Mar
04
2022
Student Loan Rehabilitation: What It Is and How It Works

Student Loan Rehabilitation: What It Is and How It Works

By | Fresh Out of School, Student Loans, student_loan | No Comments

Student loan default rehabilitation is a one-time opportunity to clear the default on a federal student loan. It also allows you to regain eligibility for federal student aid after your loans have gone into default.

With student loan rehabilitation, you can work with lenders to create a new payment plan that is theoretically more reasonable and affordable. This can be advantageous if you follow payment deadlines moving forward, but there are some caveats to student loan rehabilitation programs.

What Is Student Loan Rehabilitation?

Student loan rehabilitation is a program that’s offered by the federal government. Borrowers who have a Direct Loan, Federal Family Education Loan (FFEL), or Federal Perkins Loan that is in default, and owned by the Department of Education, may request rehabilitation. Private student loans are not eligible for student loan rehabilitation.

A federal student loan is considered in default when a borrower has missed payments for 270 days. Prior to defaulting on a student loan, the loan may be considered delinquent as soon as you miss a payment. If you fail to make a payment for 90 days, those late payments may be reported to the credit bureaus.

The monthly payment required during the student loan default rehabilitation depends on your income and can be as low as $5 per month. After making the minimum number of voluntary, reasonable, and affordable payments, the defaulted loan is considered rehabilitated.

Recommended: Types of Federal Student Loans

How Student Loan Rehabilitation Works

If you already have a federal loan in default, you can submit a written request for student loan rehabilitation through your loan holder.

A calculation, called the 15% formula, is used to determine your reasonable and affordable monthly payment during the rehabilitation program. First, it determines how much of your Adjusted Gross Income exceeds 150% of the federal poverty guideline, based on your family size and state. Then, your loan holder will calculate 15% of that amount, divided by 12, to arrive at your monthly payment.

If you don’t agree to make voluntary payments at the amount that’s calculated under the 15% formula, you can ask your loan holder to calculate an alternative payment.

To do so, you must submit a “Loan Rehabilitation: Income and Expense Information” form. You’ll need to supply details regarding your monthly income and monthly expenses and certify your family size. This alternative amount might be higher or lower than the payment amount offered under the 15% formula.

Upon agreeing to the payment amount and signing the student loan rehabilitation agreement, you must make nine on-time monthly payments within a consecutive 10-month period. After the ninth payment is completed, your loan holder will contact the credit bureaus to request the removal of the default status on your student loan account.

Pros and Cons of Student Loan Rehabilitation

The student loan rehabilitation program can be beneficial for borrowers whose federal loans are in default. However, there are also a few caveats to consider before requesting student loan rehabilitation.

Pros of Student Loan Rehabilitation

There are a handful of advantages to student loan rehabilitation. Instead of making a lump sum payment to get a defaulted loan in good standing, rehabilitation allows you to make consistent, on-time installment payments at a reasonable amount.

After successfully rehabilitating your loans after nine consecutive payments, the defaulted mark on your loan account is removed from your credit record. This can potentially improve your credit score. Any involuntary payments, such as wage garnishment or Treasury offset, will cease upon successful loan rehabilitation.

Rehabilitating your loans also gives you access to federal aid; for example, if you want to get your master’s or your Ph.D., you’ll once again be eligible to receive loans from the federal government. You’ll also have access to federal benefits, like federal loan deferment and forbearance, and the option to enroll in income-driven repayment plans.

Recommended: Student Loan Deferment vs Forbearance

Cons of Student Loan Rehabilitation

Rehabilitation is a one-time opportunity. If you default again after your loans are rehabilitated, you can’t request a rehabilitation program again.

Another point to note is that involuntary payments, such as those collected by your loan holder through wage garnishment, don’t count toward the nine voluntary payments needed to rehabilitate your loan. This means you might potentially have two separate loan payments occur each month until some rehabilitation payments are made or your loans are fully out of default.

Upon successfully rehabilitating your loan account, the default is removed from your credit report, but the late student loan payments on the account remain on record.

Pros of Student Loan Rehabilitation

 Cons of Student Loan Rehabilitation
Can remove default status from your credit report. Doesn’t remove history of late payments that led to default.
Stops collections efforts on successfully rehabilitated loans. Only one chance given to rehabilitate student loans.
Rehabilitated loans can be eligible for income-driven repayment plans. Involuntary payments can continue while your loan(s) is in rehabilitation.
You can regain federal loan benefits and eligibility for student aid.

