Feb
15
2023
Options Chain: Definition & How to Read an Options Chain

Options Chain: Definition & How to Read an Options Chain

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Options Chain: Definition & How to Read an Options Chain

An options chain is like a menu of all the available options contracts for a specific security. The options chain, or options matrix, shows the listed puts, calls, the expiration dates, strike prices, and volume and pricing information for the underlying asset, within a given maturity.

An options chain provides detailed quote and price information, and is usually divided into calls vs. puts and categorized by expiration date.

Understanding the Options Chain

To understand what an options chain is, you first need to understand how options trading works. With this knowledge, you can build options trading strategies and attempt to profit in the market.

Options may allow you to profit on movements in the price of an underlying asset that you don’t own directly, by giving you the right, but not the obligation, to buy or sell a stock or other asset at a certain price (the strike price) at a certain date in the future (expiration date). But options trading strategies can be quite risky and are typically undertaken by experienced investors.

While options can get quite complex, there are basically two kinds of options: calls vs. puts.

Calls are options that allow you to buy a stock at a preset price (the strike price) until some point in the future (the expiration date), while puts give you the ability to sell an option at a specific price until the expiration.

Call Options

A call option is a contract that typically allows an investor to buy 100 shares of an underlying stock or other security at the strike price. A call option can be appealing because it gives an investor a potential way to profit from a stock’s increase in price without having to pay the full price for 100 shares.

The investor pays what’s known in options terminology as the “premium” on each share, which is typically much less than the current price of the stock.

Put Options

By contrast, a put option is a contract that allows the investor to sell shares at a certain price at a specified time in the future. The seller of the put option has the obligation to buy the shares from the put buyer, if the put buyer chooses to exercise the option.

If call options are a way to profit from a stock going up in price without having to own the stock itself, then put options are a way to profit from the fall of a stock’s price without having to short the stock (i.e. borrow the shares and then buy them back at a lower price).

In-the-Money and Out-of-the-Money Options

Options can be “in the money” (ITM) or “out of the money” (OTM). The terms refer to the relationship between the options strike price and the market value of the underlying asset.

Knowing the difference between being in or out of the money allows the options holder to gauge whether they might see a profit from their option, and to decide if and when to exercise the option.

•   A call option would be in the money if the strike price was lower than the current market price of the underlying security. An investor holding such a contract could exercise the option to buy the security at a discount and sell it for a profit right away.

•   An out-of-the-money call option would be when you purchase an options contract that would allow you to buy a stock at a price higher than it is trading at right now. That means the option doesn’t have any intrinsic value. Any value the option has is based on the possibility that the price of the underlying security will go up in the future.

The reverse applies to puts. A put would be in the money if the strike price is higher than the current market price of the underlying security, and out of the money if the strike price is lower.

What Is an Options Chain?

Option chains are basically charts that list different options and the information that differentiates them. The options chain can vary, depending on who is providing it, but some of the terms can include:

•   the strike price

•   last price

•   trading volume

•   the bid

•   the ask

•   net change

Once you understand basic options concepts like calls vs. puts, an options chain will be pretty easy to read.

Then you can move on to more complicated options trading strategies like options trading straddles.

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.

Options Chain Example

Here is a hypothetical example of an options chain for Company ABC.

Calls for January 27, 2023

Contract name

 Last Trade Date

 Strike

 Last Price

 Bid

 Ask

 Change

 Volume

 Open Interest
ABC230127C00240000 2022-12-16 3:37PM EST 240.00 15.22 12.95 15.00 -2.58 15 54
ABC230127C00245000 2022-12-16 3:53PM EST 245.00 11.00 9.10 12.15 -3.33 68 111
ABC230127C00250000 2022-12-16 3:59PM EST 250.00 8.80 8.20 10.80 -2.55 96 175

Options chains aren’t standardized, so your options chain provider may include more or less information.

Additional information could include more detail on price fluctuations, such as percentage price changes. Some sites include information on the characteristics of the option itself, such as implied volatility.

