Aug
30
2022
Guide to Writing Put Options

Guide to Writing Put Options

By | Growing Wealth, invest, Investing | Comments Off on Guide to Writing Put Options

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.

💡 Recommended: What Are Naked Options? Risks and Rewards, Explained

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

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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.
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Aug
14
2022
9 ESG Metrics Investors Should Know

9 ESG Metrics Investors Should Know

By | Growing Wealth, invest, Investing | Comments Off on 9 ESG Metrics Investors Should Know

There are over half a dozen institutions and nonprofits involved in establishing metrics, providing disclosure guidelines, and constructing surveys in the name of establishing ESG metrics. ESG refers to companies that try to meet higher environmental, social, and governance standards, as well as securities based on those organizations.

Given the growing interest in sustainable investing, and new research that suggests these strategies can be as profitable as conventional investing, investors will benefit from the ability to measure and compare outcomes.

That said, the SEC only recently took steps to propose ESG-disclosure requirements for investment advisors and fund managers, and these have yet to be implemented. As such, there’s currently wide variance in disclosure practices as the industry continues to consolidate.

Those interested in learning more about ESG investing and the standards currently in use, should be ready for a throng of different metrics that can vary widely across industries. We cover nine of the most common below.

What Are ESG Metrics?

While ESG investing actually began in the 1960’s, the investment philosophy didn’t really catch on in the mainstream until the past couple of decades, with the increase in popularity of socially responsible investing (SRI). Socially responsible investing is a broader term in the industry, and can be used interchangeably with ESG, although the two are different.

As noted above, ESG stands for environmental, social, and governance factors, each of which represents a set of standards that can be used to measure the risks and sustainability of a business. Each factor features its own set of qualitative and quantitative metrics on how firms perform in terms of environmental responsibility, social wellness, and corporate governance.

As it stands, two of the most prominent organizations that set disclosure standards for ESG metrics include the Global Reporting Initiative (GRI) and the Value Reporting Initiative (VRI), which is a merger of the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC).

While there is much overlap amongst the existing standards for ESG, at their core, each organization seeks to establish a framework that 1) allows firms to accurately represent their ESG metrics, and 2) allows those metrics to be comparable across firms.

The Importance of ESG Metrics

ESG metrics are important because they allow investors to fairly gauge a firm’s impact on environmental issues, societal issues, and issues of corporate responsibility against a set of comparable peers. Since many investors who are interested in ESG strategies are also committed to making an impact with their money, being able to measure outcomes is important.

In theory, companies that perform well in ESG categories have lower costs of capital, are more innovative, and may help to support positive environmental, social, and corporate governance outcomes. However, it can be difficult to properly measure ESG policies across companies, as no official regulations for standardized ESG reporting currently exist.

Still, two recent studies suggest that socially responsible funds tend to outperform conventional mutual funds. The Morningstar “Sustainable Funds U.S. Landscape Report” from February 2022 found that “two-thirds of sustainable offerings in the large-blend category topped the U.S. market index last year compared with 54% of all funds in the category.”

Also, a Morningstar analysis of European-based funds found that the majority of ESG funds outperformed non-ESG strategies over one-, five-, and 10-year periods.

Investors also face difficulty when comparing ESG metrics across different industries. For example, it’s difficult to compare energy companies and financial institutions on emissions-related issues, as the two represent entirely different industries. This can easily lead to apples-to-oranges comparisons, if not monitored closely.

Finally, some of these standards are qualitative and may be prone to subjectivity, which can make the ESG evaluation process difficult to quantify. These can all present challenges if you’re trying to apply ESG principles to your investing strategy. It’s therefore important to identify an appropriate widely accepted set of ESG metrics to ensure that investors evaluate investments using the right framework.

9 Common ESG Metrics Businesses Track

Commonly employed ESG metrics are varied and consist of both qualitative and quantitative metrics across all three sub-categories of environmental, social, and governance.

We break down some of the most commonly tracked ESG factors in the industry, organized by category.

3 Common Environmental Metrics

Environmental metrics measure the long-term ecological sustainability of a firm’s actions. These can be related to emissions, finite natural resources, and the environment, among other things.

Many of these metrics can be tracked on an aggregate basis or relative to another operating metrics (per capita, per unit produced, etc).

•   Emissions: Quantifies how much a firm emits in greenhouse gases, or is working to reduce carbon emissions, through its operations.

