Aug
08
2023
broken piggy bank

How to Cash in a Bond

By | Growing Wealth, invest, Investing | Comments Off on How to Cash in a Bond

When you were younger, you may have received savings bonds from your grandparents or a relative. Now that you’re older, the bonds have matured, and you’re finally ready to redeem them to pay for an expense or reinvest the money. However, you may be uncertain about how cashing savings bonds works and what their value is.

Find out about how to cash in a bond and how much bonds are worth.

What Are Savings Bonds?

Savings bonds are long-term, low-risk investments that are a debt instrument of the United States government. Created during World War II, they initially allowed citizens to help fund the U.S. government during the war, and were formerly called Series E War Savings Bonds. (Nowadays, there are different types of bonds, as outlined below.) Since these bonds are guaranteed by the U.S. government, they are generally considered among the safest investments out there.

How Do I Cash In a Savings Bond?

Once you’re ready to redeem a savings-bond, you have two options. If it’s an older paper savings bond, financial institutions, like a bank, can often cash them out. If the bank will not redeem these bonds, they should be able to point the owner towards an institution that can. It can be helpful to call the bank first to make sure it’s able to cash the full amount of a bond’s worth.

Since the interest earned on savings bonds are subject to federal taxes (but not local state taxes), bond owners can either pay taxes every year they have the bond or wait until it’s redeemed and pay all the tax due at the end. After a bond is cashed out, an IRS Form 1099-INT is issued that shows the owner’s taxable gain.

It’s also possible to cash savings bonds through Treasury Retail Securities Services. Bond owners just need to complete FS Form 1522, with a certified signature, and mail the bonds and form to Treasury Retail Securities Services, PO Box 9150, Minneapolis, MN 55480-9150.

Another option is to convert older savings bonds into electronic bonds. Go to TreasuryDirect.gov and link a bank account to cash the existing bonds out. If you have electronic bonds, you can cash them in at the Treasury Direct website. Typically, once redeemed, the bond amount is sent to an owner’s bank account within a few days.

If you have questions about the bond redemption process, you can contact Treasury Direct by filling out an email form on the website, or call them at 844-284-2676.

How To Calculate the Value of Your Savings Bonds

Before figuring out how to redeem savings bonds, many recipients first want to calculate their bonds’ present value. Fortunately, TreasuryDirect.gov helps bond owners to do just that.

On this government website, a bond recipient or purchaser can see how much their bonds are now worth by inputting the current date, indicating whether the bond is Series E, Series EE, or Series I, and noting the issue date and serial number. The site will store this information, so users can view it again at a later time.

It’s worth noting here a few things that the Treasury savings bond calculator cannot do, including:

•   verifying whether not a user actually owns the bonds

•   guaranteeing that a bond is eligible for redemption

•   confirming that the serial number is valid

•   creating a savings bond based on the information provided

Anyone who’s been issued an electronic savings bond can go to TreasuryDirect.gov and click the “Current Holdings” tab to see how much their bonds are worth.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

When To Cash a Savings Bond

When a Series EE bond arrives at maturity (after 20 years), the bond owner can redeem the principal on it or let it collect more interest for 10 years beyond the maturity date. To redeem, an owner must hold the bond for at least a year. It’s helpful to remember that if a savings bond is redeemed within five years of the purchase date, a three-month interest penalty must be paid.

When looking into how to cash in a Series I savings bond, the same penalty of three months’ interest is applied when the bond is redeemed less than five years from its purchase date.

As mentioned, Series E bonds purchased between 1941 to 1980 no longer earn interest. However, it’s still possible to cash out or redeem savings bonds from these years. To cash in Series HH bonds, the bonds must be mailed to Treasury Retail Security Services along with a completed FS Form 1522 and a certified signature.

Finding Lost or Stolen Savings Bonds

Sometimes owners lose printed bonds that were given to them as children. In that case, if an owner no longer possesses the physical copy of the bond, they can go to TreasuryDirect.gov and fill out an FS Form 1048 , which is a “Claim for Lost, Stolen, or Destroyed United States Savings Bonds.” All that’s needed is the issue date, face-value amount, bond number, the owner’s Social Security number (or the purchaser’s Social Security number), and names and addresses noted on the bonds.

