Mar
05
2025
Forex Binary Options, Explained: What They Are & How They Work

Forex Binary Options, Explained: What They Are & How They Work

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Forex Binary Options, Explained: What They Are & How They Work

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.

If you have experience trading options in the stock market, you may also be aware of trading options in the forex world. Forex (short for foreign exchange) is a trading market that is separate from the stock market, and is where traders buy and sell different foreign currencies.

Two parties might exchange currency if one is traveling in a different country, or represents a multinational company. Many people also trade foreign currency as an investment, just as traders do with the stock market.

Binary options, also known as digital options, are one way to trade in the foreign currency market. This all-or-nothing investment option can be attractive to some traders, but comes with significant risk. Below, we’ll explore how binary options work and why one might choose to trade them.

Key Points

•   Forex binary options involve betting on future currency pair prices with fixed outcomes.

•   Traders determine their strategy by selecting a currency pair, strike price, and timeframe before the trade.

•   Buyers pay upfront and “win” $100 if the option is in the money at expiration.

•   Sellers put down the difference from $100 and win if the option is out of the money.

•   Pros include known risks, simplicity, and lower initial investment; cons include higher costs, limited broker support, and higher risk.

What Are Binary Options?

Binary options are a type of options contract with only two possible outcomes: a fixed payout or nothing at all. Traders choose an underlying asset (such as a currency pair, stock index, or commodity), set a strike price, and select an expiration timeframe.

In binary options, both the buyer and the seller put down their money upfront. These options are typically priced from 0 to 100, and the price represents the approximate probability that the given currency pair will be at or above the strike price when the option expires.

What Are Forex Binary Options?

Forex binary options focus specifically on currency pairs, such as USD/EUR. These contracts are similar to other binary options but involve predicting whether a currency pair’s exchange rate will be above or below a chosen strike price at expiration. These are considered exotic options because they have a non-traditional payout structure and only two possible outcomes: either a fixed profit or a total loss.

How Do Forex Binary Options Work?

Unlike traditional call and put options, forex binary options have two possible outcomes: if the price of the currency pair is at or above the strike price at expiration, you make money. If it is below, you lose your investment. Each contract typically settles at either $100 or $0, depending on whether it expires in or out of the money.

For example, if an option is priced at $40, then the buyer must pay $40 per contract and the seller must pay $60 ($100 minus the $40 price) upfront. When the option closes, whichever side is on the right side of the strike price collects the entire $100. The fact that there are only two possibilities leads to the name binary option.

Pros and Cons of Forex Binary Options Trading

Here are some of the pros and cons of trading binary options when forex trading:

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Pros:

•   Limited and known upfront risk

•   Can trade even with a smaller budget

•   Easier to understand since there are only two possible outcomes

•   Potential for a significant percentage gain if you are right

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Cons:

•   More expensive than traditional forex trading

•   Supported by a limited number of brokers

•   Seller, like buyer, must put money down upfront

•   100% loss of your position if you are wrong

Binary Option Risks and Rewards

Like all investments, investing in binary forex options comes with risks and rewards. These are different for the buyer and seller.

Risk for Buyers

Although there is risk in trading binary options, a trader knows the amount of money they’re risking upfront. With a binary option, you put down a specific amount of money (the option price). If the currency is below the strike price at expiration, you will lose all of the money you put down.

Reward for Buyers

The potential reward for a buyer purchasing a binary option is usually set at $100. If the currency is at or above the strike price at expiration, you will get the total amount of the contract.

Risk for Sellers

The risk for sellers of a binary forex option is known when the contract is agreed upon. Sellers of binary options must put their money down upfront, which is usually $100 minus the option price. If the option closes at or above the strike price, the option seller will lose all of the money they put down.

Reward for Sellers

If the currency closes below the strike price at expiration, the option will expire worthless and the seller will collect the entire $100. This could be a significant percentage gain, depending on how much was put down originally.

Binary Option in Forex Examples

Here are a few examples of how you could use a binary option in forex trading:

•   EUR/USD binary option for 1.15 closing in one hour, trading at $30. A buyer would need to put down $30 and the seller $70, per contract. If the price of Euros is at or above 1.15 dollars in one hour, the buyer will collect $100. Otherwise the seller will take $100.