Reading the Options Chain

Once you understand the terms listed in the options chain, it’s relatively easy to decode. Reading from left to right in the hypothetical options chain above:

•   Contract name: Just as the fictional ABC company has a stock ticker, options have an alphanumeric identifier. For instance, “ABC230127C00240000” refers to an option to buy ABC shares by January 27, 2023 for $240. In other words, this is a call option with a strike price of $240 that expires on January 27, 2023.

•   Last trade date: The date and time when the option was last traded.

•   Strike: The price at which the option may be bought (calls) or sold (puts) before the expiration date.

•   Last price: The most recently traded or posted price of the option.

•   Bid: The highest price someone is willing to pay for the option.

•   Ask: The lowest price someone is willing to sell the option.

•   Change: How the price has changed since the close of the previous trading session.

•   Volume: The number of options contracts traded the most recent day that trading has been open.

•   Open interest: These are the options contracts that haven’t been closed — meaning exercised (i.e. the stock has been bought or sold at the pre-arranged price) or otherwise settled.

How Options Chains Can Help You Trade Options

Options chains are a key tool in trading options. How they directly lead to options trading depends on how the specific brokerage you use utilize options chains, and how certain factors might fit into a trader’s overall strategy.

For example, an experienced trader would be able to gauge the market in terms of price movements and higher and lower liquidity. These are key points to know for efficient trade executions and potential profitability.

For example, a trader wanting to assess market conditions for the first call option in the matrix above, might consider the last price, the bid, ask, and net change.

Any brokerage that allows you to trade options will provide the type of information seen in an options chain, as it is necessary for options to be priced and for investors and traders to make informed decisions about options trading.

Brokerages typically also have various deposit and educational or knowledge requirements for options trading as well.

The Takeaway

Options are highly complex derivatives, and investors need to be skilled and experienced enough to digest a series of critical data points in order to have an effective options strategy. One tool that can be effective for traders is using an options chain, or options matrix.

An options chain is similar to a master list of available options contracts for a specific security (the underlying). It shows the puts, calls, expiration dates, strike prices, and volume and pricing information for the underlying asset. By reading these charts, traders can decide which options fit their strategy.

If you’re ready to try your hand at options trading, SoFi can help. You can trade options online from the SoFi mobile app or through the web platform. And if you have any questions, SoFi offers educational resources about options to learn more.

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.

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.
Probability of Member receiving $1,000 is a probability of 0.028%.

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Feb
15
2023
Guide to Moneyness in Options

Guide to Moneyness in Options

By | Growing Wealth, invest, Investing | Comments Off on Guide to Moneyness in Options

When you’re talking about moneyness in options, certain phrases capture where the strike price is in relation to the current price of the underlying asset.

Options are either in-the-money (ITM), out-of-the-money (OTM), at-the-money (ATM), or near-the-money. You can also have options that are deep-in-the-money or far-out-of-the-money.

Generally, a call option is in-the-money when the strike price is below the underlying asset price while a put is ITM when the strike price is above the underlying asset price. You flip the relationship for out-of-the-money options: an OTM call’s strike price is above the underlying stock price while an OTM put’s strike price is below the stock price.

What Is Moneyness?

The moneyness of an option describes the relationship between the strike price of an options contract and the price of the underlying shares. To explain the strike price: it refers to the price at which an investor can buy or sell a derivative contract.

Option moneyness can change depending on how the stock price moves. For example, a call option can be out-of-the-money one day, but then a share price appreciation can result in that same call turning in-the-money the next day.

Moneyness may also change on a minute-by-minute basis depending on the price fluctuations in the underlying stock.

Moneyness of options can be used to construct your options trading strategy — e.g. going long or short options, purchasing puts or calls, and executing more sophisticated options strategies.

Recommended: How to Trade Stock Options

How Does Moneyness Work?

Understanding the moneyness of an option is important for different core options trading strategies. As explained earlier, moneyness works by comparing the strike price of an option to the market price of the underlying shares.

