Investing Archives | Page 175 of 191

Oct

2022

Guide to Short Put Spreads

By Dan Miller | Growing Wealth, invest, Investing, Terminology | Comments Off

A short put spread, sometimes called a bull put spread or short put vertical spread, is an options trading strategy that investors may use when they expect a slight rise in an underlying asset. This strategy allows an investor to potentially profit from an increase in the underlying asset’s price while also limiting losses. An investor may utilize this strategy to protect against any downside risk; the investor will know their total potential loss before making the trade.

When trading options, you have various strategies, like short put spreads, from which you can choose. The short put spread strategy can be a valuable trade for investors with a neutral-to-bullish outlook on an asset. Which options trading strategy is right for you will depend on several factors, like your risk tolerance, cash reserves, and perspective on the underlying asset.

What Is a Short Put Spread?

A short put spread is an options trading strategy that involves buying one put option contract and selling another put option on the same underlying asset with the same expiration date but at different strike prices. This strategy is a neutral-to-bullish trading play, meaning that the investor believes the underlying asset’s price will stay flat or increase during the life of the trade.

A short put spread is a credit spread in which the investor receives a credit when they open a position. The trader buys a put option with a lower strike price and sells a put option with a higher strike price. The difference between the price of the two put options is the net credit the trader receives, which is the maximum potential profit in the trade.

The maximum loss in a short put spread is the difference between the strike prices of the two puts minus the net credit received. This gives the trading strategy a defined downside risk. A short put spread does not have upside risk, meaning the trade won’t lose money if the price of the underlying asset increases.

A short put spread is also known as a short put vertical spread because of how the strike prices are positioned — one lower and the other higher — even though they have the same expiration date.

How Short Put Spreads Work

With a short put spread, the investor uses put options, which give the investor the right — but not always the obligation — to sell a security at a given price during a set period of time.

An investor using a short put spread strategy will first sell a put option at a given strike price and expiration date, receiving a premium for the sale. This option is known as the short leg of the trade.

Simultaneously, the trader buys a put option at a lower strike price, paying a premium. This option is called the long leg. The premium for the long leg put option will always be less than the short leg since the lower strike put is further out of the money. Because of the difference in premiums, the trader receives a net credit for setting up the trade.

💡 Recommended: In the Money vs Out of the Money Options

Short Put Spread Example

Say stock ABC is trading around $72. You feel neutral to bullish toward the stock, so you open a short put spread by selling a put option with a $72 strike price and buying a put with a $70 strike. Both put options have the same expiration date. You sell the put with a $72 strike price for a $1.75 premium and buy the put with a $70 strike for a $0.86 premium.

You collect the difference between the two premiums, which is $0.89 ($1.75 – $0.86). Since each option contract is usually for 100 shares of stock, you’d collect an $89 credit when opening the trade.

Recommended: Guide to How Options Are Priced

Maximum Profit

The credit you collect up front is the maximum profit in a short put spread. In a short put spread, you achieve your maximum profit at any price above the strike price of the option you sold. Both put options expire worthless in this scenario.

In our example, as long as stock ABC closes at or above $72 at expiration, both puts will expire worthless and you will keep the $89 credit you received when you opened the position.

Maximum Loss

The maximum loss in a short put spread is the difference between the strike prices of the two put options minus the credit you receive initially and any commissions and fees incurred. You will realize the maximum loss in a short put spread if the underlying asset’s price expires below the strike price of the put option you bought.

In our example, you will experience the maximum loss if stock ABC trades below $70, the strike price of the put option you bought, at expiration. The maximum loss will be $111 in this scenario, not including commissions and fees.

$72 – $70 – ($1.75 – $0.86) = $1.11 x 100 shares = $111

Breakeven

The breakeven on a short put spread trade is the price the underlying asset must close at for the investor to come away even; they neither make nor lose money on the trade, not including commissions and investment fees.

To calculate the breakeven on a short put spread trade, you subtract the net credit you receive upfront from the strike price of the short put contract you sold, which is the option with the higher strike price.

In our example, you subtract the $0.89 credit from $72 to get a breakeven of $71.11. If stock ABC closes at $71.11 at expiration, you will lose $89 from the short leg of the trade with a $72 strike price, which will be balanced out by the $89 cash credit you received when you opened the position.

Set-Up

To set up a short put spread, you first need to find a security that you are neutral to bullish on. Once you have found a reasonable candidate, you’ll want to set it up by entering your put transactions.

You first sell to open a put option contract with a strike price near where the asset is currently trading. You then buy to open a put option with a strike price that’s out-of-the-money; the strike price of this contract will be below the strike price of the put you are selling. Both of these contracts will have the same expiration date.

Maintenance

The short put spread does not require much ongoing maintenance since your risk is defined to both upside and downside.

However, you may want to pay attention to the possibility of early assignment, especially with the short leg position of your trade — the put with the higher strike price. You might want to close your position before expiration so you don’t have to pay any potential assignment fees or trigger a margin call.

Exit Strategy

If the stock’s price is above the higher strike price at expiration, there is nothing you have to do; the puts will expire worthless, and you will walk away with the maximum profit of the credit you received.

If the stock’s price is below the lower strike price of the long leg of the trade at expiration, the two contracts will cancel each other, and you will walk away with a maximum loss.

Before expiration, however, you can exit the trade to avoid having to buy shares that you may be obligated to purchase because you sold a put option. To exit the trade, you can buy the short put contract to close and sell the long put contract to close.

Impacts of Time, Volatility, and Price Change

Changes in the price and volatility of the underlying stock and the passage of time can affect a short put spread strategy in various ways.

Time

Time decay will generally work in favor of the short put spread. As both of the legs of the short put spread get closer to the expiration, any time value that the option contracts have will erode.