Student Loan Rehabilitation vs Consolidation

Another way to address a defaulted federal loan is through a Direct Consolidation Loan.

Consolidating defaulted federal student loans, making it easier to keep up with one monthly payment instead of multiple. This means using a Direct Consolidation Loan with a new interest rate — generally the weighted average of your initial interest rates. To undergo a Direct Consolidation loan, you must either:

•   Make payments via an income-driven repayment plan or

•   Make three consecutive and voluntary on-time payments before initiating a Direct Consolidation Loan.

Although you can rehabilitate most federal loans, regardless of whether your student loans are in collections, there are special conditions and restrictions for Direct Consolidation Loans. For example, you can only consolidate an existing Direct Consolidation Loan that’s in default if you reconsolidate it with another eligible loan.

An important note: Consolidating only applies to your federal loans — you can’t roll private loans into a Direct Consolidation Loan.

Like rehabilitation, consolidating a defaulted loan through a Direct Consolidation Loan provides access to future federal aid, loan forgiveness programs, and federal benefits like deferment, forbearance, and an income-driven repayment plan.

Another notable factor that differentiates student loan rehabilitation vs. student loan consolidation is that the latter doesn’t remove a default from your credit history.

Student Loan Rehabilitation

 Student Loan Consolidation
Requires nine voluntary and consecutive, on-time payments. Requires an income-driven repayment plan, or three voluntary and consecutive, on-time payments before consolidation.
Access to your choice of repayment plans. Conditions and/or restrictions for defaulted Direct Consolidation Loans, FFEL Consolidation Loans, and PLUS Loans.
Can rehabilitate loans while making involuntary payments. Can’t consolidate a defaulted loan that’s in collections.
Removes default from credit record. Doesn’t remove default from credit record.

Recommended: Student Loan Consolidation vs Refinancing

Can Student Loan Rehabilitation Affect Your Credit?

Loan rehabilitation results in the defaulted loan status taken off of your credit report. Having a default removed from your record can potentially improve your credit score.

The record of late payments that resulted in the defaulted loan, however, will remain on your credit report. Late payments on your record are still considered a derogatory mark that could impact your credit for up to seven years.

What Happens After Student Loan Rehabilitation

After your defaulted loan is rehabilitated, your loan is sold or transferred to a new loan holder or lender. The loan holder will formally send a request to the three credit bureaus to have the default taken off of your credit report. Also, existing collection activity toward the rehabilitated loans will cease (e.g. wage garnishment or Treasury offset).

Once your loans are under a new loan holder, you’ll need to select a repayment plan, otherwise, a standard 10-year plan will apply.

To request a lower monthly payment, you might be able to enroll in an income-driven repayment plan which calculates your monthly payment based on your Adjusted Gross Income and family size.

This type of repayment option extends the term across 20 to 25 years, depending on the plan. In doing so, your monthly payment is limited to a percentage of your discretionary income, but you’ll pay more interest over time.

In addition to being eligible for new federal aid, you’ll again be eligible for federal benefits that were inaccessible when your loan was in default. These benefits include access to student loan forgiveness programs, and deferment and forbearance.

The Takeaway

Student loan rehabilitation might not completely erase all of the missteps you’ve had with regard to your federal loans, but it can be an option to get out of default. Another option for getting a federal student loan out of default is to consider a Direct Consolidation Loan.

Refinancing a defaulted student loan can be challenging, but if your student loans have been rehabilitated, and you’re now in good standing on your loans, student loan refinancing may be an option to consider. Refinancing lets you take out a brand-new loan with a new interest rate and new loan terms. If you qualify, refinancing could allow qualifying borrowers to secure a lower interest rate or lower monthly payments. Note that lower monthly payments are generally the result of extending your loan term, which can cost more in interest over the life of the loan.

While refinancing can help make loan repayment more affordable over the long-term for borrowers who are able to qualify for a more competitive interest rate, it will eliminate any federal loans from borrower protections – such as income-driven repayment plans, so it may not make sense for everyone. If you feel refinancing is an option for you, consider SoFi where there are no hidden fees and the application is completed entirely online.

Check your student loan refinancing rate in 2 minutes.

FAQ

How long does it take to rehabilitate student loans?