•   Waste: Measures how much waste a company generates or recycles in their operations. Can also deal with a company’s impact on its surrounding ecology.

•   Resource Usage: Tracks the efficiency and intensity of a firm’s operations when it comes to using energy, water, or other key resources.

3 Common Social Metrics

Social metrics evaluate how a firm’s policies impact its human capital and society at large. Attempts to quantify these metrics have largely been implemented on a per-occurrence basis or as a rate over time.

•   Human resources: Evaluates how a company treats its workforce, frequency/magnitude of any workplace litigation, and employee turnover.

•   Labor safety: Tracks a firm’s commitment to safe labor practices via metrics like frequency of workplace accidents and lost productivity.

•   Products: Examines a firm’s product quality and sustainability through metrics like number of recalls, complaints, or even frequency of litigation. Can also be linked to environmental when it comes to how product inputs are sourced.

3 Common Governance Metrics

Governance metrics pertain to issues relating to business ethics, mitigation of agency risks, and reporting transparency. These can be measured in terms of how executives are compensated, board policies, and accounting choices, among others.

•   Ownership Structure: Reviews how faithful a firm is to its shareholders when it comes to metrics like the number of independent directors on the board, or how voting rights are distributed between management and shareholders.

•   Executive Compensation: Measures executive compensation relative to industry standards or company profitability. Can also be tied to social when measuring how compensation structures vary for different genders/minorities.

•   Financial Reporting: Tracks a firm’s accounting policies and how comprehensive and accurate they are. Could involve reviewing a firm’s books for key disclosures or frequency of one-off exceptions.

How Can Investors Use ESG Metrics?

Investors will want to adopt a long-term perspective when it comes to evaluating investments using ESG metrics, as the principles of ESG are built off the basis of long-term secular trends when it comes to technology and social issues. The goal is to invest in companies with positive ESG traits while avoiding or underweighting firms with negative ESG traits.

Investors will want to be discerning when investing in specific firms or funds that advertise an ESG approach. The wide range of ESG frameworks mean that some firms may cherry-pick which ESG metrics they wish to disclose. Investment funds and exchange-traded funds (ETFs) that tout an ESG-based approach may use their own proprietary metrics when deciding how to allocate ESG investments; which may make them difficult to compare.

When using ESG metrics, you’ll want to examine all ESG-related disclosures closely and ensure that there’s consistency in the data being reported. Depending on the metric you’re examining, you may wish to avoid making comparisons across disparate industries and focus on identifying “best-in-class” investments for a single industry.

How do Firms Report ESG Metrics?

How each firm reports its ESG metrics depends on its policies regarding disclosures.

When it comes to policy implementation, firms often set ESG targets to meet or exceed guidelines set by governments, non-profits, or agencies; they may survey their own stakeholders and shareholders to gauge how they view company performance on ESG issues, or hire third parties to survey their customer base on their behalf.

Keep in mind, the adoption of ESG frameworks can vary widely by firm and disclosure of these metrics is still voluntary. Additionally, certain metrics may be difficult to quantify and in some cases, management, stakeholders, or shareholders may disagree on the impact of certain ESG factors.

As a result, professional money managers sometimes may solicit the assistance of third-party ESG consultants to obtain an independent assessment of how a company actually performs on ESG metrics.

The Takeaway

When used properly, ESG metrics offer another useful dimension for evaluating investments, as it focuses on a unique set of risk factors for firms that typically isn’t captured by using traditional fundamental metrics.

However, the adoption of a unifying set of standards among firms still remains elusive, and will likely remain so until regulators choose to codify their own ESG reporting requirements.
As with any investment strategy, investors will want to manage their expectations appropriately and employ ESG metrics as part of a larger toolbox for investment analysis.

Ready to explore sustainable investing — or add ESG-focused investments to your portfolio? It’s easy when you open an Active Invest account with SoFi Invest. SoFi’s investing platform offers commission-free trades on stocks and ETFs, as well as fractional shares, IPO shares, and more.

Photo credit: iStock/shapecharge

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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Aug
05
2022
Guide to Buying Stocks With a Credit Card

Guide to Buying Stocks With a Credit Card

By | Credit, Growing Wealth, Investing | Comments Off on Guide to Buying Stocks With a Credit Card

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.