On the Treasury site, it’s also possible to designate whether bonds were lost, stolen, or destroyed (and even attach any remaining pieces of the bond along with the form). By listing a bank account and routing number here, the Treasury can deposit the bond’s value into an owner’s account when they’re ready to redeem. It’s key to remember that the form must be certified with a bond owner’s signature. Once completed, the form can be sent to Treasury Retail Securities Services, P.O. Box 9150, Minneapolis, MN 55480-9150.

Since savings bonds earn interest over time, many recipients opt not to redeem their bonds before that initial five-year mark has passed. Bond owners could wait until the bond reaches maturity or, perhaps, check out a savings-bond calculator to determine how much value might accrue on their still maturing bonds. If a bond owner is pleased with its current value, they might then look into how to redeem the savings bonds for cash.

How Do You Buy Savings Bonds?

You can buy electronic Series EE and Series I bonds savings bonds from Treasury Direct. Simply go to the website and set up an account. Then fill out the form, including the amount you want to purchase in bonds, and use your credit card or debit card to buy the bonds. The electronic bonds will be kept in your account at Treasury Direct.

If you prefer paper bonds, you can only purchase paper Series I bonds. You’ll need to use your IRS tax refund to purchase them. When you file your taxes, fill out IRS form 8888 to indicate how much of your refund should go to I bonds.

Investing Your Savings Bonds With SoFi

Many bond owners opt to reinvest money earned on their savings bonds once the bonds are redeemed. If they don’t need the cash right away, the gains on a bond could go towards another type of investment, where that money might continue to grow. All you need is an investment account to reinvest the money earned on your bonds.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Do banks cash savings bonds?

You can cash paper savings bonds at many banks. Not every bank cashes paper bonds, however, so you may want to call the bank first and inquire. If you have electronic savings bonds you cash them in online at TreasuryDirect.gov. Simply log into your account to cash in your electronic bonds.

What is the best way to cash in savings bonds?

If you have electronic savings bonds, the best way to cash them in is at TreasuryDirect.gov. Just log into your online account to complete the transaction. The money can be transferred via direct deposit to your savings or checking account.

How long should you wait to cash in a savings bond?

If possible, it’s best to wait until a bond reaches maturity before cashing it in to take full advantage of the interest that accrues over time. However, if you want to cash in a bond before then, try to wait at least five years before redeeming it so you won’t lose any accrued interest. If you cash in a bond before the five-year mark, you will lose three months’ worth of interest.

Finally, it’s important to know that you have to wait at least 12 months from the time of purchase before cashing in most savings bonds.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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Aug
08
2023
Buy to Open vs Buy to Close

Buy to Open vs Buy to Close

By | Growing Wealth, invest, Investing | Comments Off on Buy to Open vs Buy to Close

Buy to Open and Buy to Close are options orders used by traders. A trader buys to open using calls or puts with the goal of closing the position at a profit after the options price increases.

Investors use a “buy to open” order to initiate a new options contract, betting that the option price will go up. On the other hand, traders who want to exit an existing options contract, thinking the option price will go down, use a “buy to close” order.

What Is Buy to Open?

“Buy to open” is an order type used in options trading, similar to going long on a stock. Generally, you think the price is going to go up, which is a bullish position. That said, in options trading, you can buy to open a call or a put, and buying a put is taking a bearish position. Either way, to buy to open is to enter a new options position.

Buying to open is one way to open an options position. The other is selling to open. When buying to open, the trader uses either calls or puts and bets that the option will increase in value – that could be a bullish or bearish wager depending on the option type used. Buying to open sometimes creates a new option contract in the market, so it can increase open interest.

A trader pays a premium when buying to open. The premium paid, also called a debit, is withdrawn from the trader’s account just as the value of a stock would be when buying shares.

Recommended: Popular Options Trading Terminology to Know

Example of Buy to Open

If a trader has a bullish outlook on XYZ stock they might use a buy to open options strategy. To do that, they’d purchase shares or buy call options. The trader must log in to their brokerage account then go to the order screen. When trading options, the trader has the choice of buying to open or selling to open.

Buying to open can use either calls or puts, and it may create a new options contract in the market Buying to open calls is a bullish bet while buying to open puts is a bearish wager.