Volatility

The short put spread is more or less volatility neutral. Because you are both long and short one put option contract each, volatility in the underlying stock similarly affects each leg of the contract.

Price

A short put spread is a bullish option strategy. You have no risk to the upside and will achieve your maximum profit if the underlying stock closes above the strike price of the higher put option. You are sensitive to price decreases of the underlying stock and will suffer the maximum loss if the stock closes below the strike price of the lower put option.

Pros and Cons of Short Put Spreads

Here are some of the advantages and disadvantages of using short put spreads:

Short Put Spread Pros	Short Put Spread Cons
No risk to the upside	Lower profit potential compared to buying the underlying security outright
Limited risk to the downside; maximum loss is known upfront	Maximum loss is generally larger than the maximum potential profit
Can earn a positive return even if the underlying does not move significantly	Difficult trading strategy for beginning investors

Short Put Calendar Spreads

A short put calendar spread is another type of spread that uses two different put options. With a short put calendar spread, the two options have the same strike price but different expiration dates. You sell a put with a further out expiration and buy a put with a closer expiration date.

Alternatives to Short Put Spreads

Short put vertical spreads are just one of the several options spread strategies investors can use to bolster a portfolio.

Bull Put Spreads

A bull put spread is another name for the short put spread. The short put spread is considered a bullish investment since you’ll get your maximum profit if the stock’s price increases.

Bear Put Spread

As the name suggests, a bear put spread is the opposite of a bull put spread; investors will implement the trade when they have a bearish outlook on a particular underlying asset. With a bear put spread, you buy a put option near the money and then sell a put option on the same underlying asset at a lower strike price.

Call Spreads

Investors can also use call spreads to achieve the same profit profile as either a bull put spread or a bear put spread. With a bull call spread, you buy a call at one strike price (usually near or at the money) and simultaneously sell a call option on the same underlying with the same expiration date further out of the money.

The Takeaway

A short put spread is an options strategy that allows you to collect a credit by selling an at-the-money put option and buying an out-of-the-money put with the same expiration on the same underlying security. A short put spread is a bullish strategy where you achieve your maximum profit if the stock closes at or above the strike price of the put option you sold. While this trading strategy has a limited downside risk, it provides a lower profit potential than buying the underlying security outright.

Short put spreads and other options trading strategies can be complicated for many investors. An options trading platform like SoFi’s can make it easier, thanks to its user-friendly design and offering of educational resources about options. Investors have the ability to trade options from the mobile app or web platform.

Trade options with low fees through SoFi.

FAQ

Is a short put spread bullish or bearish?

A short put spread is a neutral to bullish options strategy, meaning you believe the price of an underlying asset will increase during the life of the trade. You will make your maximum profit if the stock closes at or above the strike price of the higher-priced option at expiration.

How would you close a short put spread?

To close a short put spread, you enter a trade order opposite to the one you entered to open your position. This would mean buying to close the put you initially sold and selling to close the put you bought to open.

What does shorting a put mean?

Shorting a put means selling a put contract. When you sell a put option contract, you collect a premium from the put option buyer. You’ll get your maximum profit if the underlying stock closes at or above the put’s strike price, meaning it will expire worthless, allowing you to keep the initial premium you received when you opened the position.

Photo credit: iStock/akinbostanci

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Aug

2022

Institutional vs Retail Investors: What’s the Difference?

By Nina Semczuk | Growing Wealth, invest, Investing, Terminology | Comments Off

Much of the trading on Wall Street is done by institutional investors: companies or organizations that invest large sums of money on the behalf of other people. Retail, or individual investors, make up a smaller percentage of capital market investments.

In other words, the main difference between institutional vs. retail investors is size: The first category is dominated by professional financial institutions or large organizations that trade investments in large quantities (in a municipal pension fund, for example). Retail investors are made up largely of non-professional individuals (e.g. someone who trades on their own through a brokerage account).

While size and scale are two of the primary differences between institutional vs. retail investors, they each have their own advantages and disadvantages. Retail investors are afforded certain legal protections; institutional investors can have the upside in terms of research and access to capital.

Who Is Considered a Retail Investor?

Any non-professional individual buying and selling securities such as stocks or mutual funds and exchange traded funds (ETFs) — through an online or traditional brokerage or other type of account — is considered a retail investor.

The parent who invests in their child’s 529 college savings plan, or the employee who contributes to their 401(k) are both retail investors.

So in this case the term “retail” generally refers to an individual trading on their own behalf, not on behalf of a larger pool of investors. Retail here references the purchase and selling of investments in relatively small quantities.

Who Is Classified as an Institutional Investor?

By comparison, institutional investors make investment decisions on behalf of large pools of individual investors or shareholders. In general, institutional investors trade in large quantities, such as 10,000 shares or more at a time.

The professionals who do this large-scale type of investing typically have access to investments not available to retail investors (such as special classes of shares that come with different cost structures). By virtue of their being part of a larger institution, this type of investor usually has a larger pool of capital to buy, trade, and sell with.

Institutional investors are responsible for most of the trading that happens on the market. Examples of institutional investors include commercial banks, pension funds, mutual funds, hedge funds, endowments, insurance companies, and real estate investment trusts (REIT).

What Are the Differences Between Institutional Investors vs Retail Investors?

The main differences between institutional and retail investors include:

• Institutional investors invest on behalf of a large number of constituents (e.g. a municipal pension fund); retail investors are individuals who invest for themselves (e.g. an IRA).

• Size (large institutions vs. individuals) and scale of investments.

• Institutional investors typically have access to professional research and industry resources.

• Retail investors are protected by certain regulations that don’t apply to institutional investors.