It takes several months to complete a student loan rehabilitation program. Direct Loans, Federal Family Education Loan (FFEL), and Federal Perkins Loans require nine, full and on-time payments over 10 consecutive months to rehabilitate.

Can you rehabilitate student loans in collections?

Yes, you can rehabilitate student loans in collections. However, involuntary collection payments, such as those occurring as a result of wage garnishment, may continue while you make voluntary rehabilitation payments.

Is rehabilitation or consolidation of student loans better?

Deciding whether student loan rehabilitation or consolidation is best for you depends on your personal situation and goals.

Student loan rehabilitation takes longer than consolidation but by successfully rehabilitating your loans, you are able to remove the default from your credit history. So, if that is your primary goal, rehabilitation might make more sense. However, if your goal is to simplify repayment for your defaulted loans, and you want to enroll in an income-driven repayment plan as soon as possible, a Direct Consolidation Loan can be an option to consider.

Keep in mind that both student loan rehabilitation and Direct Loan Consolidation are only options for federal student loans.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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 .

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

SLR18173

Read more
Mar
03
2022
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

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

Two parties might exchange currency if one is traveling in a different country or part of a multinational company. Many people also trade foreign currency as an investment, just as people 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. Below, we’ll explore how binary options work and why one might choose to trade them.

What Are Binary Options?

Binary options are one of the more exotic options out there. With a binary option, you set a currency pair (like USD/EUR), a strike price, and a timeframe. Both the buyer and the seller put down their money upfront. Binary 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.

How Do Forex Binary Options Work?

Unlike traditional call and put options in the stock market, forex binary options have only two possible outcomes: if you’re on the right side of the strike price, you make money, and if you’re on the “wrong” side of it, you lose 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 – 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:

Pros

 Cons
Limited and defined risk More expensive than traditional forex trading
Can trade even with a smaller budget Supported by a limited number of brokers
Easier to understand since there are only two possible outcomes Even as a seller, you must put your 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 risks and rewards are different for the buyer and seller.

Risk for Buyers

While 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 rewards for a buyer purchasing a binary option are set when the option contract is set. If the currency is at or above the strike price at expiration, you will get the total amount of the contract (usually $100).

Risk For Sellers

The risk for sellers of a binary forex option is known when the contract is agreed upon. Unlike sellers of traditional options in the stock market, sellers of binary options must put their money down upfront. This is usually $100 minus the price of the contract. 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

On the other hand, 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, minus commissions.

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 the buyer and seller 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 have to be right on the direction of the move, the magnitude and the timing.

To guide your options trading platform, it can be helpful to use a platform like SoFi that offers educational resources about options. What’s more, SoFi’s options trading platform has an intuitive and approachable design that gives investors the ability to make trades from the mobile app or the web platform.

Trade options with low fees through SoFi.

FAQ

Are forex and binary options the same thing?

If you are comparing options vs. forex, you may be wondering what the difference is between forex and binary options. The two terms are similar in that they both refer to trading on the foreign currency markets, but they are slightly different. Forex refers usually 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 particular kind of currency option that have only two possible outcomes. They come with their own set of risks and rewards. 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.
SOIN0221021

Read more
Mar
03
2022
What Is Time in Force? Definition and Examples

What Is Time in Force? Definition and Examples

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is Time in Force? Definition and Examples

Time in Force is a stock investing term referring to the length for which a trading order is good. While casual or buy-and-hold investors may not use time-in-force stock limits, they’re an important tool for active traders.

Understanding different time-in-force options can help you close out more successful positions.

What Does Time in Force Mean?

Time-in-Force is a directive, set by a trader, that defines how long a trade will remain open or “in force” before expiring. Options traders and other active traders typically want to set an appropriate end date for trades to avoid unintended trade execution. This is especially true for investors employing day trading strategies and taking advantage of volatile market conditions with rapidly changing prices.

Recommended: Understanding the Risks of Day Trading

Basics of Time In Force

Before you place a Time-in-Force stock order, you’ll want to make sure that you understand exactly how they work. As with options trading terminology, it’s important to understand the language used to describe Time-in-Force orders.

Recommended: A Guide to Trading Options

Types of Time in Force Orders

There is no specific type of stock market order called “Time in Force”. Instead, the phrase refers to the collection of order types that set how long a trade order is valid, or “in force” in order to take advantage of investment opportunities. If you are considering a buy-to-open or buy-to-close order, you can also specify the time in force for either of those types of orders.