•   AUS/JPY binary option for $83 closing next Friday, trading at $75. A buyer would put down $75 and the seller of this option would put down $25 per contract. If the price of the Australian dollar is at or above 83 yen, the buyer would take $100. If it is below 83 yen, the seller would collect the entire $100.

The Takeaway

Binary options are a way to invest in the foreign currency market. At its simplest, a binary option is a bet on the ratio of two different currencies. With a binary option, both options traders put down their money upfront. At expiration, whichever side is on the correct side of the strike price collects the entire premium put down (usually $100 per contract).

Binary options can be incredibly risky because you must predict whether the price will be at or above the strike price at expiration, and within the specified timeframe.

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

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

Explore SoFi’s user-friendly options trading platform.

🛈 While investors are not able to trade binary options through SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

FAQ

Are forex and binary options the same thing?

The two terms are similar in that they both refer to trading on the foreign currency markets, but they are slightly different. Forex usually refers to buying and selling the actual currency itself, while binary options allow you to invest in forex for a smaller budget with more leverage.

Are binary options better than forex?

Binary options are a form of speculative currency option trading with limited outcomes: either a fixed gain or a loss. They carry higher risk than traditional forex trading, too. Which one is better will depend on your personal risk tolerance and knowledge of the foreign currency markets.

Can you trade binary options on forex?

Yes, binary options are typically traded in foreign currency pairs (like EUR/USD or AUS/JPY). Binary options give you an additional way to speculate or trade on movements in the foreign currency markets.

Photo credit: iStock/simonapilolla

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.

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.

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.

SOIN-Q125-104

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Mar
05
2025
Credit Spread vs Debit Spread

Credit Spread vs Debit Spread

By | Growing Wealth, invest, Investing | Comments Off on Credit Spread vs Debit Spread

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.

An options spread involves buying and selling different options contracts for the same underlying asset, at the same time. In the world of vertical spreads, there are credit spreads and debit spreads. What is the difference between a credit vs. a debit spread, and what are the potential ways investors may use these strategies?

When an investor chooses a credit spread, or net credit spread, they simultaneously sell a higher premium option and buy a lower premium option, typically of the same security but at a different strike price. This results in a credit to their account.

A debit spread differs from a credit spread in that the investor purchases a higher premium option while selling a lower premium option of the same underlying security, resulting in a net payment or debit from their account.

Keep reading to learn more about the differences between credit spreads and debit spreads, and how volatility may impact each.

Key Points

•   Credit spreads result in a net credit to the investor’s account by selling a higher premium option and buying a lower premium one.

•   Debit spreads result in a net debit from the investor’s account by buying a higher premium option and selling a lower premium one.

•   Credit spreads benefit from time decay and require margin, while debit spreads do not require margin but face time decay as a disadvantage.

•   Both strategies allow for flexible risk management without owning the underlying asset.

•   The maximum potential gain or loss is determined by the strike prices’ difference and the net premium paid or received.

Why Use a Spread Strategy When Trading Options?

Options contracts give their holder (or buyer) the right, but not the obligation, to buy or sell an underlying asset, often a security like a stock. Having different strategies to trade options gives investors exposure to price movement in an underlying asset, allowing them to take a bullish or bearish position without having to own the security itself. Beyond the market price of the underlying asset, a number of factors — including the level of volatility, time to expiration, and market interest rates — impact the value of the options contract.

With so many factors to consider, investors have developed a host of strategies for how to trade options. A vertical spread comes in two flavors — a credit or a debit spread — which can involve buying (or selling) a call (or put), and simultaneously selling (or buying) another call (or put) at a different strike price, but with the same expiration. Let’s look at these two strategies for trading options.

How a Credit Spread Works

In a credit spread, the investor sells a high-premium option at one strike price and buys a low-premium option at a different strike price, both for the same underlying security and expiration date. Those trades result in a credit to the trader’s account, because the option they sell is worth more than the one they buy. In this scenario, the investor hopes that both options will be out-of-the-money on the expiration date and expire worthless, allowing the investor to keep the original net premium collected.

