occur when someone writes an option without owning enough collateral to meet their obligations if the option is exercised. (This collateral typically means 100 shares of the underlying stock in the case of calls, or enough cash to buy 100 shares of the underlying stock at the strike price in the case of puts).
Selling naked options is extremely risky because if it goes wrong, your losses are potentially unlimited, and your account will be debited a large amount of money upfront. In some cases, unsuccessful naked option sales can push investors' account balances into the negatives, meaning that they owe money to their broker. As a result, many brokers disallow or severely restrict naked option sales.
Zero-day options, also known as 0DTE options, are puts or calls that expire in less than one day, hence the name ("0DTE" stands for "zero days to expiration.")
Trading zero-day options is an extremely risky strategy due to its short-term, everything-or-nothing, gambling-like nature. Options sometimes experience big price swings on their last day of trading, but many simply go to zero.
» Ready to jump in? NerdWallet's best brokers for options
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