Let’s assume the trader is bullish and buys 10 call contracts on XYZ stock with an expiration date of January 2025 at a $100 strike price. The order type is “buy to open” and the trader also enters the option’s symbol along with the number of contracts to purchase. Here is what it might look like:

•   Underlying stock: XYZ

•   Action: Buy to Open

•   Contract quantity: 10

•   Expiration date: January 2025

•   Strike: $100

•   Call/Put: Call

•   Order type: Market

A trader may use a buy to open options contract as a stand-alone trade or to hedge existing stock or options positions.

Profits can be large with buying to open. Going long calls features unlimited upside potential while buying to open puts has a maximum profit when the underlying stock goes all the way to zero. Buying to open options carries the risk that the options will expire worthless, however.

What Does Buy to Close Mean?

Buying to close options exit an existing short options position and can reduce the number of contracts in the market. Buying to close is an offsetting trade that covers a short options position. A buy to close order occurs after a trader writes an option.

Writing options involves collecting the option premium – otherwise known as the net credit – while a buy to close order debits an account. The trader hopes to profit by keeping as much premium as possible between writing the option and buying to close. The process is similar to shorting a stock and then covering.

Example of Buy to Close

Suppose a trader performed an opening position by writing puts on XYZ stock with a current share price of $100. The trader believed the underlying stock price would remain flat or rise, so they put on a neutral to bullish strategy by selling one options contract.

A trader might also sell options when they believe implied volatility will drop. The puts with a strike of $100, expiring in one month, brought in a credit of $5.

The day before expiration, XYZ stock trades near the unchanged mark relative to where it was a month ago; shares are $101. The put contract’s value has dropped sharply since the strike price is below the stock price and because there is so little time left until the delivery date. The trader profits by buying to close at $1 the day before expiration.

The trader sold to open at $5, then bought to close at $1, making a $4 profit.

Differences Between Buy to Open vs Buy to Close

There are important differences between a buy to open vs. buy to close order. Having a firm grasp of the concepts and order type characteristics is important before you begin trading.

Buy to Open Buy to Close
Creates a new options contract Closes an existing options contract
Establishes a long options position Covers an existing short options position
Has high reward potential Seeks to take advantage of time decay
Can be used with calls or puts Can be used with calls or puts

Understanding Buy to Open and Buy to Close

Let’s dive deeper into the techniques and trading strategies for options when executing buy to open vs. buy to closer orders.

Buy to Open

Either calls or puts may be used when constructing a buy to open order. With calls, a trader usually has a bullish outlook on the direction of the underlying stock. Sometimes, however, the trader might be betting on movements in other variables such as volatility or time decay.

Buying to open later-dated calls while selling to open near-term calls, also known as a calendar spread, is a strategy used to benefit from time decay and higher implied volatility. Buying to open can be a stand-alone trade or part of a bigger, more complex strategy.

Buy to Open Put

Buying to open a put options contract is a bearish strategy when done in isolation. A trader commonly uses a protective put strategy when they are long the underlying stock. In that case, buying to open a put is simply designed to protect gains or limit further losses in the underlying stock. This is also known as a hedge.

A speculative trade using puts is when a trader buys to open puts with no other existing position. The trader executes this trade when they believe the stock price will decline. Increases in implied volatility also benefit the holder of puts after a buy to open order is executed.

Buy to Close

A buy to close order completes a short options trade. It can reduce open interest in the options market whereas buying to open can increase open interest. The trader profits when buying back the option at less than the purchase price.

Buying to close occurs after writing an option. When writing (or selling) an option, the trader seeks to take advantage of time decay. That can be a high-risk strategy when done in isolation – without some other hedging position, there could be major losses. Writing calls has unlimited risk while writing puts has risk as the stock can fall all the way to zero (making puts quite valuable).

Shorting Against the Box

Shorting against the box is a strategy in which a trader has both a long and a short position on the same asset. This strategy allows a trader to maintain a position, such as being long a stock.

Tax reasons often drive the desire to layer on a bearish options position with an existing bullish equity position. Selling highly appreciated shares can trigger a large tax bill, so a tax-savings play that also reduces risk is to simply buy to open puts.