How a Debit Spread Works

In a debit spread, the investor buys a high-premium option and sells a low-premium option of the same security. Those trades result in a debit from the trader’s account. But they make the trade in the expectation that the price movement during the life of the options contract will result in a profit. The best case scenario is that both options are in-the-money on the day of expiration, allowing the investor to close out both contracts for their maximum potential gain.

Credit Spreads

To help with understanding how credit spreads works: An investor simultaneously buys and sells options on the same underlying security with the same expiration, but at different strike prices. The premium that the investor receives on the option they sell is higher than the premium they pay on the option they buy, which leads to a net return or credit for the investor.

Credit spreads often require traders to have a margin account, as the short leg (or short position) may create a financial obligation if exercised. Before a trader can engage in a credit spread, they’ll need to make sure their brokerage account is appropriately set up.

The strategy takes two forms. The first credit spread strategy is the bull put credit spread, in which the investor buys a put option at one strike price and sells a put option at a higher strike price. Put options tend to increase in value as the underlying asset price goes down, and they decrease in value as the underlying price goes up.

Thus, this is a bullish strategy, because the investor hopes for a price increase in the underlying such that both options expire worthless. If the price of the underlying asset is above the higher strike price put on expiration day, the investor achieves the maximum potential profit. On the flip side, if the underlying security falls below the long-put strike price, then the investor would suffer the maximum potential loss on the strategy. The maximum potential loss is equal to the difference between the two strike prices, minus the net premium received.

Another factor that can work in favor of the investor in credit spread is time decay. This is the phenomenon whereby options tend to lose value as they approach their expiration date. Holding the price of the underlying asset constant, the difference in value between the two options in a credit spread will naturally evaporate, meaning that the investor can either close out both contracts for a gain or let them expire worthless.

The other credit-spread trading strategy is called the bear call credit spread, or a bear call spread. In a way, it’s the opposite of the bull put spread. The investor buys a call option at one strike price and sells a call option at a lower strike price, hoping for a decrease in the price of the underlying asset.

A bull put spread can be profitable if the price of the security remains under a certain level throughout the duration of the options contracts. If the security is below the lower call’s strike price at expiration, then the spread seller gets to keep the entire premium on the options they sell in the strategy. But there’s a risk, too. If the stock falls below the lower strike price at expiration, the investor will face the maximum loss, which is the difference between the strike prices minus the net premium received.

Debit Spreads

A debit spread is the inverse of a credit spread. Like a credit spread, a debit spread involves buying two sets of options, in equal amounts, of the same underlying security with the same expiration date. But in a debit spread, the investor buys one set of options with a higher premium, while selling a set of options with a lower premium.

While the credit spread strategy results in a net credit to the trader’s account when they make the trade, a debit spread strategy results in an immediate net debit in their account, hence the name. The debit occurs because the premium paid on the options the investor purchases is higher than the premium the investor receives for the options they buy.

Investors typically use debit spread strategies to offset the cost of buying an option outright, or to speculate on moderate price movements in the underlying asset. They may choose a debit spread over purchasing a lone option if they expect moderate price movement in the underlying asset.

Like credit spreads, debit spreads can reflect bullish or bearish outlooks. For instance, a bull debit spread involves call options, where the investor purchases a call option at a lower strike price and sells a call option at a higher strike price. A bear debit spread involves puts, where the investor purchases and sells a put option at a lower strike price, aiming to profit from a decline in the underlying asset’s price.

The maximum potential gain is equal to the difference in strike prices minus the net premium paid up front, and is achieved if the underlying asset goes above the higher strike price call on expiration day. Similarly, one can construct a bear-debit spread using put options.

With debit spread strategies, the investor faces an initial outlay on their trade, which also represents their maximum potential loss. Unlike with credit spreads, time decay is typically working against the investor in a debit spread, since they are hoping for both options to expire in-the-money so that they can close out both contracts and pocket the difference.

Pros and Cons of Credit and Debit Spreads, Depending on Volatility

When comparing a credit spread vs. debit spread, here are a few key details to keep in mind.