Because options are complex, it’s also important to know options terminology.

•   An in-the-money (ITM) option has intrinsic value and time value.

•   An out-of-the-money (OTM) option only has time value, and thus is worthless if exercised.

•   OTM options have zero intrinsic value and thus are cheaper than in-the-money options.

•   At-the-money (ATM) options are rare since it might only occur for a moment when the stock price equals a specific strike price — near-the-money options are more common.

•   A near-the-money option has a strike closest to the underlying share price on an options chain.

Practically speaking, if you are very bullish on a stock, you might consider purchasing out-of-the-money call options since those would appreciate the most on a percentage basis if there is a sharp share price rise. They also drop the most if the price moves against you.

If you expect just a small move on a stock, in-the-money options are probably the better play. And due to the leverage in options ITM will provide higher returns/losses than available by purchasing the underlying stock.

The deeper in-the-money an option is, the greater the sensitivity it will have to movements in the underlying shares.

Understanding Intrinsic and Time Value of Options

What’s the difference between intrinsic value and time value? It’s important to understand how these two factors play into the value of options.

The intrinsic value of an in-the money call option is simply the price of the stock less the strike price of the option. The intrinsic value of an in-the money put is the strike price of the option less the price of the stock.

The difference between the intrinsic value and the actual current price of the option is time value. Options that are in the money always have intrinsic value. Out-of-the-money options have no intrinsic value, but they might have time value.

The drivers of time value are complex and include many factors. If you’re looking for more information, you should consider learning about the option Greeks to inform your trading strategy.

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.

Types of Moneyness

An option can be categorized in four common ways with respect to the relationship with its strike price and underlying share price: in-the-money, out-of-the-money, at-the-money, and near-the-money. Understanding how option pricing works between in-the-money vs. out-of-the-money options is important.

In-the-Money (ITM)

In-the-money options are those that have intrinsic value. For a call option, that means the underlying stock price is above the option’s strike price. A put option is in-the-money when the stock price is below the strike price.

If a call option is in-the-money, you can exercise the option, receive shares at the strike price, then immediately sell the shares in the market. In-the-money puts allow the option holder to sell a stock at a higher price compared to the market price of the security. Long calls are usually used to place bullish bets on a stock while long puts are generally used when a trader is bearish.

In-the-money options, while having intrinsic value, also have a degree of time value. It is often advantageous for an options trader to exit the trade in the market rather than exercising immediately.

Options that can be exercised at any time before expiration are known as American Style options. Options that can only be exercised upon expiration are European Style. There are other differences between American and European options but the different exercise options are most relevant to this discussion.

Out-of-the-Money (OTM)

An out-of-the-money call option is one in which the strike price is above the underlying stock price. The owner of a call option hopes that the share price rises prior to expiration so that the option has intrinsic value. The seller of a call option benefits when the underlying stock price remains below the exercise price so they can keep the premium they collected when they sold to open the call.

Puts are out-of-the-money when the strike price is below the market price of the underlying shares. The owner of puts is bearish on the stock, so they want the stock to fall below the strike price so that the puts become in-the-money. Put sellers, who are neutral to bullish on the stock, hope the share price stays above the exercise price.

Out-of-the-money options do not have intrinsic value. Their premium is made up of time value only. Out-of-the-money options generally have lower premiums than in-the-money and at-the-money options since they are more likely to expire worthless.

At-the-Money (ATM)

At-the-money puts and calls have strike prices that are the same as the market price of the underlying stock. These options, like out-of-the-money options, have no intrinsic value. At-the-money options are usually more expensive than out-of-the-money options, but less expensive than in-the-money options.

This type of option moneyness means that calls and puts are heavily influenced by volatility and time decay.

Near-the-Money

Near-the-money options have strike prices that are very close to the market price of the underlying stock, so they are just slightly in-the-money or out-of-the-money.

Near-the-money options are much more common than at-the-money options since the stock price is rarely precisely at a specific strike price. Near-the-money strikes are used when a trader wants exposure to an at-the-money option that is not available in the market.