Not all brokerage firms allow this type of transaction, however. Also, when done incorrectly or if tax rules change, the IRS could determine that the strategy was effectively a sale of the stock that requires capital gains payments.

Recommended: Paying Taxes on Stocks: Important Information for Investing

Using Buy to Open or Buy to Close

A trader must decide if they want to go long or short options using puts or calls. Buying to open generally seeks to profit from large changes in the underlying stock while selling to open often looks to take advantage of time decay. Traders often place a buy to close order after a sell to open order executes, but they might also wait with the goal of the options expiring worthless.

Another consideration is the risk of a margin call. After writing options contracts, it’s possible that the trader might have to buy to close at a steep loss or even be forced to sell by the broker. The broker could also demand more cash or other assets be deposited to satisfy a margin call.

The Takeaway

Buy to open is a term that describes when an options trader establishes a long position. Buy to close is when a short options position is closed. Understanding the difference between buy to open vs. buy to close is essential to successful options trading. These option orders allow traders to put on positions to fit a number of bullish or bearish viewpoints on a security.

Thinking about investing in options? SoFi’s options trading platform has an intuitive and approachable design that gives investors the ability to trade options either on the mobile app or web platform. Also, they can learn more by accessing the associated library of educational content on options.

Pay low fees when you start options trading with SoFi.

Photo credit: iStock/undefined undefined

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Aug
07
2023
What Is a Nominated Advisor (NOMAD) in an IPO?

What Is a Nominated Advisor (NOMAD) in an IPO?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is a Nominated Advisor (NOMAD) in an IPO?

A nominated advisor (NOMAD) is a type of corporate advisor, such as a boutique finance firm, investment bank, or accounting firm, which helps international companies get listed on a branch of the London Stock Exchange (LSE).

NOMADs have to be approved by the LSE, and they assist smaller, riskier companies gain access to public capital through an initial public offering or IPO on the Alternative Investment Market, or AIM, which is less stringent compared to larger exchanges.

The NOMAD determines whether the company can be listed on AIM, even if the company will not IPO. If the company ends up pursuing an IPO, the NOMAD advises the company through the AIM IPO process and afterward. Here’s how the process works.

Recommended: What Is the IPO Process?

Nominated Advisor (NOMAD), Explained

NOMADs or Nominated Advisors determine whether a company should be admitted on LSE’s AIM. These are typically small- or mid-cap companies that are seeking aggressive growth and want to be listed on a public exchange. Thousands of companies have gone public, thanks to the more flexible listing requirements of AIM. But these companies are also required to work with a NOMAD that will guide it through this process and continue to be a resource once the company is admitted.

A NOMAD focuses on specific sectors in which they are an expert in, and they provide the company with continuous guidance on all the AIM rules. Assuming the company goes public via an IPO and gets listed on AIM, the NOMAD makes sure the company remains compliant with AIM standards, is up-to-date with AIM’s regulatory changes, and provides the company strategic advice depending on the market cycle.

Some NOMAD responsibilities include: providing financial planning advice, determining whether the company is eligible to be listed on AIM, preparing the company to be listed on the public exchange, and acting as the company regulator during its time on the AIM.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How Do Nominated Advisors Work?

The Alternative Investment Market (AIM) is a sub-market of the LSE. It is a network that’s designed to allow certain companies that may not be ready for a larger exchange to gain access to the markets and thus reach their full potential.

In order for a company to gain entry into this market, a NOMAD needs to facilitate the process.

The NOMAD does research to see if a company is viable to join this part of the stock market, which is a market for small to mid-sized growth companies. If the company fits the AIM listing requirements, the NOMAD will work with the company to apply to the exchange. If the company is admitted successfully, the NOMAD continues to oversee the company, much like a regulator, to make sure the company is adhering to all the AIM rules.

Recommended: How to Buy IPO Stock

Qualifications for NOMADs

The NOMAD has to be approved by the London Stock Exchange, and there are certain criteria the advisor must meet in order to hold the title of a NOMAD.

First, a NOMAD is not an individual person, rather it is a firm or company that a company uses to get on the LSE. And according to the AIM rules, the NOMAD has to have practiced in corporate finance for at least two years.