Credit Spreads

 Debit Spreads
Investor receives a net premium when the trade is initiated. Investor pays a net premium when the trade is initiated.
Maximum potential loss may be greater than the initial premium collected upfront. Maximum potential loss is limited to the net premium paid.
Requires the use of margin. Does not require the use of margin.
Time decay works in favor of the investor. Time decay is working against the investor.

The Takeaway

Spreads are commonly used options trading strategies, whether it’s a credit spread or a debit spread. The spread in these strategies refers to a practice of buying and selling of different options with the same underlying security and expiration date, but with different strike prices.

Key to the strategy is the fact that spreads create upper and lower bounds on potential gains and losses. It’s at the discretion of the investor to choose the strike prices of the options they buy and sell when creating the spread. This gives the investor a degree of flexibility with respect to how much risk they take on.

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

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

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.

🛈 While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

Photo credit: iStock/Pekic

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q125-102

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Mar
05
2025
Guide to Risk Reversal

Guide to Risk Reversal

By | Growing Wealth, invest, Investing | Comments Off on Guide to Risk Reversal

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.

Risk reversal refers to two distinct concepts: an options hedging strategy in stock trading, or a measure of volatility in forex trading.

From a stock market perspective, you can use a risk reversal option strategy by buying and selling options to protect either a long or short position from risk, though it also limits potential profits.

Risk reversal is also used in foreign exchange trading (forex, or FX) with a slightly different definition. There, risk reversal refers to the difference in implied volatility between call and put options. This can give forex traders an idea of the overall market conditions.

Key Points

•   A risk reversal strategy uses options to hedge against potential losses in stock trading.

•   For long stock positions, this often means selling a call and buying a put typically out of the money.

•   For short stock positions, this often means selling a put and buying a call, typically out of the money.

•   In stock trading, a risk-reversal strategy reduces but does not eliminate all risks, including market volatility and premium erosion.

•   In forex trading, risk reversal measures the difference in implied volatility between call and put options.

What Is a Risk Reversal Option Trade?

Risk reversal is an options strategy that allows you to protect either a long or short position in a stock by buying put or call options to hedge your position. If you are long a stock, you can buy an out-of-the-money put and sell an out-of-the-money call option to help offset potential losses from adverse movements in the stock. If you are short a stock, you can use a risk reversal trade by selling an out-of-the-money put and buying an out-of-the-money call option contract.

How Does Risk Reversal Work?

Here is how options traders use risk reversal options, and how you might use them to hedge a position that you hold. It’s important to note that while risk reversal can hedge a position, it does not eliminate all risk and may result in losses should the price move unfavorably.

Setup

How you set up a risk reversal depends on whether you are long or short the underlying stock. You’ll want to use both a call and put option contract in each case, but which one you sell and which you buy depends on if you are long or short.

If you are long a stock, you will hedge by writing (or selling) a call option and purchasing a put option. If you are short a stock, you will do the opposite — selling a put option and buying a call option that expires at the same time.

Profit/Loss

Let’s examine a scenario where you are long a stock and want to use risk reversal to hedge some of the risk in your position. So you sell an out-of-the-money call option and buy an out-of-the-money put option, usually at a net credit to yourself.

If the stock’s price goes up past the strike price of your call, you will profit based on the increased value of your stock holding. Your maximum loss occurs if the stock price declines below the strike price of the put option, reduced by the net premium you receive from executing the strategy.

Breakeven

Because you generally hold the underlying stock as well as the option when using risk reversal, there is not a specific breakeven price.

Exit Strategy

Often when using a risk reversal strategy, you will keep repeating the process each month as new options expire. That way you can continue to hold the underlying stock and collect the net premium from your options each month. One of your options may expire in the money, depending on stock price movements. At that point, you’ll need to decide whether to adjust or close your position.

Maintaining a Risk Reversal

Maintaining your risk reversal will depend on the movement of the underlying stock. In an ideal situation, the stock will not make any drastic movements. If the stock’s price closes between the strike price of your call and put options, both will typically expire worthless. That will allow you to continue to use the risk reversal strategy and collect an additional premium.

Risk Reversal Example

Let’s say you are slightly bullish on a stock that is trading at $80 per share. You own 100 shares of that stock and want to protect against risk. You can use the risk reversal strategy by buying a $75 put and selling an $85 call through your brokerage. Prices will vary depending on the delta or theta of the options, but you may receive a slight credit.

