What Are Real Estate Options? Advantages for Buyers

Understanding the Basics of Real Estate Options

Another way to invest in real estate is through buying or selling real estate options. With an options contract, a buyer is granted the right to purchase a property for a specific price by a specific date, but they are not obligated to buy it.

In order to purchase this option, the buyer of the contract pays the seller a premium.

This is a flexible and typically less expensive way to enter the real estate market that may also help reduce risks involved in single property investment.

What Are Real Estate Options?

Real estate options are contracts between a potential buyer and seller. They grant the buyer the exclusive right to purchase a particular property within terms set in the contract. But the buyer doesn’t have to purchase the property.

However, if the buyer decides to exercise the option and purchase the property, the seller is obligated to sell the property at the agreed-upon price. Once the agreement is entered into, the property owner can’t sell to anyone else within the time period set in the option.

An options contract for a purchase is also known as a call option, whereas an option to sell would be called a put option.

Recommended: Call vs Put Options: Main Differences

How Do Options in Real Estate Work?

Generally, real estate options set a particular purchase price and are valid for anywhere from six months to one year. The buyer doesn’t have to purchase the property, but if they want to, the seller is obligated to sell to them even if the market price has gone up.

The buyer pays what is known as a “premium” in options terminology to enter into the contract. If they decide not to buy the property, the property owner (the seller) keeps that premium.

Real estate options are most often used in commercial real estate, but they can be used by retail investors as well. They aren’t sold on exchanges, and each contract is specific for the property it represents. Usually a contract is only for a single property, not multiple properties.

Real estate options are similar to stock options in that they set a specific price, premium, and period of time for a contract related to an underlying asset. Options can be exercised early or at the expiration date. They can also be sold to another investor.

•   Most of the benefits involved in real estate options tilt in the buyer’s favor.

•   If the property value goes up a few months into the contract, the buyer can exercise the contract and purchase the property, and sell it for a profit.

•   If the property value drops, the buyer can simply let the option expire — thus losing only the premium they paid, which is typically a small percentage of the value of the underlying asset or property in this case.

If the buyer decides not to exercise the contract, they can sell it to another buyer at a potentially higher premium (and pocket the difference).

For a seller, there is the potential for them to make a profit if the buyer exercises their option to purchase the property. They may also profit if the buyer doesn’t exercise the option — at which point they can keep the premium amount, and then sell the contract (or the property) to someone else.


💡 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.

Lease Options

In addition to real estate options for purchases, there are also lease options. These are rent-to-own agreements between a buyer and seller. They let someone lease a property with the option to buy it after a certain amount of time, but not the obligation.

Generally with a lease option, some or all of the rental payment goes towards the purchase. Some lease options lock in a particular price, but others just give the buyer the exclusive right to buy at whatever the market price is.

Although lease options can be great for buyers, they are also more expensive than simply renting a property since they involve a premium. For this reason, it’s important for a buyer to carefully consider the contract and their future plans before entering into a lease option agreement.


💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

2 Advantages of Real Estate Options for Buyers

Options are a common investing strategy for commercial real estate investors. There are several reasons a buyer might enter into a real estate option contract with a seller.

It Can Allow Time for the Buyer to Amass Funds

One might choose a real estate option if they want to secure a piece of land or property at a certain price but they need some time to get funds in order for the purchase.

A Real Estate Option Locks in a Price

If a buyer thinks the price of a property might go up, they can purchase an option to lock in the current market price. However, some real estate options are not completely set in their sale prices. There may be clauses in the contract to determine what the final sale price will actually be.

2 Advantages of Real Estate Options for Investors

Real estate investors can also use options to their advantage.

It’s a Lower-Risk Way to Develop Property

For example, let’s say an investor finds a property they’re interested in developing into housing. The investor needs to create a plan for the property and get other investors involved before they can buy it, so they purchase a real estate option to give them the exclusive right to buy the land.