Other Moneyness Terms

Other terms for moneyness include deep-in-the-money and far-out-of-the-money. These terms have no real qualitative difference between in-the-money and out-of-the-money, but are simply intensifiers. They are, however, in fairly common usage.

What Moneyness Means to Investors

Option moneyness tells a trader important information. The trader can use the moneyness of an option to help construct a trading thesis. For example, if you believe a stock price will drop substantially over a short time frame, you might consider purchasing an out-of-the-money put option since that option type and moneyness will appreciate greatly when the stock price drops in a big way.

Moneyness of options grows more crucial when you embark on more complex options strategies since multiple option legs have different moneyness — knowing the moneyness of the options strategy is critical to understanding your exposure.

Still, an option holder might exit an option by selling or covering in the market rather than exercising early so that they can capture the time value of an option in addition to any intrinsic value.

The Takeaway

Moneyness is used to describe where an option’s strike price is relative to the price of the underlying stock. It can help options traders gauge the amount of intrinsic value an option has and inform simple and complex options strategies.

A great way to get started is with SoFi’s options trading platform. The platform’s intuitive design makes it easy to use, whether you’d prefer to trade on the mobile app or through the web platform. You’ll also have access to educational resources to continue to help guiding you along the way.

Pay zero commission or contract fees when you start options trading with SoFi.

FAQ

How is moneyness calculated?

For a call option, moneyness is calculated by taking the underlying asset’s price and subtracting the option’s strike price. If that is a positive value, the call option is in-the-money. If it is a negative value, the call is out-of-the-money. The moneyness definition describes an option’s strike price relative to its underlying stock’s market price. The underlying asset price has to be above the strike price for a call to be in-the-money.

For a put option, the opposite is true: Moneyness is calculated by taking the underlying asset’s price and subtracting the option’s strike price. If that is a positive value, the put option is out-of-the-money. If it is a negative value, the put is in-the-money. The underlying asset price has to be below the strike price for a put to be in-the-money.

An at-the-money option is simple when the stock price and strike price are the same. Near-the-money options have strikes very close to the share price.

How are moneyness and delta different?

Option moneyness simply describes the price difference between a strike price and the price of the underlying asset. Delta, on the other hand, tells a trader how sensitive an option is to changes in the underlying stock.

How are moneyness and implied volatility related?

Implied volatility tends to be lowest with at-the-money options. It increases when the option moves further out-of-the-money or further in-the-money. The “volatility smile” describes the relationship between the moneyness of an option and the implied volatility.

Photo credit: iStock/AsiaVision

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Feb
15
2023
Introduction to Options Volume and Open Interest

Introduction to Options Volume and Open Interest

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Introduction to Options Volume and Open Interest

In the world of options trading, the investor is given constant information about what is happening in the options market. Two of those pieces of information are Options Volume and Open Interest.

Options Volume represents all of the transactions made during a trading session updated in real-time.

Open Interest represents the number of open contracts at the start of each trading session and is updated once per day prior to the market opening.

How Is Option Volume Calculated?

Option Volume is different from stock volume in some fundamental ways. When you’re investing in stocks, volume represents shares trading hands. Typically trading volumes in stocks are far smaller in scale than the total shares available in a stock.

Options volume, on the other hand, can very often exceed the total contracts outstanding represented by Open Interest.

Options Volume is calculated in real-time after every transaction. This information is typically reported within the options chain and will be updated as frequently as your particular brokerage and account provides.

Every transaction is counted.

If you buy to open 10 calls, volume increases by 10 during the trading session.

If you then sell these calls to a second investor, volume increases by 10.

If this second investor closes these 10 calls, volume increases by 10.

Recommended: Popular Options Trading Terminology

How Is Open Interest Calculated?

Open Interest is calculated the same way for options trading as it is for futures trading. This information is also reported within the options chain, however it is updated once daily prior to the market opening and will not change over the course of a trading session.