If the options expire with the stock in between $75 and $85, both financial instruments will expire worthless. Then you can continue the strategy by buying another put and selling another call. If the stock price rises above $85, your call option will be exercised, and you will close your stock position with a slight profit. This strategy reduces your exposure to downward price movements of the stock below $75, but does not fully eliminate risk. Additionally, put premium could cut into returns as the value of the put option declines over time, potentially offsetting gains from the hedge.

Forex Risk Reversal

Risk reversal has a slightly different meaning in the world of forex trading, having to do with the volatility of out-of-the-money call or put options. In forex trading, positive and negative risk reversal figures reflect the sentiment of traders and their expectations for future price direction.

A positive risk reversal is when the volatility of call options is higher than that of the corresponding put options. A negative risk reversal is when the volatility of put options is higher than that of call options. This information can help traders decide on which strategies might be more effective.

The Takeaway

The risk reversal options strategy is a way to mitigate potential losses from market volatility when trading options to hedge a position in the stock market. In forex trading, risk reversal refers to differences in implied volatility between call and put options. Understanding how different options strategies work can help you better understand the stock market.

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

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

Explore SoFi’s user-friendly options trading platform.

🛈 While investors are not able to trade forex or sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

FAQ

Why is it called risk reversal?

The risk reversal strategy gets its name because it allows investors to mitigate or reverse the risk you have from a long or short stock position. If you’re slightly bullish on a stock, you can use risk reversal to protect you against downward movement on the stock.

How are long and short risk reversal different?

With a long risk reversal, you are hedging against a short position in the underlying stock. You can do this by purchasing a call option and funding that call purchase by selling a put option. In a short risk reversal, you are mitigating the risk of a long position by selling a call and buying a put option.

How can you calculate risk reversal?

In forex trading, you can calculate the risk reversal by looking at the implied volatility of out-of-the-money call and put options. If the volatility of calls is greater than the volatility of the corresponding put option contracts, there is positive risk reversal, and vice versa.

Photo credit: iStock/Likoper

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.

SOIN-Q125-103

Read more
Mar
05
2025

How Much Does a Construction Worker Make a Year?

By | Building Your Career, Life & Career, relay | Comments Off on How Much Does a Construction Worker Make a Year?

According to the latest figures from the Bureau of Labor Services, the average salary for a construction worker is $49,280, or $23.69 per hour. Construction workers are a crucial part of the labor force across the country, and the industry is expected to grow through the end of the decade. Without a formal education requirement, construction work can be a viable option for anyone uninterested in getting a college degree right after high school.

That said, construction labor can be grueling. The job is physically demanding and at times dangerous. You’ll need to consider your physical limitations before pursuing a career in construction work.

Knowing what your income will look like may be the most important consideration of all. We’ll break down the average construction worker starting salary, as well as their typical responsibilities and required skills, below.

Key Points

•   The average annual salary for construction workers is $49,280.

•   Salaries vary by location and experience, with Massachusetts at $67,780 and Texas at $38,990.

•   Construction work involves handling heavy machinery, using hand tools, and performing tasks like plumbing and electrical work.

•   Career growth potential exists, with construction management roles averaging $104,900 annually.

•   It is possible to earn a higher-than-average income without a college degree, exceeding the average of $37,000.

What Do Construction Workers Do?

Construction crews work on building sites for new homes, multi-family units, commercial buildings, roads, and bridges. Following detailed plans, construction workers are responsible for taking apart old structures and erecting new ones.

Depending on the job site, construction workers may operate heavy machinery, use hand tools, and perform plumbing and electrical tasks.

Construction work requires significant strength, endurance, and tolerance for extreme temperatures. The industry also has one of the highest rates of injuries on the job, so construction laborers must be familiar with safety protocols.