The investor can make a profit by bringing in investors at a higher rate than the option. They can then buy the land and sell it to the developers they brought in to make a profit.

If they aren’t able to get developers and investors involved before the contract expires then they simply don’t buy the land.

An Investor Can Buy and Sell Real Estate Options

Investors can also make a profit just on buying and selling real estate options contracts rather than the properties themselves. This is a much less capital-intensive way to get involved in real estate investing.

For instance, an investor might find a property they expect will increase in value in the coming months. They purchase a real estate option to buy the land at the current market rate within the next year, pay a premium, and wait.

At any point during the period of the agreement the investor can either act on the contract and buy the property, or they can sell the contract to someone else. Let’s say the value of the property increases three months into the contract. The investor can find another investor who wants to purchase the contract for them for a higher price than the premium the original investor paid.

Whether any investor buys the property or not, the seller of the property keeps the premium.

The Takeaway

Real estate options are a way for investors to get involved in real estate investing without directly buying properties. As with any other kind of options, the investor buys the right to buy or sell at a certain price, but is not obligated to do so.

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®.


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


Photo credit: iStock/Melpomenem

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.
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.

SOIN0723075

Read more
What's NBBO?

NBBO: What It Is and How It’s Calculated

NBBO stands for the National Best Bid and Offer, a regulation put in place by the Securities and Exchange Commission (SEC) that requires brokers who are working on behalf of clients to execute a trade at the best available ask price, and the best available bid price.

The NBBO is a quote available marketwide that represents the tightest spread, e.g. the highest bid price and the lowest ask price for a certain security trading on various exchanges.

Brokers must guarantee at least the NBBO to their clients at the time of a trade, per SEC rules.

How Does “Bid vs Ask” Work in the Stock Market

In order to understand NBBO, investors need to understand the bid-ask price of a security, e.g. a stock. This is also known as the spread (two of many terms investors and traders should know). If an investor is “bidding,” they’re looking to buy. If they’re “asking,” they’re looking to sell. It may be helpful to think of it in terms of an “asking price,” as seen in real estate.

The average investor or trader will typically see the bid or ask price when looking at prices for investment securities. Most of the bid-ask action takes place behind the scenes, and it’s happening fast, landing on an average price. These are the prices represented by stock quotes.

That price is the value at which brokers or traders are required to guarantee to their customers when executing orders. NBBO requires brokers to act in the best interest of their clients.

Recommended: How to Invest in Stocks: A Beginner’s Guide

What Is NBBO?

The National Best Bid and Offer (NBBO) is effectively a consolidated quote of the highest bid and the lowest ask price of a security from all exchanges. NBBO was created by the SEC to help ensure that brokerages offer customers the best publicly available bid and ask prices when trading securities.

NBBO Example

Let’s run through a quick example of how the NBBO might work in the real world.

Let’s suppose that a broker has a few clients that want to buy a stock:

•   Buyer 1 puts in an order to the broker to buy shares of Company X at $10

•   Buyer 2 puts in an order to the broker to buy shares of Company X at $10.50

•   Buyer 3 puts in an order to the broker to buy shares of Company X at $11

Remember, these are “bids” — the price at which each client is willing to purchase a share of Company X.

On the other side of the equation, we have another broker with two clients that want to sell their shares of Company X, but only if the price reaches a certain level:

•   Client 1 wants to sell their shares of Company X if the price hits $12

•   Client 2 wants to sell their shares of Company X if the price hits $14

In this example, the NBBO for Company X is $11/$12. Why? Because these are the best bid vs. ask prices that were available to the brokers at the time. This is, on a very basic level, how calculating the NBBO for a given security works.


💡 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 NBBO and “Bid vs Ask” Prices Are Calculated

To make those calculations on the fly requires a whole lot of infrastructure. Because the NBBO is updated constantly through the day with offers for stocks from a number of exchanges and market players, things need to move fast.

Most of the heavy lifting in NBBO calculations is done by Securities Information Processors (SIPs). SIPs connect the markets, processing bid and ask prices and trades into a single data feed. They were created by the SEC as a part of the Regulation National Market System (NMS).