Open interest represents all contracts that remain open and nets out trades from the previous session that offset.

Therefore using the same trades from above:

If you buy to open 10 calls, open interest does not change during the trading session.

If you then sell these calls to a second investor, open interest does not change.

If this second investor then closes these 10 calls, open interest does not change.

However, at the end of the session the Options Clearing Corporation (OCC) nets out any offsetting trades and reports simply the remaining open contracts.

In this example, since the options were opened and closed on the same day, and despite having changed hands, the net effect on Open Interest is zero.

What Do Option Volume and Open Interest Indicate About Options?

As far as assessing what these two data points indicate, it depends on whether you consider yourself a “fundamental” trader or a “technical” trader.

•   Traders who use fundamental analysis believe in analyzing company and market data to determine what is happening in the markets. They look at corporate metrics such as profits, operating margins, debt ratios, etc, as well as some limited market data.

•   Technical traders primarily focus on market data and use it to predict market sentiment and price movements.

Fundamental Analysis

Fundamental traders look at the Open Interest as an indicator of liquidity in the market. And if you dig into the typical options chain, you’ll see that higher Open Interest corresponds to lower bid-ask spreads.

These two factors taken together, result in more rapid order filling and increase the likelihood of better, i.e., more competitive, pricing.

The fundamental trader looks at Options Volume as a first indication of cash flows in and out of the option. However, these cash flows won’t be confirmed until the end of the day when a comparison between Open Interest changes from the previous day will confirm this analysis.

Increasing Open Interest shows cash moving into that option.

Recommended: What Are Calls vs Puts?

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.

Technical Analysis

Technical traders also look at Open Interest and Options Volume as indicators of liquidity and cash flows, but their analysis doesn’t stop there.

Technical traders look at these increased cash flows and liquidity improvements and believe that the strength in the Options Volume and Open Interest indicate confirmation of the trends occurring in the price of the underlying asset.

For example, if the underlying asset is seeing price increases and call volumes and Open Interest are also increasing, then the technical trader sees confirmation of the trend and these factors reinforce the likelihood of the trend continuing.

Conversely, if the Options Volume and Open Interest are changing at a slower pace, this may indicate that the previously existing trends in the underlying market – whether up or down – may be coming to an end.

Technical Analysis, Other

Although the following phenomenon falls under technical trading, it should really be its own brand of trading.

Often, you’ll hear experienced options traders talking about spikes in Option Volume and Open Interest as an indication of what the “smart money” is doing, or that “somebody knows something” about a particular company or a particular trade.

Consider this a red flag. First, just because an investor has made a large investment, doesn’t make them “smart.”

Second, why have they made that investment? Is it a single position, or one of a few different types of investments, or a combination trade that you may not know about, and with different investment goals than what you are pursuing.

Finally, the people who made the trades, and those who identify these spikes, typically have access to information and resources the typical investor does not have access to. That means while they might be going into a trade with eyes open, you may not have the same visibility.

Option Volume

 Open Interest
Total of all transactions during a trading session Total of all open contracts at the start of a trading session
Updated continuously after every transaction Updated once per day prior to the trading session
Opening a transaction increases the volume Opening a transaction will increase Open Interest
Closing a transaction increases the volume Closing a transaction will decrease Open Interest
Indication of liquidity Indication of liquidity
Indication of Cash Flows Confirmation of Cash Flows

The Takeaway

Options Volume and Open Interest can be useful data points for the options investor.

Depending on your particular investing approach, fundamental versus technical, you may use this information in varying ways to inform your investing decisions.

If you’re ready to try your hand at options trading, You can set up an Active Invest account and trade trade options online from the SoFi mobile app or through the web platform.

And if you have any questions, SoFi offers educational resources about options to learn more. SoFi doesn’t charge commission, and members have access to complimentary financial advice from a professional.