Institutional Investors	Retail Investors
Professionals and large companies	Non-professional individuals
Invest in large quantities	Invest in small quantities
Invest on behalf of others	Invest for themselves
Access to industry-level sources, research	DIY
Access to preferred share classes and pricing	Access to retail shares and pricing

What Are the Similarities Between Institutional Investors vs Retail Investors?

There are very few similarities between institutional vs. retail investors except that both parties tend to seek returns while minimizing risk factors where possible.

Retail vs. Institutional Investor

Do Institutional or Retail Investors Get the Highest Returns?

There are no crystal balls on Wall Street, as they say, so there’s no guaranteed way to predict whether institutional investors always get higher returns vs. retail investors.

That said, some institutional investors may have the edge in that they have access to industry-level research as well as powerful technology and computer algorithms that enable them to make faster trades and more profitable calculations.

Does that mean institutional investors always come out ahead? In fact, retail investors who have a longer horizon also have a chance at substantial returns over time, although there are no guarantees on either side.

How Many Retail Investors Are There?

In the U.S., it’s fairly common to be a retail investor. About 58% of Americans say they own stock, according to a 2022 Gallup poll, meaning they own individual stocks, stock mutual funds, or they hold stock in a self-directed 401(k) or IRA.

Examples of retail investors include people who manage their retirement accounts online (e.g., an IRA) and those who trade stocks as a hobby.

Because individual investors are generally thought to be more prone to emotional behavior than their professional counterparts (and typically don’t have access to the resources and research of larger institutions), they may be exposed to higher levels of risk. Thus the Security Exchange Commission (SEC) provides certain protections to retail investors.

For example, the 2019 Regulation Best Interest rule states that broker-dealers are required to act in the best interest of a retail customer when making a recommendation of a securities transaction or investment strategy. This federal rule is intended to ensure that broker-dealers aren’t allowed to prioritize their own financial interests at the expense of the customer.

Another protection provided to retail investors is that investment advisors and broker-dealers must provide a relationship summary that covers services, fees, costs, conflicts of interest, legal standards of conduct, and more to new clients.

Types of Institutional Investors

The most common institutional investors are listed below.

1. Commercial Banks

Commercial banks are the “main street” banks many people are familiar with, such as Wells Fargo, Citibank, JP Morgan Chase, Bank of America, TD Bank, and countless others. Along with providing retail banking services, such as savings accounts and checking accounts, large banks are also institutional investors.

These large corporations have entire teams dedicated to investing in different markets: e.g. global markets, bond markets, socially responsible investing, and so on.

2. Endowment Funds

Typically connected with universities and higher education, endowment funds are often created to help sustain these nonprofit organizations. Churches, hospitals, nonprofits, and universities generally have endowment funds, whose funds often derive from donations.

Endowment funds generally come with certain restrictions, and have an investment policy that dictates an investment strategy for the manager to follow. This might include stipulations about how aggressive to be when trying to meet return goals, and what types of investments are allowed (some endowment funds avoid controversial holdings like alcohol, firearms, tobacco, and so on).

Another component is how withdrawals work; often, the principal amount invested stays intact while investment income is used for operational or new constructions.

3. Pension Funds

Pension funds generally come in two flavors:

• Defined contribution plans, such as 401(k)s or 403(b)s, where employees contribute what they can to these tax-deferred accounts.

• Defined benefit plans, or pensions, where retirees get a fixed income amount, regardless of how the fund does.

Employers that offer defined benefit pensions are becoming less common in the U.S. Where they do exist, they’re often linked to labor unions or the public sector: e.g. a teachers union or auto workers union may offer a pension.

Public pension funds follow the laws defined by state constitutions. Private pension plans are subject to the Employee Retirement Income Security Act of 1974 (ERISA); this act defines the legal rights of plan participants.

As for how a pension invests, it depends. ERISA does not define how private plans must invest, other than requiring that the plan sponsors must be fiduciaries, meaning they put the financial interest of the account holders first.

4. Mutual Funds

As defined by the Securities and Exchange Committee (SEC), mutual funds are companies that pool money from many investors and invest in securities such as bonds, stocks, and short-term debt. Mutual funds are thus considered institutional investors, and are known for offering diversification, professional management, affordability, and liquidity.

Typical mutual fund offerings include money market funds, bond funds, stock funds, index funds, actively managed funds, and target date funds.

The last category here is often designed for retail investors who are planning for retirement. The asset mix of these target date funds, sometimes known as target funds or lifecycle funds, shifts over time to become more conservative as the investor’s target retirement date approaches.

5. Hedge Funds

Like mutual funds, hedge funds pool money from investors and place it into securities and other investments. The difference between these two types of funds is that hedge funds are considered private equity funds, are considered high risk vehicles, and aren’t as regulated as mutual funds.

Because hedge funds use strategies and investments that chase higher returns, they also carry a greater risk of losses — similar to high-risk stocks. In general, hedge funds also have higher fees and higher minimum investment requirements. So, they tend to be more popular with wealthier investors and other institutional investors. (In some cases, they’re only available to accredited investors).

6. Insurance Companies

Perhaps surprisingly, insurance companies can also be institutional investors. They might offer products such as various types of annuities (fixed, variable, indexed), as well as other life insurance products which are invested on behalf of the investor, e.g. whole life or universal life insurance policies.

Getting Started as a Retail Investor

Institutional investors may be larger, more powerful, and run by professionals — whereas retail investors are individuals who aren’t trained investment experts — but it’s important to remember that these two camps can and do overlap. Institutional investors that run pension funds, mutual funds, and insurance companies, for example, serve retail investors by investing their money for retirement and other long-term goals.

If you’re ready to start investing as a retail investor, it’s easy when you set up an online brokerage account with SoFi Invest.