There are two SIPS in the U.S.: The Consolidated Tape Association (CTA) , which works with the New York Stock Exchange, and the Unlisted Trading Privileges (UTP) , which works with stocks listed on the Nasdaq exchange.

The SIPS crunch all of the numbers and data to keep prices (NBBO) updated throughout the day. They’re incredibly important for traders, investors, brokers, and anyone else working in or adjacent to the markets.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Is NBBO Pricing Up to Date?

The NBBO system may not reflect the most up-to-date pricing data. Bid, ask, and transaction data is flying around every millisecond, and it takes time to ingest and process it all. For high-frequency traders that are making fast and furious moves on the market, these small price fluctuations can cost them.

To make up for this lag time, the SEC allows trading via intermarket sweep orders (ISO), letting an investor send orders to multiple exchanges in order to execute a trade, regardless of whether a price is the best nationwide.

The Takeaway

NBBO represents the crunching of the numbers between the bid-ask spread of a security, and it’s the price you’ll see listed on a financial news network or stock quote.

The NBBO adds some legal teeth for investors, effectively forcing brokers to execute trades at the best possible price for their clients.

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.


Photo credit: iStock/g-stockstudio

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

SOIN0723076

Read more
Stock Oscillator: Types & How To Use Them for Technical Analysis

Stock Oscillator: Types & How to Use Them for Technical Analysis

A stock oscillator is an equation or software program used by traders to help them decide when to buy or sell a given stock. It works by identifying trends in a stock’s price along with other metrics, then using that data to help determine whether the stock is overbought — making it a good time to sell it — or oversold, in which case it might be a good time to buy.

Investors typically use oscillators at times when the trend for a stock’s price is unclear, either because it’s in a sideways trading pattern, or because the markets themselves are choppy. An oscillator will show underlying trends in other quantifiable aspects of the stock, such as its buying or selling volume, which may indicate if the stock is likely to move up or down in the near future.

Investors may have access to oscillators through their brokerage account or trading programs. Because oscillators are mathematical, it’s even possible for savvy investors to program them directly into a spreadsheet.

Stock Oscillators and Technical Analysis

Stock oscillators are valuable tools in technical analysis, an approach taken by investors to try to forecast the ways a stock might perform based on its current data and past movements. (Though it’s worth remembering that past performance is no guarantee of future success or failure.)

As a strategy, technical analysis involves looking at a wide range of data and indicators, such as a stock’s price and trading volume, to locate opportunities and risks.

But technical analysis typically doesn’t involve researching the underlying companies, their industries, or any macroeconomic trends that might drive the success or failure of those underlying companies. Rather, it solely analyzes the stock’s performance to find patterns and trends.

As such, these tools are mostly used by short-term traders who plan to hold onto a stock for days or weeks, rather than long-term investors who plan to hold a stock for periods of years.

Recommended: 5 Bullish Indicators for a Stock

How Do Stock Oscillators Work?

While every oscillator differs, they all tend to identify a normal range for a given stock, using specific criteria to determine if the stock is overbought or oversold based on that range.

Oscillators can help identify buying or selling opportunities. But they can also mislead investors if a stock undergoes a price breakout, which is when an event occurs that effectively resets the trading range of a stock higher or lower.

During a breakout, an oscillator may show that the stock is overbought or oversold for a long period of time. For this reason, many traders consider oscillators best used in sideways or choppy markets.


💡 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.

Types of Trading Oscillators

There are a number of different types of trading oscillators. Here’s what to know about them.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) works by taking measurements of a stock’s recent price changes to determine if it’s overbought or oversold. It’s a popular tool for investors looking for entry and exit points of a given stock position.

The RSI measures the speed and size of a stock’s price movements, and calculates the momentum using the ratio of higher closing prices to lower closing prices. In this oscillator, stocks that have more frequent or larger positive changes receive higher scores. Investors typically chart RSIs over a 14-day timeframe, and rate stocks on a scale from 0 to 100, though they may create custom timeframes.