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

Photo credit: iStock/BartekSzewczyk

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.
SOIN0821363

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Feb
15
2023
Leap Options: What Are They? Pros & Cons

Leap Options: What Are They? Pros & Cons

By | Growing Wealth, invest, Terminology | Comments Off on Leap Options: What Are They? Pros & Cons

The term “LEAPS” in LEAPS options is actually an acronym, which stands for “Long-term Equity Anticipation Securities.” LEAPS options are long-term options that have an expiration period between one and three years, versus less than a year for standard options.

LEAPS (sometimes called leap options) are derivatives contracts traded on exchanges, and allow investors to utilize less capital than if they were purchasing the underlying asset outright.

Other than the longer-than-normal expiration date, leap options are functionally much like other types of options — they’re contracts that grant the buyer the right to buy or sell an underlying asset at a specific price before its expiration date.

LEAPS Options Defined

Puts, calls, bulls, and bears. For the uninitiated, options terminology offers a steep learning curve. Even those who are familiar with options trading can occasionally find themselves in the weeds, as there are myriad option types and derivatives to keep track of.

LEAPS or leap options are a variation on the basic options contract, and these longer-term instruments may become part of your strategies for trading options.

LEAPS come in two basic flavors: call options and put options. And like shorter-term options, traders pay a premium when buying LEAPS options. Further, LEAPS can be tied to individual stocks or ETFs, as well as market indexes and other types of securities.

Recommended: Options Trading 101

How to Buy LEAPS Options?

Buying LEAPS options is pretty straightforward, assuming you’ve been investing for a bit. Typically, all that’s required is a brokerage account with access to options trading — and that’s something that many, if not most brokerages offer investors.

The process for actually executing a LEAPS option trade will depend on the specific brokerage you use, but it’ll generally involve choosing a put or call option, a strike price, and critically, a long-term expiration date.

Remember, LEAPS options expire more than a year from when they’re purchased, so opting for the longer-term expiration date will differentiate a LEAPS option from a standard option purchase. This may be helpful when considering long-term vs. short-term strategies.

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.

What Are the Pros & Cons of LEAPS Options?

Like trading other types of options, there are some upsides and downsides to trading and investing with LEAPS options:

What Are the Pros of LEAPS Options?

A big upside to LEAPS is that they have a longer time frame compared to standard options. Thus, they experience less time decay, and theoretically, their values should move more closely with the price movements of the underlying asset.

A less recognized advantage of the longer time frame is that — unlike options that may expire in months, weeks, or even days — the need to constantly oversee the markets and to take advantage of short-term moves is lessened.

LEAPS also tend to cost less than their underlying asset, making them an attractive alternative for some investors.

But perhaps the biggest advantage to LEAPS is they can provide outsized returns, despite the attendant risks, which is what attracts some traders to them in the first place.

What Are the Cons of LEAPS Options?

On the other side of the coin, investors should know that LEAPS can have higher premiums than standard options due to the much higher time value of LEAPS while still remaining cheaper than the underlying asset.

Buying LEAPS, you’ll need to put more money upfront than if you were to purchase shorter term options, risking more of your capital.

LEAPS are also not available for every stock, industry, or index out there (index investing is a separate strategy, but some options are tied to indexes). So, you may not be able to find what you want.

Plus, if you decide to purchase LEAPS options, you could also magnify your losses (just as you can increase your gains), which is something that’s critical to keep in mind. In other words, there are additional risks when investing with LEAPS.

LEAPS Options: Pros and Cons
Pros

 Cons
Potentially magnify investing gains Potentially increase investing losses
Costs less than the underlying asset Higher premiums vs. standard options
Value mirrors underlying asset more closely LEAPS may not be available for all assets

Explaining LEAPS Options Trading

How does LEAPS options trading actually work?

Let’s run through an example, and note that trading LEAPS is the same as trading options, but with longer expiration periods:

If you were of the belief that a certain stock, we’ll call it Stock XYZ, was going to experience a decline in value at some point in the next few years, you could use LEAPS options to position yourself accordingly. Specifically, you’d look at buying a LEAPS put option on XYZ with a long-term expiration date.