You can invest in stocks, ETFs, IPO shares, fractional shares, and more. For folks who’d like to discuss their financial goals or questions, SoFi members can connect at no cost with financial advisors.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What are the different types of investors?

Institutional investors are big companies with teams of professional investment managers who invest other people’s money. Retail investors are individuals who typically manage their own investment (e.g. for retirement or college savings).

What percentage of the stock market is made up of institutional investors?

The vast majority of stock market investors are institutional investors. Because they trade on a bigger scale than retail investors, institutional trades can impact the markets.

Are institutional or retail investment strategies better?

Institutional investors have access to more research and technology compared with retail investors. Thus their strategies may be considered more sophisticated. But it’s hard to compare outcomes, as both groups are exposed to different levels of risk.

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

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SOIN0822022

Aug

2022

Guide to Writing Put Options

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

Puts, or put options, are contracts between a buyer – known as the holder of an option – and a seller – known as the writer of an option – that gives the buyer the right to sell an asset, like a stock or exchange-traded fund (ETF), at a specific price within a specified time period. The seller of the put option is obligated to buy the asset at the strike price if the buyer exercises their option to sell.

Writing a put option is also known as selling a put option. When you sell a put option, you agree to buy the underlying asset at a specified price if the option buyer, also known as the option holder, exercises their right to sell the asset. The premium you receive for writing the put option is your maximum possible profit.

Generally, traders who buy put options have a bearish view of a security, meaning they expect the underlying asset’s price to decline. In contrast, the put option writer has a neutral to bullish outlook of a security. The put writer should be willing to take the risk of having to buy the asset if it falls below the strike price in exchange for the premium paid by the put option holder.

Writing put options is just one of numerous trading strategies investors use to build wealth, speculate, or hedge positions. While there is potential to generate income by writing put options, it can also be a risky way to enhance a portfolio’s return. Only investors with the knowledge of how to write put options and risk tolerance to take on this strategy should do so.

Writing Put Options

When writing a put option contract, the seller will initiate a trade order known as sell to open.

As mentioned above, the put option writer is selling a contract that gives the holder the right to sell a security at a strike price within a specified time frame. The put option writer will receive a premium from the holder for selling this option. If the price of the security falls below the strike price before the expiration date, the writer may be obligated to buy the security from the holder at the strike price.

There are two main reasons to write a put option contract: to earn income from the premium or to hedge a position.

A naked, or “uncovered,” put option is an option that is issued and sold without the writer setting aside any cash to meet the obligation of the option when it reaches expiration. This increases the writer’s risk.

Maximum Profit/Loss

The most a put option writer can profit from selling the option is the premium received at the start of the trade. Many traders take advantage of this profit as a way to generate regular income by writing put options for assets that they expect will not fall below the strike price.

However, this strategy can be risky because there can be significant losses if the asset’s price falls below the strike price. For example, if a stock’s price plummets because a company announces bankruptcy, the put option writer may be obligated to buy the stock when it’s trading near $0. The maximum loss will be equal to the strike price minus the premium.

Breakeven

The breakeven point for a put option writer can be calculated by subtracting the premium from the strike price. The breakeven point is the market price where the option writer comes away even, not making a profit or experiencing a loss (not including trading commissions and fees).

Writing Puts for Income

There are many options trading strategies. As noted above, many traders will write put options to generate income when they have a neutral to bullish outlook on a specific security. Because the writer of a put option receives a premium for opening the contract, they will benefit from that guaranteed payment if the put expires unexercised or if the writer closes out their position by buying back the same put option.

For example, if you believe an asset’s price will stay above a put option’s strike price, you can write a put option to take advantage of steady to rising prices on the underlying security. By keeping the option premium, you effectively add a stream of income into your trading account, as long as the underlying asset’s price moves in your favor.

However, with this strategy, you face the risk of having to buy the underlying asset from the option holder if the price falls below the strike price before the expiration date.

💡 Recommended: How to Sell Options for Premium

Put Writing Example

Let’s say you are neutral to bullish on shares of XYZ stock, which trade at $70 per share. You execute a sell to open order on a put option expiring in three months at a strike price of $60. The premium for this put option is $5; since each option contract is for 100 shares, you collect $500 in income.

If you wrote the put option contract for income, you’re hoping the price of XYZ stock will stay above $60 through the expiration date in three months, so the option holder does not exercise the option and requires you to buy XYZ. In this ideal scenario, your maximum profit will be the $500 premium you received for selling the put option.

At the very least, you hope the stock does not fall below $55, or the breakeven point ($60 strike price minus the $5 premium). At $55, you may be obligated to buy 100 shares at the $60 strike price:

$5,500 market value – $6,000 price paid + $500 premium earned = $0 return

If XYZ stock falls to $50, the put option holder will likely exercise the option to sell the stock. In this scenario, you will be obligated to buy the stock XYZ at the $60 strike price and incur a $500 loss in this trade:

$5,000 market value – $6,000 price paid + $500 premium earned = -$500 return

However, the further the price of XYZ falls, your potential loss risk increases. In the worst-case scenario where the stock falls to $0, your maximum loss would be $5,500:

$0 market value – $6,000 price paid + $500 premium earned = -$5,500 return

Put Option Exit Strategy

In the example above, it is assumed that the option is exercised or expires worthless. However, a put option writer can also exit a trade in order to profit or mitigate losses prior to the contract’s expiration.

A put writer can exit their position anytime using a trade order known as buy to close. In this scenario, the writer of the initial put option will buy back a put option to close out a position, either to lock in a profit or prevent further losses.