The oscillator selects a “horizontal channel,” which is a common RSI score for a stock, then marks out price bands above and below that band at which the stock may be considered overbought or oversold.

Moving Average Convergence/Divergence (MACD)

The MACD is an oscillator traders use to understand the momentum of a given stock. It uses the moving average of a stock to determine where a stock is trading over a set period of time. Most investors prefer 12-day and 26-day time spans for their MACDs, but they can also create their own custom MACD measurements with time spans that better fit their own particular trading strategies.

The MACD compares the moving average of the short- and long-term moving average to see if those averages are getting closer (converging) or farther apart (diverging).

If the MACD of a given stock is positive, that means its short-term average is higher than its long-term average, which indicates that the stock’s price is on an upswing. A higher MACD indicates more pronounced momentum in that upswing. On the other hand, a negative MACD indicates that a stock is trending downward.

Recommended: What Is MACD?

Commodity Channel Index (CCI)

The CCI is a momentum-based oscillator that investors use to spot price extremes and possible price reversals, and to understand the strength of price trends for commodities, currencies, and stocks. The CCI measures the variation of a security’s price from its statistical mean.

So when the indicator goes above zero, that indicates the price is above the security’s historical average price. When it’s below zero, the price is below the historical average.

The CCI assigns scores that tend to fall between +100 and -100, but the indicator is unbound. CCI scores over +100 mean that a stock may be overbought, while scores below -100 indicate that a stock may be oversold, but there are no fixed points that indicate one condition or the other.

Stochastic Oscillator

A stochastic oscillator, or “sto indicator,” compares a stock’s average price levels to its current price levels to determine if a stock is overbought or oversold.

Specifically, a stochastic oscillator compares a stock’s closing price to a range of the security’s highest and lowest prices over a period of time that the trader can set. By changing the time frame of the oscillator, traders can adjust its sensitivity to recent market fluctuations.


💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Pros of Using Oscillator Indicators

There are a number of potential benefits to using oscillator indicators.

•   Using multiple oscillators may help investors better understand how a particular stock is trading.

•   Oscillators may provide useful alerts that a stock is nearing a price at which an investor may consider buying or selling it.

•   Stock oscillators may be highly effective in helping investors identify overbought or oversold conditions in a specific stock.

•   Oscillators may be highly effective tools in sideways or choppy markets, where a stock’s trading price remains within a fixed range.

Cons of Using Oscillator Indicators

There are also potential drawbacks to using oscillator indicators.

•   While oscillators can be effective in helping investors identify overbought or oversold conditions in a specific stock, whether a stock is overbought or oversold is not necessarily a clear signal to buy or sell it.

•   In strong bull or bear markets, an oscillator signal that a stock is overbought or oversold may be misleading.

•   Oscillator signals only offer stock price information, and not the bigger picture of what’s happening with the company or its industry.

The Takeaway

Stock oscillators are one set of tools in technical analysis, which also employs close reading and interpretation of charts, as well as other technical indicators. Oscillators may help investors determine if a stock is overbought or oversold, even if the price of a stock isn’t giving clear indications.

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.


Photo credit: iStock/svetikd

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

SOIN0723074

Read more
What Is Hedging & How Does It Work? Strategies & Examples

What Does Hedging Mean? How Does It Work? Strategies & Examples

Hedging is a type of investment strategy that seeks to limit risk exposure in different parts of your portfolio. Essentially hedging involves taking a position with one investment to offset the risk of loss in another investment.

Hedging methods vary widely depending on what the investor views as the main risks they face. Common hedges include derivatives like options and futures contracts, or investments in commodities like gold or oil, or cryptocurrencies, or fixed-income investments like Treasury bonds.

What Is Hedging?

You can define hedging as an investment that’s made to reduce the risks associated with another investment.