XYZ is trading at around $55, but again, you think that it will fall. As such, you pay $7.50 for a $45 put that matures more than a year from now.

If XYZ drops in price, you can expect the put to increase in value and you may sell for a profit as you see fit.

OR

You can wait for the XYZ to drop below $37.50 (your break even point = $45 – $7.50 = $37.50) and exercise your option or sell the option. Based on time to expiration and multiple other factors, you can decide which choice is more profitable.

Recommended: Long-term Investing Strategies

What Are Some Helpful LEAPS Options Strategies?

There are many different strategies for trading options, and many can be applied to trading LEAPS. And since options strategies can quickly get complicated, it may be best to keep it simple.

As such, one basic LEAPS options trading strategy is to buy calls, and try to benefit from a potential increase in value of the underlying asset over the course of a year or two.

LEAPS can almost stand in for the underlying asset itself, and offer a couple of key advantages: They can increase returns by allowing you control over more shares for less capital, and minimizing your potential losses to the cost of the option’s premium.

Active investors can use LEAPS to benefit from short and long-term market activity. If, for instance, you thought that XYZ was going to experience a stock value decline over the next year, but suspect that it may bounce back and increase in value over two or three years’ time.

You could buy a three-year put LEAPS call option, in that case, along with a standard put option. That would allow you to potentially benefit in the short and long-term in regards to Stock X.

Invest in LEAPS Options with SoFi

The chief difference between LEAPS options and other types of options is that they have longer-than-normal expiration periods of one to three years versus less than a year for traditional options.

Other than that, LEAPS are similar to other types of options in that they’re derivative contracts that grant the buyer the right to buy (call options) or sell (put options) an underlying asset at a specific price before its expiration date.

Trading options is complicated, and can be quite risky, there’s no way around it. For some investors, it may be best to stick to the basics — invest for the long term, and build a portfolio with stocks and ETFs. But once your bases are covered, options can be a next step in your investing evolution.

If you’re ready to try your hand at online options trading, SoFi can help. You can trade options from the SoFi mobile app or through the web platform. And if you have any questions, SoFi offers educational resources about options to learn more.

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

Photo credit: iStock/dusanpetkovic

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Feb
15
2023
11 Things to Buy With a Credit Card to Build Credit

11 Things to Buy With a Credit Card to Build Credit

By | Credit, credit card, Financial Independence | Comments Off on 11 Things to Buy With a Credit Card to Build Credit

There are many ways that you can build and establish credit. Your credit score is made up of a number of factors, two of which are how much you currently owe and your overall payment history. As such, applying for and responsibly using a credit card can help build your credit, as can paying off your credit card statement on time and in full.

When deciding how much to use your credit card to build credit, it’s a bit of a balancing act. If you simply have a credit card but don’t use it, it may not improve your credit score very much. But if you spend too much on your credit card, you may damage your score. Building your credit comes down to finding the sweet spot between not using your card at all and using it too much.

Recommended: Tips for Using a Credit Card Responsibly

How Making Purchases With Your Credit Card Could Possibly Help Your Credit Score

The amount of credit that you use and your overall payment history are two of the most important factors that determine your credit score. As you start to establish credit, you’ll want to responsibly use your credit card, making sure to keep your spending low in comparison to your overall credit limit. You’ll also want to make at least the minimum payment by the statement due date or, even better, pay off your statement balance in full each month.

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

Minor Purchases to Build Credit

As you work toward building your credit, you’ll likely want to put some of your everyday purchases on your credit card. Just make sure that you set aside enough money to pay off your statement balance when it comes.

Recommended: What is the Average Credit Card Limit?

Groceries

Groceries are one of the biggest monthly expenses for many families and households, so it can make sense to put your grocery purchases on your credit card. Most grocery stores accept credit card payments for no additional charge. Then you can plan to pay off your statement balance by the due date to help build your credit.