Using the example above, say that after two months, shares of XYZ have increased from $70 to $85. The value put contract you sold, which still has one more month until expiration and a $60 strike price, has collapsed to $1 because of a share price rise and perhaps a drop in expected volatility. Rather than wait for expiration, you decide to buy to close your put position, buying back the put contract at $1 premium, for a total of $100 ($1 premium x 100 shares). You are no longer obligated to buy shares of XYZ in the event the stock drops below $60 during the next month, and you lock in a profit of $400:

$500 premium earned to sell to open – $100 premium paid to buy to close = $400 return

A buy to close strategy can also be used to mitigate substantial losses. For example, if stock XYZ’s price starts dropping, the value of puts with a $60 strike price and a similar expiration date will rise. Rather than wait for expiration and be obligated to buy shares of a stock you don’t want, potentially losing up to $5,500, you may exit the position at any time. If option premiums for this trade are now $8, you can pay $800 ($8 premium x 100 shares) to buy to close the trade. This will result in a loss of $300, a potentially more manageable loss than the worst-case scenario:

$500 premium earned to sell to open – $800 premium paid to buy to close = -$300 return

Finally, user-friendly options trading is here.^*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

The Takeaway

Writing a put option is an options strategy in which you are neutral to bullish on the underlying asset. Potential profit is limited to the premium collected at the start of the trade. The maximum loss can be substantial, however. Finally, there is the risk that you will be liable to buy the stock at the option strike price if the holder exercises the option. Because of all these moving parts, writing put options should be left to experienced traders with the tolerance to take on the risk.

Looking to try different investment opportunities? SoFi’s intuitive and approachable options trading platform is a great place to start. You can access educational resources about options for more information and insights. Plus, you have the option of placing trades from either the mobile app or web platform.

Trade options with low fees through SoFi.

FAQ

What happens when you sell a put option?

Selling a put option is the same thing as writing a put option. You profit by collecting a premium for selling the option or when the put options decline in value, which usually happens when the underlying asset price rises. A significant risk of writing a put option is that you might be required to buy shares of the underlying asset at the strike price.

How would you write a put option?

You write a put option by first executing a sell to open order. You collect a premium at the onset of the trade without owning shares of the underlying asset. This strategy can be risky, so it generally requires high-level options trading knowledge.

When would you write a put option?

If a trader believes an asset’s price will stay flat or increase over a period of time, they may choose to write a put option. If the underlying asset’s price increases, the put option’s value will decline as it nears expiration. A profitable outcome occurs when the value of the put option is zero by expiration, or if the put writer buys to close the position before expiration. The put writer will profit by keeping the premium received at the initiation of the trade.

Photo credit: iStock/insta_photos

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

2022

Guide to Buying Stocks With a Credit Card

By Dan Miller | Credit, Growing Wealth, Investing | Comments Off

It is (sometimes) possible to buy stocks with a credit card, but it’s rarely a good idea for most people. Most brokerages do not allow you to directly fund your account with a credit card, and even if you find a brokerage that does, the fees associated with buying stocks with a credit card can outweigh any advantages.

Before you buy stocks with a credit card, make sure you understand the risks as well as the benefits. Investing in the stock market always comes with a degree of risk. If your investments lose money, you may not be able to pay off your credit card statement, which will mean that you’ll have to pay additional interest.

Using Your Credit Card to Buy Stocks

Most brokerages do not allow you to use your credit card to buy stocks. For example, SoFi’s online trading platform does not permit you to fund your account with a credit card. Brokerages generally don’t allow you to buy stocks with a credit card to help comply with the federal regulations governing financial products, such as stocks.

However, while you can’t purchase stocks directly with a credit card, there are still ways you can use your credit card to fund your purchase of stocks. This includes using cash back rewards to fund investments as well as taking out cash advances. Another option is to use a credit card that allows you to transfer funds to a checking account, which you can then move over to your brokerage account.

Benefits of Buying Stocks With a Credit Card

You generally aren’t able to buy shares of stock with a credit card, and even if you find a workaround to do so, the risks mostly outweigh the potential benefits.

Perhaps the main benefit if you’re investing with credit card rewards is that it can offer a way to put the rewards you get from your everyday purchases toward your financial future. While there’s no guarantee of success in investing, it’s possible the rewards points or cash you invest could grow in the stock market.

Risks of Buying Stocks With a Credit Card

Just like buying crypto with a credit card, buying stocks with a credit card comes with considerable risk. If you attempt to do so, take note of the following potential downsides:

• Investments in the stock market may lose value. If this happens, you may have a hard time paying off your monthly credit card statement in full.

• There are fees associated with buying stocks with a credit card. If you can find a brokerage that allows the purchase of stocks with a credit card, you’ll generally pay a fee to do so. Additionally, if you opt for a cash advance to use to buy stocks, you’ll also run into fees, not to mention a higher interest rate. There’s always a chance your investment returns won’t offset these costs.

• High credit utilization could affect your credit score. Making stock purchases with your credit card, taking out sizable cash advances, or racking up spending in order to earn rewards could all drive up your credit utilization, a major factor in determining your credit score. Having a high credit utilization — meaning the percentage of your total credit you’re using — could cause your credit score drop.

• You could get scammed. If you’re getting offers to buy certain shares with your credit card, there’s a chance it’s a scam. Do your own research before making any moves, and be wary before providing any personal information.

Recommended: Can You Buy Crypto With a Credit Card

Factors to Consider Before Buying Stocks With a Credit Card

There are a variety of different factors that you should keep in mind before buying stocks with a credit card.

Investment Fees

If you do find a brokerage that allows you to buy stocks with a credit card, they will likely charge a credit card convenience fee. This fee, which helps the brokerage to offset their costs for credit card processing, usually runs around 3% of the total price of your investment. Starting 3% in the hole makes it very difficult to make profitable investments.