Most often, investors will hedge to protect themselves in the event that their investments go down in value and limit potential losses. While there are many ways to hedge, many investors go about hedging with options, purchasing securities that move in the opposite direction of the main investment.

Another common hedge is an investment whose price movements historically do not correlate to the main investment.

For investors, protecting a portfolio against downside risk can be as important as generating returns.


💡 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.

How Does Hedging Work?

In many ways, hedging investments work like an insurance policy. A homeowner may purchase insurance to protect their home from fire or other potential risks. That insurance policy costs money, which is an investment of sorts. So if there’s a fire, that insurance may protect the homeowner from greater losses.

Hedging is like that insurance policy. Investors can’t protect against all risks. But with the proper hedges in place — the right insurance policy — they can protect their holdings from certain dangers. But, like insurance, those hedges cost money to make.

Hedging may also reduce an investor’s exposure to the upside of the other elements of their portfolio.

Pros & Cons of Hedging

In addition to investors, companies that operate with heavy exposure to the prices of certain commodities like oil, or whose business model only works in stable interest-rate environments, also use hedges to protect their business.

To understand the pros and cons of hedging, consider an airline, whose fuel costs impact the company’s profitability. The airline may have a trading desk whose sole job is to buy and sell options and futures contracts related to crude oil, as a way of protecting the company against the shock of a sudden upturn in oil prices.

The first pro of hedging for the airline is that those financial derivative instruments allow it to project its fuel costs with some degree of certainty at least a few months into the future.

The other pro of hedging comes when the price of oil skyrockets for whatever reason. In that case, the airline knows it can buy oil at the previously predetermined price in the oil futures contracts it owns.

The con of hedging would be the constant ongoing expense of maintaining it. The airline has to pay for the oil futures contracts, even if it never exercises them. Futures contracts expire on a regular basis, requiring the company to continue buying them. And if fuel costs don’t go up, then it’s likely that the futures contracts the airline buys will be worthless when they expire.

Recommended: What Is a Future’s Contract? How Do They Work?

The company also has to devote personnel to maintaining the portfolio of its hedges, to buy and sell the derivatives, and to periodically test the hedge to make sure it continues to protect the company as the markets shift. For the airline that represents money and talent that is diverted away from its core business.

The analogy for investors is clear. While hedges can protect an investment plan, they also come with a cost in time and money. And it’s up to each investor to determine whether the cost of a hedge is worth the protection it offers.


💡 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.

Hedging Examples and Strategies

There are several ways that investors can use hedging to protect their portfolios.

Diversification

Portfolio diversification is probably the best known and most widely used risk management strategy. It relies on a broad mix of investments within a portfolio to help protect the portfolio from facing too large of a loss if one investment loses value.

A diversified portfolio will hold several distinct asset types to reduce its exposure to any single investment risk. For example, investors may balance out the risk of a stock holdings with bond securities, since bonds tend to perform better in markets where stocks struggle.

Spread Hedging

Spread hedging is a risk-management strategy employed by options traders. In this strategy, a trader will buy options with two separate strike prices to earn a small return and protect themselves against price movements in the security that underlies the options. In a bull put spread, for example, a trader might purchase one long put with a lower strike price and one short put with a high strike price.

Forward Hedge

Forward contracts are financial derivatives used mostly by businesses to protect themselves from changes in the value of a currency. For the purchaser, the contract effectively fixes the rate of exchange between two currencies for a period of time. The airline example discussed above is a forward hedge.

Delta Hedging

Delta hedging is a strategy used by options traders to reduce the directional risk of price movements in the security underlying the options contracts. In the strategy, the trader buys or sells options to offset investment risks and reach a delta neutral state, in which the investment is protected regardless of which way the asset price moves.

Tail Risk Hedging

Tail risk hedging refers to an array of strategies whose goal is to protect against extreme shifts in the markets. The strategies involve a close study of the major risk factors faced by a portfolio, followed by a search for the least expensive investments to protect against the most extreme of those risks.