Recommended: Tips for Using a Credit Card Responsibly

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.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

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




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Jul
20
2022

10 Options Trading Strategies for Beginners

By | Growing Wealth, invest, Investing | Comments Off on 10 Options Trading Strategies for Beginners

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.

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
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.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Jul
18
2022
Exercising in Options? What Does It Mean & When to Exercise

Exercising in Options? What Does It Mean & When to Exercise

By | Growing Wealth, invest, Investing | Comments Off on Exercising in Options? What Does It Mean & When to Exercise

Investors in stock option contracts have the right to buy or sell underlying stocks (or other assets) at a predetermined price within a certain time period. When an investor decides they want to take action on their right to buy or sell, it’s called exercising. There are a number of ways investors can choose to exercise their options contract, depending on their individual goals and financial situation.

Option contracts are complex investment vehicles. They’re a multi-faceted tool that involves precise timing and are backed by lots of strategizing. While options are not for all investors, if handled by experienced traders, options could add diversity to a well-diversified portfolio.

In this article, we focus on the concept of exercising in options. What does it really mean to “exercise an option?” And how do you do it?

What Does Exercising Mean?

Exercising a stock option means that a trader purchases or sells the underlying stock associated with the options contract at the price set by the contract, which is called the strike price. This price may differ from the current market price of the stock.

Options contracts are valid for a certain amount of time. So if the owner doesn’t exercise their right to buy or sell within that period, the contract expires worthless, and the owner loses the right to buy or sell the underlying security at the strike price.

There is also an upfront fee, called a premium, that gets paid when a trader enters into an options contract. If the trader doesn’t exercise the contract, they forfeit that fee along with any other brokerage fees. Most options contracts never get exercised. Some contracts are sold instead of exercised, because the contract itself has value if it has the potential to be exercised later.

There are two main choices of types of options contracts, call options and put options. Purchasing a call option gives traders the right, but not the obligation, to purchase the underlying security at the strike price. Selling put options gives traders the right to sell the underlying security at the strike price.

Each contract is different, and there are also different types of options. American-style options let traders exercise them prior to the contract’s expiration date, while European-style options can only be exercised after the expiration date.

How Do You Exercise an Option?

Generally, traders have several choices when it comes to exercising their stock options. When a trader is ready to exercise an option, they can let their brokerage firm know. The broker will create an exercise notice to the Options Clearing Corporation (OCC) to let the individual or entity buying or selling the underlying stock know that the trader wants to execute a trade on a particular date. The option seller is required to fulfill the obligations of the contract.

The OCC assigns the exercise notice to one of their clearing members, which tends to be the trader’s brokerage firm. The broker then assigns the option to one of their customers who has written an option contract that they have not yet covered. Depending on the broker, the customer they choose may either be chosen randomly or picked on a first-in-first-out (FIFO) principle .

Holding

If a trader thinks a stock will go up in value, they can purchase options at a lower market price, then wait until the market price goes up to exercise the option. Then they purchase at their original lower price and can decide to sell at the new, higher market price. This is one of the benefits of trading stock options. However, traders can’t wait forever, because options contracts do have expiration dates.

Exercise-and-Hold

It is common for company employees to receive stock options, which give them the right to purchase company stock. They can purchase the stock and then hold onto it if they think it will rise in value. However, it’s important for employees to understand the rights they have with their options. Often, stock shares are vested for a certain amount of time, so an employee has to wait for that time to end before they are allowed to exercise the option.

Exercise-and-Sell-to-Cover

Sometimes there are fees, commissions, and taxes involved in exercising company stock options. To cover those fees, traders can exercise options, purchase shares of company stock and simultaneously sell some of those shares to cover the expenses.

Exercise-and-Sell

If a company employee wants to immediately sell their stock options after exercising their right to buy the stock, they can choose to exercise and sell. They will receive the cash amount of the current market value of the stock minus any fees and taxes.

Early Exercise

In addition to profiting off of a stock’s price increase, options traders may want to exercise early so that they can earn dividends off of the underlying security. Traders who write call options should be prepared to close out a trade at any time prior to the contract’s expiration date, especially if the contract is in-the-money. If a put option is in the money, most likely the owner will exercise it before it expires.

Advantages and Disadvantages of Exercising an Option

Exercising options presents opportunities to earn a profit, but there also are potential downsides to exercising options.