Recommended: What is a Charge Card

Cash Advance Fees

If your brokerage does not support buying stocks with a credit card, you might consider taking out a cash advance from your credit card. Then, you could use the cash to fund your brokerage account.

However, this transfer will often involve a cash advance fee, which typically will run anywhere from 3% to 5% of the amount transferred. Additionally, interest on cash advances starts to accrue immediately, which is different than how credit cards work usually, and often at a higher rate than the standard purchase APR.

Transfer Fees

Another way to use your credit card to purchase stocks is by making a balance transfer. You can transfer funds from your credit card to your checking account, and then move that money again to your brokerage account. In addition to the hassle of moving money around, you’ll likely pay a balance transfer fee, which is often 3% or 5%. Plus, interest will start accruing on balance transfers right away unless you have a 0% APR introductory offer.

Interest

If you’re not able to pay your credit card statement in full (because your investments have decreased in value), your credit card company will charge you interest. With many credit card interest rates often approaching or even exceeding 20% APR, this will very likely swallow up any profits from your short-term investments.

You’ll also want to look out for interest getting charged at a higher rate and starting to accrue immediately if you opt for a cash advance or a balance transfer.

Recommended: How to Avoid Interest On a Credit Card

Avoiding Scams When Buying Stocks With a Credit Card

Because most reputable brokerages don’t allow you to buy stocks with a credit card, there are occasionally scams that you need to be on the lookout for.

Watch out for individuals or lesser-known companies that say you can buy stocks with a credit card through them. Do your own research to make sure it is a legitimate brokerage and offer before using these other companies.

Does Buying Stock With Your Credit Card Affect Your Credit Score?

The act of just buying stock with your credit card won’t affect your credit score any more than any other purchase on a credit card. However, your credit score might be affected if you aren’t able to pay your monthly balance off in full. One of the best ways to improve your credit score is to always make sure that you have the financial ability and discipline to pay off your credit card statement in full, each and every month.

Additionally, your credit score could take a hit if you use too much of your available balance or even max out your credit card with your stock purchases, as this would increase your credit utilization. Also, you might see an impact on your credit if you open a new account to fund your stock purchases. This is because credit card applications trigger a hard inquiry, which will temporarily cause a dip in your score.

Alternatives to Buying Stocks With a Credit Card

As you can see, buying stocks with a credit card generally isn’t a great option — or even possible with most brokerages. If you want to start investing in stocks, you might consider these other ways to do so:

• Cash back rewards: Then, you can take your cash back rewards that you earn and use them to invest in stocks or other investments.

• Employer-sponsored 401(k): A great way to invest is through an employer-sponsored retirement plan like a 401(k). By using a 401(k), you’ll get to invest with pre-tax dollars and defer paying taxes until you make withdrawals in retirement.

• Brokerage margin loans: If you’re looking to borrow money to invest, one option could be a brokerage margin loan. These allow you to borrow money directly from the brokerage, often at a lower rate than what’s offered by most credit cards. Be aware of the risk involved here though — even if your investments don’t pan out, you’ll still have to repay your loan.

The Takeaway

Very few (if any) brokerages allow you to directly buy stocks with a credit card. If you do find a brokerage that allows you to buy stocks with a credit card, note the fees involved, not to mention the risk of loss in investing and the possibility of damaging your credit score. This is why even if you do find a way to do it, it’s rarely a good idea to buy stocks with a credit card for most people.

One alternative is to get a cash back rewards credit card and then use rewards you earn to fund your stock investments.

FAQ

What is credit card arbitrage?

Credit card arbitrage is usually defined as borrowing money at a low interest rate using a credit card and then investing that money, hoping to earn a higher return on investment. This is often done with cards that offer 0% introductory APRs.

What are the risks of credit card arbitrage?

The biggest risk of credit card arbitrage is that your investments will lose money, or they won’t make enough money to repay your credit card balance. This can cost you a significant amount of interest and/or credit card fees. You should also be aware that having a large balance on your credit card (even if it’s at 0% interest) can have a negative effect on your credit score.

Does buying stock with a credit card affect my tax?

Buying and selling stocks does often come with tax consequences, and you should be aware of how your investments affect your tax liability. How you buy stocks (with cash, credit card ,or in other ways) doesn’t affect the amount of taxes you might owe on your stock purchase.

Should I buy stocks with my credit card?

The way that credit cards work is that you borrow money and, if you don’t pay the full amount each month, you’re charged interest. Some brokerages may also charge credit card processing or convenience fees if they allow you to purchase stocks with a credit card. Because of the interest and fees potentially involved, it’s very difficult to come out ahead buying stocks with a credit card. Plus, there’s no guarantee of success when investing.

Is it safe to buy stocks with a credit card?

Because most reputable stockbrokers do not accept credit card payments to fund your account or buy stocks, you’ll want to be careful with any site that says that it will let you buy stocks with a credit card. Follow best practices for internet safety when trying to buy stocks with a credit card, just like you would before making any purchase online.

Do stockbrokers accept credit card payments?

Most stockbrokers do not accept credit card payments to fund your account or to buy stocks. If you want to buy stocks with a credit card, you will need to find a workaround such as taking a cash advance from your credit card and using that to fund your brokerage account. Just be sure that you understand any cash advance fees and the interest rate that come with that type of financial transaction.

Photo credit: iStock/katleho Seisa

¹See Rewards Details at SoFi.com/card/rewards.

Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points toward active SoFi accounts, including but not limited to, your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, Student Loan Refinance, or toward SoFi Travel purchases, your rewards points will redeem at a rate of 1 cent per every point. For more details, please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOCC0622007

Jul

2022

10 Options Trading Strategies for Beginners

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

While the options market is risky and not suitable for everyone, these contracts can be a tool to make a speculative bet or offset risk in another position.