Not all brokers or dealers support every different kind of time in force order, but here is a look at several of the most common types of time in force stock market orders.

1. Day Order

This is the most common time-in-force order, and means the trade remains open until the end of the trading day. If your order has not been executed at the close of the day’s markets, it will expire. With many brokers, day orders represent the default option, and as such, this is the time in force order with which most people are likely familiar.

2. On-Open Order

Depending on the types of order that your broker or dealer offers, there can be two different types of time-in-force-on-the-open orders.

A market-on-open (MOO) order is an order filled when the market opens, at the prevailing opening price. With a Limit-on-Open (LOO) order, you can set a limit price for the highest price you’ll pay or the lowest price at which you’ll sell. If the market opens within the constraints of your limit order, it will be executed. Otherwise, your broker will cancel the LOO order.

3. Market on Close Order

A Market-on-Close (MOC) order is one that requests the sale or purchase of a security at the final closing price of the trading day. If your brokerage offers market-on-close orders, they will generally have a cutoff time by which you need to enter in any MOC orders.

Recommended: Buy to Open vs. Buy to Close

4. What Is Good ‘Til Canceled (GTC)?

As its name suggests, a good-til-canceled (GTC) order is a type of time-in-force order that remains in force until you proactively cancel the order or it is filled. Depending on the type of options strategy you’re employing, a good-to-cancel order can make a lot of sense, if you’re waiting for a moment in the underlying stock price. Many brokerages will restrict the number of days a good-to-cancel order will be open, often to 90 days.

Examples of Time in Force

You currently own 100 shares of ABC stock that you purchased at $20 per share. ABC stock announced earnings last night, and you’re considering liquidating your position. You’re not sure how the market will react to the earnings news, so you place a Limit-on-Open (LOO) order for $30 per share. If ABC stock opens at $30 or higher, your trade will execute, otherwise your broker will cancel it.

If ABC stock’s shares have been rising all day, but you expect them to open at a lower price, you might use a market-on-close order in order to try to sell at the high price at the end of the day. If you want to hold onto your ABC stocks until they reach $40 per share, you could set a good-til-canceled order to do so. Your order would automatically execute when shares hit $40, or it would expire after reaching your broker’s time limit for such orders, typically 90 days.

Time in Force Day Order vs On-Close Order

A Day order and an On-Close order are similar, but they have some important differences. A Day order is one that is good for the entire trading day, up to and including close. If you’re placing an order in the middle of the trading day and don’t care when it executes, this is the type of order you’d use.

On the other hand, an On-Close order (either Market on Close or Limit On Close) is only good at the close of the trading day. The intent of an On Close order is to execute at the final trading price of the day. If you place an On Close order in the middle of the trading day, it will not execute until the end of the trading day, regardless of the price throughout the day.

Using Time in Force Orders

How you use the different Time-in-Force orders will depend on your options trading strategy. Most buy-and-hold investors won’t use Time-in-Force orders at all, but if you’re using a more complex strategy, such as buying to cover, you may want to have more control over how and at what price your order is executed.

Start Trading With SoFi

Using time-in-force orders can help day traders execute on specific strategies and minimize potential offers. It determines how long a trade will remain open before being canceled. Most long-term investors do not use time-in-force orders.

If you’re ready to start options trading one way to get started is with SoFi’s options trading platform. This user-friendly platform boasts an intuitive design, and you can make trades from either the mobile app or web platform. Plus, there’s a library of educational content available for reference.

Trade options with low fees through SoFi.

Photo credit: iStock/Tatomm

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.
SOIN1121490

Read more
Feb
22
2022
Bollinger Bands Explained

Bollinger Bands Explained

By | Growing Wealth, invest, Investing | Comments Off on Bollinger Bands Explained

What Are Bollinger Bands?

Bollinger Bands® are popular tools used in technical analysis of securities. They are a set of three bands that measure the relative high or low of a security’s price in relation to previous trades.

These defined trend lines are the simple moving average (SMA) of the price of the security plus plotted lines two standard deviations away from the SMA. The bands are plotted positively and negatively from the SMA, which measures the volatility of a security, and the trader can adjust them based on their particular use case. When the security becomes more volatile the bands widen, when it becomes less volatile they get closer together.