The NOMAD needs to also have experience in facilitating at least three qualified transactions.

Lastly, the NOMAD must employ at least four qualified executives on staff of the firm. To become a NOMAD, the firm needs to complete the Nominated Advisor application form.

Once the NOMAD is appointed for the company, typically a smaller company by market cap, the Nominated Advisor is then responsible for advising and guiding the company on how it can be successfully admitted into AIM. The Nominated Advisor must maintain its eligibility status even after it is approved by the LSE.

The Exchange can conduct interviews with the NOMAD to ensure it maintains understanding of AIM rules for companies seeking admission and maintaining their position in the exchange. This is important to mitigate the potential for risk for investors. IPOs are considered extremely volatile events, and can expose all investors — but particularly inexperienced individual investors — to heavy losses.


💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

The NOMAD Process

The NOMAD is needed once a company decides it wants to be listed on the AIM. Next, the NOMAD is appointed to assist the company through the application, admissions processes and ongoing guidance while listed on the exchange. After the company is finally listed on the AIM, the NOMAD offers consistent oversight of the company to ensure its listing.

Once admitted to the exchange, if the company the NOMAD oversees does not continue to meet AIM requirements, the NOMAD may choose to resign from their position or report the company, otherwise, the NOMAD could be subject to a fine for not upholding AIM expectations. In such a scenario, the company’s shares would be suspended and eventually de-listed if a NOMAD replacement is not found within a 30-day period.

What Is the Importance of a NOMAD During the IPO Process?

The Alternative Investment Market was launched in 1995, and its success can be partly attributed to the role that NOMADs play. When a company applies to be admitted into AIM, the NOMAD facilitates the process and is integral to the company getting listed on the exchange. The company that wants to be listed in AIM must appoint a NOMAD, a trusted and experienced representative that ideally may lead the company to go public.

This critical process requires the NOMAD to make sure the company is following the AIM’s rules and regulations, which is why the LSE had strict criteria for becoming a NOMAD. The Exchange wants to ensure the company seeking admission to AIM meets the criteria and has the potential to be a long-term success, and to keep the integrity of the market and protect shareholders who may invest in companies listed on the exchange.

The Takeaway

For some smaller, perhaps riskier, companies hoping to gain access to market capital, a NOMAD or nominated advisor, is required to become listed on the Alternative Investment Market (AIM), a submarket of the London Stock Exchange (LSE).

This route may offer an easier path to an initial public offering. The AIM is considered less rigorous in its requirements, compared with some larger exchanges, and they will consider listing small companies seeking aggressive growth as long as those entities are paired with a NOMAD.

The NOMAD is typically a corporate finance advisor that thoroughly reviews the AIM applicant in terms of its business model, track record, executive team, financials, and so forth. Assuming the company satisfies all requirements, the NOMAD agrees to assist the company in its application to the AIM, and to continue to provide oversight afterward.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is a NOMAD company?

A NOMAD company is a financial entity that has been approved by the London Stock Exchange (LSE) to help eligible companies who are interested in being admitted into Alternative Investment Market (AIM), which is part of the LSE.

What do NOMADs do during an IPO?

As corporate nominated advisors, NOMADs provide advice to a company that wants to go public on AIM. The NOMAD has market sector expertise and does their due diligence to make sure a company meets the eligibility requirements to be listed on the exchange.

What is a NOMAD investment?

NOMADs is integral in the pre-IPO process because they provide guidance for being admitted into the exchange along with ongoing oversight once the company has successfully been accepted into the public exchange.

Photo credit: iStock/ridvan_celik

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Aug
04
2023

What Are Options on Futures & How Do They Work?

By | Growing Wealth, invest, Investing | Comments Off on What Are Options on Futures & How Do They Work?

Futures options can be a low-risk method to getting exposure to the futures market. Trading options on futures works like trading options on individual equities but rather than the underlying asset being a stock, it’s a futures contract.

In addition, there are other key differences for investors to bear in mind, including how futures are traded.

It is important to be aware of these differences, and familiarize yourself with key terms and understand how futures options work for buyers and sellers.

What Are Options on Futures?

Options on futures allow you to make bets on futures contracts with lower capital requirements than the futures themselves, which is in turn lower than the capital required to trade in the assets underlying the futures. Instead, puts and calls are used.