Many option strategies can involve one “leg,” meaning there’s only one contract that’s traded. More sophisticated strategies involve buying or selling multiple options contracts at the same time in order to minimize risk.

Here’s a guide that covers 10 important options trading strategies–from the most basic to the more complex and advanced.

10 Important Options Trading Strategies for Every Investor

When trading options, investors can either buy existing contracts, or they can “write” or sell contracts for securities they currently hold. The former is generally used as a means of speculation, while the latter is most often used as a way of generating income.

Here’s a closer look at important options strategies for beginner, intermediate and more advanced investors to know.

Long Calls
Long Puts
Covered Calls
Short Puts
Short Calls or Naked Calls
Straddles and Strangles
Cash-Secured Puts
Bull Put Spreads
Iron Condors
Butterfly Spreads

1. Long Calls

Level of Expertise: Beginner

Being long a call option means an investor has purchased a call option. “Going long” calls are a very traditional way of using options. This strategy is often used when an investor has expectations that the share price of a stock will rise but may not want to outright own the stock. It’s therefore a bullish trading strategy.

Let’s say an investor believes that Retail Stock will climb in one month. Retail Stock is currently trading at $10 a share and the investor believes it will rise above $12. The investor could buy an option with a $12 strike price and with an expiration date at least one month from now. If Retail Stock’s price rises to hit $12 within a month, the value or “premium” of the option would likely rise.

2. Long Puts

Level of Expertise: Beginner

Put options can be used to make a bearish speculative bet, similar to shorting a stock, or they can also function as a hedge. A hedge is something an investor uses to make up for potential losses somewhere else. Here are examples of both uses.

Let’s say Options Trader wants to wager shares of Finance Firm will fall. Options Trader doesn’t want to buy the shares outright so instead purchases puts tied to Finance Firm. If Finance Firm stock falls before the expiration date of the puts, the value of those options will likely rise. And Options Trader can sell them in the market for a profit.

An example of a hedge might be an investor who buys shares of Tech Stock C that are currently trading at $20. But the investor is also nervous about the stock falling, so they buy puts with a strike price of $18 and an expiration two months from now.

One month later, Tech Stock C stock tumbles to $15, and the investor needs to sell their shares for extra cash. But the investor capped their losses because they were able to sell the shares at $18 by exercising their puts.

3. Covered Calls

Level of Expertise: Beginner

The covered call strategy requires an investor to own shares of the underlying stock. They then write a call option on the stock and receive a premium payment.

The tradeoff is that if the stock rises above the strike price of the contract, the stock shares will be called away from them, and the shares (along with any future price rises) will be forfeit. So, this strategy works best when a stock is expected to stay flat or go down slightly.

If the stock price of Company Y stays below the strike price when the option expires, the call writer keeps the shares and the premium and can then write another covered call if desired. If Company Y rises above the strike price when the option expires, the call writer must sell the shares at that price.

4. Short Puts

Level of Expertise: Beginner

Being short a put is similar to being long a call in the sense that both strategies are bullish. However, when shorting a put, investors actually sell the put option, earning a premium through the trade. If the buyer of the put option exercises the contract however, the seller would be obligated to buy those shares.

Here’s an example of a short put: Shares of Transportation Stock are trading at $40 a share. An investor wants to buy the shares at $35. Instead of buying shares however, the investor sells put options with a strike price of $35. If the shares never hit $35, the investor gets to keep the premium they made from the sale of the puts.

Should the options buyer exercise those puts when it hits $35, the investor would have to buy those shares. But remember the investor wanted to buy at that level anyways. Plus by going short put options, they’ve also already collected a nice premium.

5. Short Calls or Naked Calls

Level of Expertise: Intermediate

When an investor is short call options, they are typically bearish or neutral on the underlying stock. The investor typically sells the call option to another person. Should the person who bought the call exercise the option, the original investor needs to deliver the stock.

Short calls are like covered calls, but the investor selling the options don’t already own the underlying shares, hence the phrase “naked calls”. Hence they’re riskier and not for beginner investors.

Here’s a hypothetical case: Investor A sells a call option with a strike price of $100 to Trader B, while the underlying stock of Energy Stock is trading at $90. This means that if Energy Stock never rises to $100 a share, Investor A pockets the premium they earned from selling the call option.

However, if shares of Energy Stock rise above $100 to $115, and Trader B exercises the call option, Investor A is obligated to sell the underlying shares to Trader B. That means Investor A has to buy the shares for $115 each and deliver them to Trader B, who only has to pay $100 per share.

6. Straddles and Strangles

Level of Expertise: Intermediate

With straddles in options trading, investors can profit regardless of the direction the underlying stock or asset makes. In a long straddle, an investor is anticipating higher volatility, so they buy both a call option and a put option at the same time. Short straddles are the opposite–investors sell a call and put at the same time.

Straddles and strangles are used when movement in the underlying asset is expected to be small or neutral.

Let’s look at a hypothetical long straddle. An investor pays $1 for a call contract and $1 for a put contract. Both have strikes of $10. In order for the investor to break even, the stock will have to rise above $12 or fall below $8. This is because we’re taking into account the $2 they spent on the premiums.

In a long strangle, the investor buys a call and put but with different strike prices. This is likely because they believe the stock is more likely to move up than down, or vice versa. In a short strangle, the investor sells a call and put with different strikes.

Here’s an example of a short strangle. An investor sells a call and put on an exchange-traded fund (ETF) for $3 each. The maximum profit the investor can make is $6 — the total from the sales of the call and the put options. The maximum loss the investor can incur is unlimited since the underlying ETF can potentially climb higher forever. Meanwhile, losses would stop when the price hit $0 but still be significant.