Gas

Gas is another large expense for many people. Most gas stations accept credit cards with no additional charges. Plus, paying for gas with a credit card is also usually more convenient. Keep in mind that some gas stations may offer a discount for paying for gas with cash, which can be a good way to save money on gas.

Utilities

Admittedly, utilities can be challenging to pay with a credit card. Some utilities may offer online payments with a credit card without a fee, though others may only allow fee-free payments by cash, check, or ACH. Unless you can find a way to dodge fees, it doesn’t make financial sense to pay a convenience fee just to pay bills with your credit card.

Coffee

If a daily coffee run is part of your regular routine, consider paying for it with your credit card. That way, you can earn credit card rewards and possibly build your credit, too, from a purchase you’d be making anyways. Also check if your coffee shop offers its own rewards program — you’ll want to make sure to sign up for that as well to take advantage of perks and offers.

Streaming Subscriptions

If you have recurring monthly subscriptions to places like Netflix, Hulu, or Disney+, that can be another cost to move over to your credit card. Setting up those recurring streaming subscriptions for autopay can help ensure your service is not interrupted and possibly build up your credit history.

Gym Membership

A gym membership is another potential cost to pay with a credit card in order to build up your credit. You’ll want to make sure that you are getting value from your gym membership, however. If you find that you rarely go to the gym, you might get better value from canceling your membership and saving or investing that money.

Entertainment

If going out to eat or other forms of entertainment are frequent monthly expenses for you, consider covering those with a credit card. Having a variety of expenses on your credit card statement can help you stay organized and more easily track your spending — plus, you could build your credit in the process.

Major Purchases to Build Credit

Besides everyday smaller purchases, it can make sense to use a credit card for major purchases as well. Many credit cards offer price protection or an extended warranty, which can provide additional benefits.

Car

Whether or not you’ll be able to use a credit card to pay for a car purchase will depend on the policies of the place where you’re buying the car. Some dealerships will allow you to cover the full cost of the car with a credit card, while others only allow credit cards for partial payment, such as the down payment.

Just make sure to negotiate a final price before you offer to pay with a card — otherwise, the dealer may try to charge a higher price to make up for credit card processing fees.

Recommended: What is a Charge Card?

Jewelry

Jewelry is another big-ticket item that you might cover with a credit card. Talk with the store where you’re making your purchase to see what options are available. Some jewelry stores might offer a discount for paying with cash, which might sway you in the choice between cash or credit card.

Home Appliances

There are several reasons it can make sense to buy large home appliances with a credit card. Not only could you earn rewards and build your credit, but the credit card you use may also offer credit card protection. This can potentially save you hundreds of dollars or more if you end up having a problem with your appliance down the road.

Taxes

It is possible to pay your taxes with a credit card, though there are very few ways to do it for free. Depending on where you live and the type of taxes you’re trying to pay, you’ll likely pay a convenience fee of 2% to 3%. Still, depending on what kind of rewards your card earns and your overall financial situation, it can make sense to pay taxes with a credit card.

The Takeaway

Just having a credit card may help build credit some, since your total amount of available credit plays a factor in determining your credit score. But if you’re really looking to build credit, you’ll want to use your credit card, and use it responsibly. Put some of your regular purchases and big-ticket items on your credit card, and make sure to have a plan to pay your statement off in full, each and every month.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What is a credit score?

Your credit score is a number that lenders can use to help determine how likely you are to repay your debts and obligations. The higher the credit score, the better, with the maximum credit score being 850.

What items help you build credit?

There are a variety of factors that make up your credit score, including the age and type of credit accounts you have, how much of your available credit you’re using, and your payment history. Responsibly using your credit card and paying off your balance in full and on time, for example, can help to build credit.

Recommended: When Are Credit Card Payments Due?

What is the fastest way to build up your credit?

There generally are not any magic bullets to build up your credit from scratch fast. That said, one of the best ways to build up your credit is to show a history of reliably paying your bills on-time, each and every month. The longer your track record of using your existing credit responsibly, the better it is for your credit score.

Photo credit: iStock/Tingting Ji

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

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

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

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