Recommended: How to Trade Options

Key Terms to Know About Futures Options

Experienced options traders might be familiar with many of the primary terms of options on futures. New traders should understand these basics. Let’s investigate some key terms.

Premium

Premium is the amount you pay for calls and puts when you buy these instruments. Options sellers collect the premium at the initiation of a trade. The amount of premium paid or collected is determined by a variety of factors including the size of the underlying futures contract.

The lower the premium, the less the market believes a futures contract will be in-the-money by expiration.

Contract Months

Unlike stocks, options contracts have expiration dates. When trading options on futures there are two expiration dates to keep in mind: the expiration date of the futures option and the expiration date of the futures contract.

Options on futures pricing usually expire near the end of the month before physical delivery of the futures contract takes place.

In general, the longer the time until expiration, the more expensive the options will be.

Strike Price

The strike price on futures options is the price at which you can buy or sell the underlying futures contract.

For example, when you buy a call option on a futures contract with a strike price of $10, you have the right, but not the obligation, to buy the underlying futures contract at $10 on or before expiration for an American-style option.

Many futures options contracts are European-style, however, which means they can only be exercised on the expiration date and not before.

Most options are not exercised, rather they are closed in the market before expiration.

How Do Futures Options Work?

Futures options work very much like options on equity securities, but there are differences.

Let’s outline some of the specifics so you understand the mechanics of trading options on futures contracts.

Calls and Puts: Rights for Buyers

The buyer of a call option on a futures contract has the right to buy the underlying futures contract at a predetermined price and time. The buyer of a put option on a futures contract has the right to sell the underlying futures contract at a predetermined price and time.

Recommended: 10 Options Trading Strategies

Calls and Puts: Obligations for Sellers

The seller, or writer, of a call option on a futures contract is obligated to sell the underlying futures contract at a predetermined price and time. The seller of a put option on a futures contract has the obligation to buy the underlying futures contract at a predetermined price and time.

Be aware that most options on futures are cash-settled. That means the price difference is paid or received — there is no physical delivery of the futures contracts or assets with cash-settled options.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

Pros and Cons of Options on Futures

Options and futures have benefits and drawbacks. Let’s clarify some of those.

Pros

A primary advantage of options on futures is that you can trade with high leverage. This means you put down a small amount of capital to access a large notional value of an asset. Small swings in price can lead to large moves in your account’s equity.

Another upshot is the options market on futures is open more hours than the stock market. You can trade overnight in many markets.

When you purchase options, the most you can lose is the premium you pay. When you sell options, you know what your max gain is: the premium received. For this reason, options on futures can be used to tailor an investment strategy based on your risk and reward objectives.

Cons

There are downsides to consider. For example, when you trade with high leverage, you expose yourself to a large loss potential.

You must also be aware of differences in options specifics in futures trading. For example, a $1 move on a futures index option could have a much greater impact on your account’s equity versus a $1 move on an equity option.

Finally, futures contracts are more complex than equity options. Each futures contract has unique specifications. It can be tough to understand all the futures contracts available to trade.

American-Style vs European-Style

American-Style

 European-Style
The holder can exercise before expiration The holder cannot exercise before expiration
Most options on equities are American-style Futures contracts often have European-style options
Quarterly options on S&P 500 futures contracts, Eurodollar options, and Treasury options Most CME Group options on futures are European style

There is a third less common option, the Bermudan option. Bermudan options lie somewhere between American and European options — hence the name. The biggest difference is Bermudan options can be exercised on specified dates prior to expiration. These dates are laid out in the options contract.

Option Value vs Underlying Futures Value

The price impact on a futures option works just as options on stocks. Calls benefit from higher prices on the underlying asset while puts rise when the underlying price drops, all else equal.

Futures Price Change

 Call Price Change

 Put Price Change
Increase Increase Decrease
Decrease Decrease Increase

In-the-Money vs At-the-Money vs Out-of-the-Money

It is important to understand the moneyness of options when trading. Moneyness is simply the difference between an option’s strike price and the underlying asset’s price. Knowing the moneyness of an option can help you decide whether to exercise.