Construction Worker Job Responsibility Examples

What kinds of things might you be responsible for as a construction worker on a job site? Here are some examples:

•   Removing debris

•   Loading and unloading materials

•   Assembling bracing, scaffolding, and other temporary structures to help with the construction

•   Operating heavy machinery and using hand tools when building and taking apart structures

•   Digging trenches, compacting earth, and backfilling holes

•   Directing traffic

•   Driving work trucks (may require a CDL, or commercial drivers license)

•   Measuring and cutting materials

•   Conducting minor plumbing, electrical, and carpentry work

Construction Worker Skills

Though you don’t need a secondary education to be a construction worker, you’ll need to learn specific skills. You might learn some of these on the job:

•   Ability to use tools and operate machinery

•   Plumbing, electrical, carpentry, masonry, concrete, roofing, drywall, and/or demolition know-how

•   Knowledge of various safety protocols

•   Basic math and measurement

•   Hand-eye coordination

•   Physical strength and energy

In addition, construction workers must be able to problem-solve on the fly and must embrace teamwork. This is not a job for introverts!

How Much Do Starting Construction Workers Make?

Construction worker entry-level salaries vary by state, but you can expect pay to be on the lower end when just starting out. The bottom 10% of earners in the industry bring home about $31,510 per year.

If you’re entering the construction industry with a degree, you will likely make more starting out. With an education, you might go straight into construction management. The bottom 10% of construction managers earn $64,480 a year. The average annual salary is $104,900.

Recommended: 25 High-Paying Trade Jobs in Demand

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Recommended: Is $100,000 a Good Salary?

What Is the Average Salary for a Construction Worker?

The average salary for a construction worker in 2022 was $49,280, but rates vary significantly across the country. The average hourly rate for a construction worker is $23.69 per hour. Total income is about the same whether you get a salary vs. hourly pay.

As you’d expect, areas with a higher cost of living (think California, New York, and Hawaii) generally have more competitive pay than areas with a lower cost of living (states like Alabama, Mississippi, and Arkansas). But no matter where you live, a budget planner app can help you keep tabs on your spending and saving.

How much do construction workers make in California? $61,710, on average. In New York, the mean salary is even higher, at $63,830 a year. But it’s Massachusetts where construction workers make the most money on average: $67,780.

Check out the following table for additional state insights:

State

 Average Construction Worker Salary
Alabama $36,300
Alaska $55,690
Arizona $46,030
Arkansas $36,690
California $61,710
Washington $56,630
California $56,210
Colorado $45,760
Connecticut $55,160
Alaska $53,270
Connecticut $53,050
Delaware $46,940
Florida $40,680
Georgia $39,580
Hawaii $65,570
Idaho $44,260
Illinois $66,670
Indiana $50,570
Iowa $46,730
Kansas $41,790
Kentucky $43,540
Louisiana $43,640
Maine $43,980
Maryland $43,260
Maryland $46,610
Massachusetts $67,780
Michigan $49,760
Minnesota $58,490
Mississippi $36,860
Missouri $53,920
Montana $49,130
Nebraska $44,170
Nevada $51,060
New Hampshire $45,980
New Jersey $67,280
New Mexico $39,610
New York $63,830
North Carolina $40,830
North Dakota $48,930
Ohio $53,550
Oklahoma $40,150
Oregon $50,980
Pennsylvania $52,290
Rhode Island $58,070
South Carolina $41,430
South Dakota $39,400
Tennessee $42,230
Texas $38,990
Utah $47,910
Vermont $44,680
Virginia $39,520
Washington $59,680
West Virginia $41,330
Wisconsin $53,860
Wyoming $42,150
Source: Bureau of Labor Statistics, May 2023 data



💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

Pros and Cons of Construction Worker Salary

Being a construction worker has some advantages, but there are also drawbacks to consider:

Pros

•   Higher-than-average salary: The average salary for someone without a college degree is just over $37,000. Construction workers earn more than $9,000 a year over that, without any formal education — and without any student loan debt.

•   Job growth: The job market is projected to grow by 7% from 2023 to 2033, meaning there should be ample opportunities available.

•   Flexibility: Construction jobs are available across the country. If you want to relocate somewhere else, you shouldn’t have trouble finding a job.

Recommended: Should We Raise the Minimum Wage?

Cons

•   Difficult work: Construction labor can be physically demanding. It may lead to injury and illness, and you can leave job sites tired and sore each day.