7. Cash-Secured Puts

Level of Expertise: Intermediate

The cash-secured put strategy is one that can both provide income and let investors purchase a stock at a lower price than they might have been able to if using a simple market buy order.

Here’s how it works: an investor writes a put option for Miner CC they do not own with a strike price lower than shares are currently trading at. The investor needs to have enough cash in their account to cover the cost of buying 100 shares per contract written, in case the stock trades below the strike price upon expiration (in which case they would be obligated to buy).

This strategy is typically used when the investor has a bullish to neutral outlook on the underlying asset. The option writer receives cheap shares while also holding onto the premium. Alternatively, if the stock trades sideways, the writer will still receive the premium, but no shares.

8. Bull Put Spreads

Level of Expertise: Advanced

A bull put spread involves one long put with a lower strike price and one short put with a higher strike price. Both contracts have the same expiration date and underlying security. This strategy is intended to benefit from a rising stock price. But unlike a regular call option, a bull put spread limits losses and can also profit from time decay.

Let’s say a stock is trading at $150. Trader B buys one put option with a strike of $140 for $3, while selling another put option with a strike of $160 for $4. The maximum profit is $1, or the net earnings from the two options premiums. So $4 minus $3 = $1. The maximum profit can be achieved when the stock price goes above the higher strike, so $160 in this case.

Meanwhile, the maximum loss equals the difference between the two strikes minus the difference of the premiums. So ($160 minus $140 = $20) minus ($4 minus $3 = $1) so $20 minus $1, which equals $19. The maximum loss is achieved if the share price falls below the strike of the put option the investor bought, so $140 in this example.

Recommended: A Guide to Options Spreads

9. Iron Condors

Level of Expertise: Advanced

The iron condor consists of four option legs (two calls and two puts) and is designed to earn a small profit in a low-risk fashion when a stock is thought to have little volatility. Here are the four legs. All four contracts have the same expiration:

1. Buy an out-of-the-money put with a lower strike price

2. Write a put with a strike price closer to the asset’s current price

3. Write an call with a higher strike

4. Buy a call with an even higher out-of-the-money strike.

If an individual makes an iron condor on shares of Widget Maker Inc., the best case scenario for them would be if all the options expire worthless. In that case, the individual would collect the net premium from creating the trade.

Meanwhile, the maximum loss is the difference between the long call and short call strikes, or the long put and short put strikes, after taking into account the premiums from creating the trade.

10. Butterfly Spreads

Level of Expertise: Advanced

A butterfly spread is a combination of a bull spread and a bear spread and can be constructed with either calls or puts. Like the iron condor, the butterfly spread involves four different options legs. This strategy is used when a stock is expected to stay relatively flat until the options expire.

In this example, we’ll look at a long-call butterfly spread. To create a butterfly spread, an investor buys or writes four contracts:

1. Buys one in-the-money call with a lower strike price

2. Writes two at-the-money calls

3. Buys another higher striking out-of-the-money call.

The Takeaway

Options trading strategies offer a way to potentially profit in almost any market situation—whether prices are going up, down, or sideways. The market is complex and highly risky, making it not suitable for everyone, but the guide above lays out different trading strategies based on the level of expertise of the investor.

Investors who are ready to dip their toe into options trading might consider SoFi’s options trading platform, where they’ll have access to a library of educational content about options. Plus, the platform has a user-friendly design.

Pay low fees when you start options trading with SoFi.

Photo credit: iStock/Rockaa
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Guide to Short Put Spreads

What Is a Short Put Spread?

How Short Put Spreads Work

Short Put Spread Example

Maximum Profit

Maximum Loss

Breakeven

Set-Up

Maintenance

Exit Strategy

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Impacts of Time, Volatility, and Price Change

Time

Volatility

Price

Pros and Cons of Short Put Spreads

Short Put Calendar Spreads

Alternatives to Short Put Spreads

Bull Put Spreads

Bear Put Spread

Call Spreads

The Takeaway

FAQ

Is a short put spread bullish or bearish?

How would you close a short put spread?

What does shorting a put mean?

Institutional vs Retail Investors: What’s the Difference?

Who Is Considered a Retail Investor?

Who Is Classified as an Institutional Investor?

What Are the Differences Between Institutional Investors vs Retail Investors?

What Are the Similarities Between Institutional Investors vs Retail Investors?

Do Institutional or Retail Investors Get the Highest Returns?

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Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

How Many Retail Investors Are There?

Types of Institutional Investors

1. Commercial Banks

2. Endowment Funds

3. Pension Funds

4. Mutual Funds

5. Hedge Funds

6. Insurance Companies

Getting Started as a Retail Investor

FAQ

What are the different types of investors?

What percentage of the stock market is made up of institutional investors?

Are institutional or retail investment strategies better?

Guide to Writing Put Options

Writing Put Options

Maximum Profit/Loss

Breakeven

Writing Puts for Income

Put Writing Example

Put Option Exit Strategy

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The Takeaway

FAQ

What happens when you sell a put option?

How would you write a put option?

When would you write a put option?

Guide to Buying Stocks With a Credit Card

Using Your Credit Card to Buy Stocks

Benefits of Buying Stocks With a Credit Card

Risks of Buying Stocks With a Credit Card

Factors to Consider Before Buying Stocks With a Credit Card

Investment Fees

Cash Advance Fees

Transfer Fees

Interest

Avoiding Scams When Buying Stocks With a Credit Card

Does Buying Stock With Your Credit Card Affect Your Credit Score?

Alternatives to Buying Stocks With a Credit Card

The Takeaway

FAQ

What is credit card arbitrage?

What are the risks of credit card arbitrage?

Does buying stock with a credit card affect my tax?

Should I buy stocks with my credit card?

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