In-the-money options have intrinsic value and are priced more expensively than out-of-the-money options. Out-of-the-money options are often cheaper and can be accessed with a smaller amount of capital.

In-the-Money

At-the-Money

 Out-of-the-Money
For calls, when the underlying asset’s price is above the strike For calls, when the underlying asset’s price at the strike For calls, when the underlying asset’s price is below the strike
For puts, when the underlying asset’s price is below the strike For puts, when the underlying asset’s price is at the strike For puts, when the underlying asset’s price is above the strike

Examples of Futures Options

You can find examples of futures options on many types of futures contracts. Stock market indexes and commodities are two markets that have options available to trade. Interest rate and foreign exchange markets also have futures markets with options. You can construct options strategies in these markets including defined-risk plays such as a collar in options.

The Takeaway

Options on futures allow investors to make bets on futures contracts with lower capital requirements than the futures themselves, which is also lower than the capital they’d need to trade the underlying asset. Instead, puts and calls are used.

So in that case, an option on a futures contract gives the holder the right, but not the obligation, to buy or sell a futures contract at a predetermined price usually on a pre-specified expiration date. Trading options and futures is a low risk way to access the futures market.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

With SoFi, user-friendly options trading is finally here.

FAQ

Can you trade options on futures?

Yes, you will need to open an account with a broker that offers this type of trading. There might be high capital requirements to meet in order to open an option on a futures trading account.

How do you buy futures?

Futures contracts can be bought through a futures trading brokerage company or directly at an exchange. Most retail traders go through a brokerage company. Not all brokerage firms offer these products, however.

What is the difference between futures and options?

Futures obligate the buyer to purchase an asset and a seller to deliver that asset unless the option buyer’s position is closed by the expiration date.

Options give the buyer the right, but not the obligation, to buy or sell an asset at a specified price during the life of a contract, while potentially creating an obligation for the seller (of the option) to buy or sell the underlying asset if the buyer exercises that option.

Photo credit: iStock/Drs Producoes

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Aug
04
2023
Do IPOs Offer Dividends?

Do IPOs Offer Dividends?

By | Growing Wealth, invest, Investing | Comments Off on Do IPOs Offer Dividends?

Some companies may have the financial means to make regular dividend payments before being listed on a public exchange, i.e. prior to their initial public offering, or IPO. A company may choose to offer this type of pre-IPO dividend in order to garner interest in the IPO if it anticipates a high valuation.

Dividends represent a percentage of a company’s profits that it pays out to shareholders. Dividends most commonly come from established companies, but it’s possible to collect an IPO dividend from up-and-coming companies as well.

Do IPOs Offer Dividends?

Most companies that are going public are doing so to raise capital and don’t necessarily have money to spare that they can pay out as special dividends or stock dividends.

However, some companies involved in the IPO process can pay dividends on a regular basis before and/or after going public, or they may pay a special one-time dividend. In either case, the dividends could serve as a useful incentive to attract and retain investors.

In general dividend-paying stocks and IPOs pay different roles in an investors’ portfolio. The former represents a steady source of income, while the latter holds the potential for capital appreciation through strategies such as the Dogs of the Dow, a strategy in which investors purchase the Dow Jones Industrial Average stocks with the highest dividend yield.

A simple way to know whether a pre-IPO company plans to offer a dividend is to review their registration documents. Companies must amend their S-1 registration form with the SEC if they plan to offer any type of dividend payment to investors. You can find S-1 forms through the SEC’s EDGAR database online.


💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

REIT IPOs and Dividends

Typically, companies do not offer dividends as part of the IPO process. If you do find an IPO company that’s offering a dividend payment, it’s more likely to be a real estate investment trust (REIT) versus a more traditional company structure.

REITs are companies that own income-producing real estate investments and must pay out 90% of their taxable income to shareholders as dividends. Just like other companies, REITs can choose to go public in order to raise capital from investors.

REIT IPOs work a little differently than other IPOs in that there are additional filing requirements they have to meet under SEC rules, but otherwise the overall process is largely the same.

IPOs Explained

IPO stands for Initial Public Offering, and the event represents the first time a company makes its shares available for trade on a public exchange. This is often referred to as “going public”.