For example, an investor overweight U.S. equities might purchase derivatives based on the Volatility Index, which tends to negatively correlate to the S&P 500 Index.

Binary Options Hedging Strategy

In a binary options hedging strategy, the investor buys both a put and a call on the same underlying security, each with a strike price that makes it possible for both options to be in the money at the same time. Binary options only guarantee a payout if a predetermined event occurs.

Forex Hedging

A forex hedge refers to any transaction made to protect an investment from changes in currency values. As a hedge, they may be used by investors, traders and businesses. For example, since GBP/USD and EUR/USD typically have a positive correlation, you could hedge a long position in GBP/USD with a short position in EUR/USD.

Another example of forex hedging is purchasing a currency-hedged ETF. Doing so gives investors the protection of a forex hedge against the investments within their ETFs, without having to actually purchase the hedge on their own.

Recommended: What Is Forex Trading?

Hedging for Hyperinflation

Inflation hedges are those investments that have outperformed the market when inflation is a major factor in the economy. While every inflationary period is different, with other global, market and macroeconomic factors in play, investors have historically found shelter — and even growth — during inflation by investing in certain assets.

Some investments that have a reputation as inflation hedges include precious metals such as gold, and commodities like oil, corn, beef, and natural gas. Other inflation hedges include REITS and real estate income.

Dollar-Cost Averaging

Some investors view dollar-cost averaging, which involves investing a set amount of money at preset intervals regardless of market performance, as a way to hedge against market volatility. That’s because dollar-cost averaging, by definition, means that you’re buying investments when they’re both high and low — and you don’t have to worry about trying to time the market.

Is Hedging Viable for Retail Investors?

Yes. While some hedging involves complicated options strategies, you can also hedge your portfolio by simply making sure that you have diversified holdings. If you’re investing to protect against certain risks, such as inflation or interest rate increases, that’s also an example of hedging.

The Takeaway

Hedges are investments, often derivatives, that help protect investors from risk. Hedging is a common strategy to use certain types of securities to offset the risk of loss from another security.

However, it’s possible to hedge some investments without investing in derivatives. Building a diversified portfolio of stocks and bonds, for example, or investing in real estate to protect against inflation risk are also examples of hedging.

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.


Photo credit: iStock/Rossella De Berti

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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.
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.

SOIN0723073

Read more
What Are Power Hour Stocks? What to Know When Trading

Power Hour Stocks: What Are They and How Do You Trade Them?

While the U.S. stock market is technically open from 9:30am to 4pm ET, some times of day are more active than others, and go by the moniker “power hour.”

Depending on who you talk to, the power hour can be the first hour of trading (from 9:30 to 10:30 ET) or the last hour of trading (3:30 to 4:30 ET).

Derivative traders may argue that the time is even more specific, such as at 3:30 on the third Friday of every month in March, June, September, and December when option, futures and index contracts all expire on the same day. They call that the “triple witching hour.”

Here’s a closer look at the power hour, and what it might mean to you.

What Is the Stock Market Power Hour?

During the trading day, the power hour is when traders have a concentrated time to leverage specific market opportunities. That goes for anyone trading common market securities like stocks, index funds, commodities, currencies, and derivatives, especially options trading and futures.

When Does Stock Power Hour Occur?

The term power hour is subjective, but most market observers land on two specific times in defining the term:

•   The first trading hour of the market day. This is when news flows in overnight from across the world that can impact portfolio positions that investors may want to leverage.

•   The last hour of the trading day. This is when sellers may be anxious to close a position for the day, and buyers may be in a position to pounce and buy low when selling activity is high.

One commonality between the first hour of a stock market trading session and the last hour is that trading volatility tends to be higher than it is during the middle of a normal trading day. That’s primarily because traders are looking to buy or sell when demand for trading is robust, and that usually happens at or near the market opening or the market close.

Each power hour brings something different to the table, when it comes to potential investing opportunities.


💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

Power Hour Start of Day

The first hour of any trading session tends to be the most active, as traders react to overnight news and data numbers and stake out advantageous positions.

For example, an investor may have watched financial or business news the previous night, and is now reacting to a story, interview, or prediction.

Some traders refer to this scenario as “stupid money” trading, as conventional wisdom holds that one news event or one interview with a Fortune 500 CEO shouldn’t sway an investor from a strategy-guided long-term investment position. The fact is, by the time the average investor reacts to overnight data, it’s likely the chance for profit is already gone.

Here’s why: Most professional day traders were likely already aware of the news, and have already priced that information into their portfolios. As the price goes up on a stock based on artificial demand, the professional traders typically step in and take the other side of the trade, knowing that in the long run, investing money will drift back to the original trade price for the stock and the professional investor will likely end up making money.

Power Hour End of Day

The last hour of the trading day may also come with high market volatility, which tends to generate more stock trading. Many professional traders tend to trade actively in the morning session and step back during mid-day trading, when volatility is lower and the market is quieter than in the first and last hours of the day.

Regular traders can perk up at the last hour of trading, where trading is typically more frequent and the size of trades generally climb as more buyers and sellers engage before the trading session closes out. Just as in the first hour of the trading day, amateur investors tend to wade into the markets, buying and selling on the day’s news.

That activity can attract bigger, more seasoned traders who may be looking to take advantage of ill-considered positions by average investors, which increases market trading toward the close.

Red Flags and Triggers to Look for During Power Hour Trading

For any investor looking to gain an advantage during power hour trading, the idea is to look for specific market news that can spike market activity and heighten the chances of making a profit in the stock market.

These “triggers” may signal an imminent power hour market period, when trading can grow more volatile.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Any Earnings Report

Publicly-traded companies are obligated to release company earnings on a quarterly basis. When larger companies release earnings, the news has a tendency to move the financial markets. Depending on whether the earnings news comes in the morning or after hours, investors can typically expect higher trading to follow. That could lead to heavier power hour trading.

News on Big “Daily Gainers”

Stock market trading activity can grow more intense when specific economic or company news pushes a single large stock — or stock sector — into volatile trading territory.

For instance, if a technology company X announces a new product release, investors may want to pounce and buy the stock, hoping for a significant share price uptick. That can lead to higher volume trading stock X, making the company and the market more volatile (especially later in the day), thus ensuring an active power hour trading time.

Reserve/Economic News

Major economic news, like jobs reports, consumer sentiment, inflation rates, and gross domestic product (GDP) reports, are released in the morning. Big news from the Federal Reserve typically comes later in the day, after a key speech by a Fed officer or news of an interest rate move after a Fed Open Markets Committee meeting.

Make no mistake, news on both fronts can be big market movers, and can lead to even more powerful power hour trading sessions. Anticipation of huge economic news, like a Federal Reserve interest rate hike or the release of the U.S. government’s monthly non-farm labor report, can move markets before the actual news is released, potentially fueling an even larger trading surge after the news is released, either at the open (for government economic news) or at the end of the trading day (for Federal Reserve news).

Triple Witching Hour Events

Quarterly triple witching hours — when stock options, futures and index contracts expire on four separate Fridays during the year — historically have had a substantial impact on market activity on those Friday afternoons, in advance of the contracts expiring at the days’ end.

When options contracts involving larger companies expire, market activity on a Friday afternoon prior to closing can be especially volatile. Thus, any late afternoon power hour on a triple-witching-hour Friday can be highly active, and may be one of the largest drivers of power hour trading during the year.

The Takeaway

The concept of a stock market “power hour” is very real, but so is the risk of trading in more volatile markets when power hours tend to be more active.

Consequently, it’s a good idea to give power hours a wide berth if you’re not familiar with trading in choppy markets, where the risk of losing money is high when power trading activity is at its highest.

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.


Photo credit: iStock/Tatiana Sviridova

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

SOIN0723072

Read more
TLS 1.2 Encrypted
Equal Housing Lender