•   Less money: Construction workers make significantly less money than construction managers. (A money tracker can help you take control of your finances.) If you’re able to get a bachelor’s degree in construction management, you may earn more money over your lifetime.

•   Long-term career options: As you age, you may become less equipped to keep up with the physical demands of the job. This could force an early retirement, right when you should be in your earning prime. You may instead need to look for a work-from-home job for retirees to ensure you have enough income until you’re eligible for Social Security benefits and other retirement income.

Recommended: Should We Raise the Minimum Wage?

The Takeaway

Construction workers can make decent money over the course of their careers, and you won’t have to take out a student loan to get a degree to land a job. However, the work can be exhausting and lead to injury. Weigh all the pros and cons carefully before starting a career as a construction worker.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

How much do most construction workers make?

How much money a construction worker makes depends on where they live and their level of experience. However, the average construction laborer brings in $49,280 a year.

Who is the highest paid construction worker?

Massachusetts has the highest paid construction workers, with an average salary of $67,780.

What job pays the best in construction?

Pipeline transportation of natural gas is the highest paying job in construction, with laborers earning $94,640 a year on average. Other high-paying construction jobs include electric power generation, transmission, and distribution; construction support services; construction work for medical and surgical hospitals; and rail transport construction.

Photo credit: iStock/damircudic

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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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05
2025
What Is a Bond Option? Definition & Examples

What Is a Bond Option? Definition & Examples

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is a Bond Option? Definition & Examples

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.

A bond option, like any option contract, gives the contract holder the right to buy or sell an underlying asset (in this case, a bond) at a specific price and time.

Although bond options are generally considered less risky than stock options, they still typically carry higher risk than more traditional investments.

Like all options, bond options are derivative securities, used by investors to bet on the direction of an underlying security. Understanding what bond options are and how they work can help you understand these risks and determine whether bond options make sense for your portfolio.

Key Points

•   The put-call ratio measures market sentiment through the volume of put and call options.

•   A ratio above 1 indicates bearish sentiment, while a ratio below 1 indicates bullish sentiment.

•   Traders use the PCR for trend confirmation and contrarian strategies, often alongside other indicators.

•   Extreme PCR values, such as above 1.5 or below 0.5, can signal potential market reversals.

•   Interpreting PCR within historical benchmarks and current market conditions enhances trading decisions.

What Are Bond Options?

A bond option is a legal contract to buy and sell underlying bond assets, usually through a call option (the option to buy an underlying bond) or a put option(the option to sell a bond) at a specific price (known as the strike price), at or before a specific expiration date.

For example, an investor might purchase a bond call option with a strike price of $900. The level value (also known as “par value”) of the underlying U.S. government bond is $1,000. Let’s say market conditions push the value of that bond up to $1,100. In that scenario, the option holder has the right to buy the government bond at $900 — even as the value of that underlying bond now stands at $1,100.

Investors typically trade bond options on over-the-counter exchanges. Bond options on U.S. Treasury bonds can sometimes be found through specialized brokers or financial institutions that offer derivative products.

Pros and Cons of Bond Options

There are benefits and drawbacks to incorporating bond options in your portfolio.

Pros of Bond Options

Higher return potential. A well-executed options strategy can potentially increase a trader’s gains on a particular investment. Bond options can also be used to protect against downside risk. Investors often use bond options as a hedge against higher-risk investment strategies.

Risk hedging. Bond options investors can leverage derivative contracts to take advantage of interest rates and other short-term drivers of investment performance in the market. Investors can also lean on bond options to take advantage of pricing variations in options pricing, or to position their portfolios ahead of major geopolitical events (e.g., presidential elections, potentially big Federal Reserve policy decisions, or major recessions and other powerful economic forces).

Cons of Bond Options

The risk of unlimited investment loss. Although call options provide a buyer with the potential for unlimited gain if the underlying security rises in value, the seller of a call option faces the risk of unlimited potential loss, since the price of the underlying asset could theoretically continue to rise.

Should the underlying assets plummet to zero, the seller of a put option could face substantial loss, as they would lose the difference between the strike price and the asset’s zero value.

The risk of losing money quickly. As options are short-term investment instruments by nature, investors need to have extensive knowledge of near-term price movements and also be aware of the potential for loss when pursuing gains through options trading.