Companies launch IPOs, a process regulated to raise capital from investors. The Securities and Exchange Commission regulates the IPO process to ensure that the company has performed its due diligence, completed all of the appropriate paperwork, and established an accurate valuation of the IPO.

Investing in IPOs can offer an opportunity to diversify a portfolio while potentially getting in on the ground floor of a company poised for significant growth. It can, however, be risky as there are no guarantees whether an IPO stock will be a success — and even a successful IPO doesn’t necessarily predict how well a company will do over time.

For this reason, it can be difficult for individual investors to buy IPO stock when it’s first issued. In most cases, individuals can trade IPO shares on the secondary market through their brokerage.

IPO stocks are considered high-risk investments, and while some companies may present an opportunity for growth, there are no guarantees. Like investing in any other type of stock, it’s essential for investors to do their due diligence.


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Dividends Explained

A dividend is a share of a company’s profits that’s paid out to shareholders, usually in cash. The company determines how frequently to make these payments to investors. For example companies may pay dividends on a monthly, quarterly, biannual or annual basis, or it can pay them on a one-time basis.

The amount an investor receives in dividends correlates to the amount of stock they own. Preferred stock shareholders receive first priority for dividend payouts, ahead of common stock shareholders. However, preferred stock shareholders do not have voting rights while common stock shareholders do.

Companies that offer dividends can decide whether to increase or decrease dividend payouts over time, depending on profitability. Companies that consistently increase dividend payouts over a period of 25 consecutive years or more are called Dividend Aristocrats. Companies that do so over a period of 50 consecutive years or more are called Dividend Kings.

Types of Dividends

Dividends can take different forms, depending on when and why a company pays them out to investors. When discussing IPOs and dividends, you’re typically talking about special dividends and stock dividends. Companies may use both to encourage investors to buy that their IPO is an investment opportunity, though they aren’t exactly the same in terms of what the investor is getting.

Special Dividends

Special dividends, also referred to as one-time dividends or extra dividends, are dividend payments made to investors outside the scope of regular dividend payments. A company that plans to go public may make a pre-IPO special dividend payment to its existing shareholders. The total value of the dividends paid may be equal to or less than the amount the company expects to be raised through the Initial Public Offering.

Dividends

Dividends are regular payments made in stock or via cash to shareholders out of a company’s profits. Cash dividends can increase the value of an investor’s holdings over time if the investor reinvests them in the stock. Again, the amount an investor receives in dividends depends on the company.

Dividends may go up when profits are up and drop when profits fall. But a high dividend payout alone is not a reason to consider investing in a company. It’s important to look at the company’s financials to determine whether that higher payout is sustainable over time.

Why Do Companies Give Dividends?

Companies offer dividends as a reward or incentive to attract new investors and retain existing ones. A company that offers a dividend regularly can attract income-focused investors. As long as the dividend payout sticks around, then the investors are likely to stick around as well. Of course, this assumes that a company is profitable and has the means to pay out dividends in the first place.

Dividends are less common among newer companies because they’re typically reinvesting any profits they realize into further growth. That doesn’t mean they won’t offer a dividend to investors later but for the near term, they may need every bit of profit to continue expanding.

The Takeaway

The purpose of most IPOs is to raise capital and generate buzz; paying shareholder dividends is more common with an initial public offering for a REIT than a traditional company IPO. In either case, the dividends could serve as an incentive to attract new investors.

The easiest way to know whether a pre-IPO company plans to offer a dividend is to review their registration documents by reading the S-1 registration form that’s been submitted to the SEC.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.


Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is an IPO dividend?

An IPO dividend is a dividend payout associated with a company’s Initial Public Offering. IPO companies can make special dividend payouts on a one-time basis or offer regular stock dividend payments to investors.

How do shareholders make money in an IPO?

Shareholders can make money in an IPO if they’re able to sell shares at a higher price than their initial offering price. Shareholders can also collect IPO dividend payments to supplement their profits.

Are dividends taxed?

Yes. The IRS considers dividends a form of taxable income. The tax rate that applies can depend on whether you have qualified or nonqualified dividends. The IRS taxes nonqualified dividends at ordinary income tax rates while qualified dividends follow the long-term capital gains tax rate structure.

Photo credit: iStock/LaylaBird

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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