Exercising Options

Advantages Disadvantages
Earn dividends from owning the underlying stock. Fees, taxes, transaction costs potentially could cancel out any profit.
Sell the underlying stock for a profit. Increases chance of risk: margin call, stock’s value could decrease.
In general, traders can make a greater profit via closing positions — by buying or selling options rather than exercising them.

One of the few instances where it could be advantageous to exercise a contract is if you’d like to own the stock outright instead of basing a contract on it.

The one way that exercising a contract could actually make you lose out on money has to do with the complicated price structure of options, which consists of two components: extrinsic (time value) and intrinsic value.

If you own options contracts that are in the money, then the price of those contacts will comprise both extrinsic and intrinsic value. If you sell these options, you’d benefit from both the intrinsic and the extrinsic price components.

But if you exercised them instead, you would only benefit from the intrinsic value. Why?

Extrinsic value serves to compensate the writer (seller) of options contracts for the risk they are taking. Once you exercise an options contract, the contract itself effectively ceases to exist, so that all extrinsic value is lost.

How Do You Know Whether to Hold or Exercise an Option?

It can be difficult to know when and whether to exercise an option. There are different options trading strategies that can prove beneficial to exercising early, or to waiting or even selling the option contract itself. Many factors come into play when making the decision to exercise an option, such as

•   the amount of time left in the contract,

•   whether it is in-the-money and if so by how much, and

•   whether the trader wants to buy, sell, or hold shares of the underlying security.

Time Value

One key thing to know about options trading is how options pricing works. Options lose value over time until they are finally worth nothing at their expiration date. If a trader owns an option that still has time left on it, they may consider selling the option or waiting to exercise it. Often it is more profitable to sell the option than to exercise it if it still has time value. If an option is in the money and close to expiring, it may be a good idea to exercise it. Options that are out-of-the-money don’t have any intrinsic value, they only have time value.

Transaction Costs

In addition to the premium a trader pays when buying an option, they must also pay transaction and commission fees to their broker. There can be fees both when exercising an option and when buying or selling the underlying shares.

Increased Chance of Risk

Buying a call option is fairly low risk because the most a trader can lose is the premium amount they paid when they bought into the contract. Exercising an option increases risk, because even if the trader profits in the short term by exercising and buying the stock at a good price, the stock could decrease in value any time. Because the trader already lost the premium amount, they would need to earn at least that amount back to break even on the trade.

Exposure to Margin Risk

To purchase the shares of the underlying security, a trader needs to use cash from their account or take out a margin loan from their broker. If they take out a loan, they increase their chances for risk and greater expenses.

Options Obligations

The owner of a long option contract has the right to buy shares of the underlying stock if they choose to exercise it. The selling trader on the other side of the contract is obligated to fulfill the contract if the owner decides to buy. If the buyer exercises their right, the seller must deliver the number of shares — generally 100 shares per contract — for the strike price set by the contract. If the buyer does exercise the contract, they are then obligated to pay the seller for those shares.

The brokerage firm gives notice to a random seller when a buyer exercises an option that fits the transaction parameters. This could happen at any time prior to the expiration date. A seller can close out their option contract early if it hasn’t been exercised yet. The process of assigning and exercising options is all automated. So if a trader sells an option, when it gets exercised the stock will automatically be removed from their account, and they receive cash in their account in return. The buyer will receive the shares in exchange for cash from their brokerage account.

The Takeaway

Stock options are a popular investing tool to gain exposure to securities with a smaller upfront cost and level of risk. If you’re interested in starting to build a portfolio, a great tool to use is SoFi Invest. The online trading platform lets you research, track, buy and sell stocks, ETFs, and other assets right from your phone — all with 24/7 convenience.

More ways to invest — all in one place. You can connect your banking and any other investment accounts to the SoFi Invest app to see all your financial information easily in one simple dashboard.

Get started trading on SoFi Invest today.

FAQ

How can you tell when to exercise an option?

It could be beneficial to exercise an option if the underlying security’s price is more than the strike price of a call option; or the underlying security’s price is less than the strike price of a put option.

How are early-exercise options different from exercise options?

Early-exercise options differ from exercise options in one way: Early exercise is possible with American-style option contracts only. You cannot do this with European-style option contracts, as they rule that you may exercise on the expiration date only.

What is a cashless exercise in options?

Also called the “same-day sale,” a cashless exercise is when an employee exercises their stock options via a short-term loan provided by a brokerage firm.


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.
*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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.

Photo credit: iStock/whyframestudio
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