That means all options investors must master two key trading objectives — knowing the right time to purchase an options contract and knowing when to sell that contract, or cut losses by allowing the contract to expire without exercising the option to buy or sell by the expiration date. Although allowing an option to expire may sometimes be the best strategy, it can still result in the loss of premium and fees, which may add up over time.

Recommended: A Beginner’s Guide to Options Trading

Types of Bond Options

Bond options offer investors the right to buy or sell (via calls and puts) an underlying investment security at a specific time and at a set price.

Call Option Bonds

With a bond call option, if the price of the underlying bond rises, the contract holder (or buyer) can earn a profit by exercising the option to purchase the asset at a lower price and then selling it at the higher market price. A call option is in the money if the strike price is lower than the current market price of the underlying bond.

Conversely, the seller of a bond option hopes that the price of the bond stays below the strike price. If the bond price rises above the strike price, they would be required to sell the bond at loss for the lower strike price if the buyer exercises the option.

While a call option bond buyer stands only to risk the premium paid for the option, a call option seller, as mentioned previously, could face significant losses if the price of the bond rises significantly above the strike price.

Bond Put Options

While an investor who expects the bond’s price to increase might purchase a call option on that bond, an investor who expects the bond’s price to decrease might purchase a put option.

In this scenario, the holder is hoping the price of the underlying bond will fall below the strike price of the bond put option, so they can sell the bond for more than it’s worth, realizing a profit.

Conversely, bond put option sellers take on the risk that the bond’s price will decline. If the bond’s value falls below the strike price, the seller is obligated to buy it at a loss. However, their maximum loss is limited since a bond’s price cannot drop to zero like a stock.

Understanding Price Movements

Both of the above scenarios assume that the price moves in the direction the trader had hoped. What a bond investor strives to avoid is being on the wrong side of an options trade, selling below market rate or buying at an above-market rate.

For example, if an investor anticipates that bond prices will decline due to future market conditions, they may purchase a put option. If the face value of the underlying bond option were $1,000, a bond put option may give the contract holder the right to sell the option contract at the strike price of $900 — on or before the expiration date.

If bond prices fall, and assuming the underlying bond is now valued at $870, that bond option investor can still exercise the sale of the options contract at the strike price of $900, even though the bond’s value is lower. That can result in a profit for the investor.

Embedded Bond Options

Embedded bond options are features within certain bonds that grant either the bondholder or issuers specific rights under certain conditions. Examples of embedded bond options include:

•   Call options, which allow the issuer to redeem the bond before maturity

•   Convertible provisions, which allow the bondholder to convert the bond into equity

•   Floating-rate provisions, which adjust the bond’s interest rate based on changes in a benchmark rate

Callable Bond Options

Callable bond options come with an embedded call feature that allows issuers to redeem the bond before maturity at face value. These options are often used if the issuer expects interest rates to fall, which allows them to refinance at a lower rate.

Callable bond options offer flexibility, but they also face the risk of being called early. This prevents the investor from collecting interest payments against the full life of the bond.

Bond Options Pricing

Given all the variables, including the current price and future price of a bond, volatility levels, interest rates, and time to expiration, it can be very complicated to properly price a bond option.

Investors rely on several mathematical formulas for this, including the Black-Derman-Toy Model and Black’s Model (an elaboration of the well-known Black-Scholes model used for options pricing).

All of those options pricing models are complex, but they all rely on a few primary factors that determine the investment value of an options contract:

•   The market price of the asset that underlies the option (a.k.a. the spot price)

•   The current intrinsic value of the option

•   The time until the option expires

•   Volatility

For a bond option, interest rate movements are also a key determinant in pricing.

The Takeaway

Options traders may use a bond option as a hedge against economic volatility in key areas, such as interest rates and bond yield rates. Depending on your strategy, a bond option can be a useful portfolio management tool.

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

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

Explore SoFi’s user-friendly options trading platform.

🛈 While SoFi does not offer bond option trading at this time, SoFi members can buy call and put options to try to benefit from stock movements or manage risk.

Photo credit: iStock/PeopleImages

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.

SOIN-Q125-122

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