Bollinger Bands were created to help investors understand whether a security is currently oversold or overbought, to help determine whether it is likely to increase or decrease in value over time. When the upper band is close to the SMA, generally traders see this as an overbought security. When the lower band is close to the SMA, the security is considered to be oversold.

The bands and a set of 22 rules about using them for trading were developed in the 1980s by John Bollinger, a well-known technical trader.

How Do Bollinger Bands Work?

Bollinger Bands are plotted using two parameters, period and standard deviation.

Period is found by calculating the simple moving average of the security a trader is interested in. The calculation generally uses a 20-day SMA, an average of a security’s closing prices over a 20 day period — or roughly a month of trading days. The first data point on the graph would be the average of the first 20 days being tracked. The second data point would be the next 20 days, and so on.

That line shows the SMA over time, and the Bollinger Bands are then placed above and below it by calculating the standard deviation of the security’s price along each data point. The standard deviation is a calculation of the average variance of the SMA value, which shows how far apart values are from the SMA.

The standard deviation is calculated by first finding the square root of the variance, which is the average of the squared differences of the mean. After finding the square root of the variance, that number is generally multiplied by two, although the number can be adjusted. The resulting value is then added and subtracted from each SMA data point to form the upper and lower Bollinger Bands.

Key Things to Know About Bollinger Bands

A few key things to understand about Bollinger Bands:

•   When volatility is low, the bands get closer together. This indicates that volatility may increase in the future and therefore there could be a significant price movement up or down.

•   When volatility is high, the bands get farther apart. This indicates that an existing price trend could be coming to a close in the future.

•   Generally the security’s price movements stay within the two bands. And once they touch one band they start moving towards the other band. But the price can also bounce off the band multiple times or it can cross over the band. If the price hits one of the bands and then crosses over the SMA line, that is an indicator that it is heading toward the opposite band’s price level.

When the price crosses to the outside of the bands, this is a strong indicator of a trend in that direction.

Formula for Bollinger Bands

Below is the formula to plot Bollinger Bands:

BOLU=MA(TP,n)+m∗σ[TP,n]

BOLD=MA(TP,n)−m∗σ[TP,n]

where:

BOLU=Upper Bollinger Band

BOLD=Lower Bollinger Band

MA=Moving average

TP (typical price)=(High+Low+Close)÷3

n=Number of days in smoothing period (typically 20)

m=Number of standard deviations (typically 2)

σ[TP,n]=Standard Deviation over last n periods of TP
​

How Do You Read Bollinger Bands?

Bollinger Bands help traders understand whether a security’s price is relatively high or low so that they might make trades based on trends. Bollinger Bands can indicate uptrends and downtrends as well as possible upcoming price reversals.

Trends can last for minutes, hours, days, weeks, months, and even years, so traders should understand how to set up the bands based on the timeline of their trading strategy. Here are some patterns and indicators traders might want to learn.

Uptrends

Traders can use Bollinger Bands to see whether there is a bullish trend in a security’s market price. If the center line hits the upper band multiple times, this indicates an uptrend. If the price hits the upper band, decreases but stays above the center line, then hits the upper band again, that is a strong indicator of an uptrend. If the price then hits the lower band, it may indicate a reversal or a loss of strength in the uptrend.

Downtrends

The lower band can indicate a downtrend or an upcoming reversal towards an uptrend. If the price hits the lower band continuously and stays below the center line, this indicates a downtrend. Traders typically avoid making trades during downtrends, but if there is an indicator of a reversal they might choose to buy.

The Squeeze

When the bands are close together, this is known as a squeeze. The squeeze happens when the security has low volatility, but it indicates that the security will probably have increased volatility in the future. Traders look for high volatility periods to find trading opportunities, so the squeeze indicates that those opportunities may be showing up soon.

Traders typically like to exit trades during periods of lower volatility, so they look for far-apart bands as a clue that volatility may soon decrease. The squeeze is not used as a trading signal and doesn’t show whether a security will increase or decrease in value, but it may help traders figure out the potential timing of upcoming trades.

Breakouts

The SMA line doesn’t always stay between the Bollinger Bands — it can also move above or below the bands. Around 90% of price changes do happen between the bands, so if the price has a breakout above or below the bands it’s a significant event. However, breakouts are not used as trading signals and are not indicators that the security price will move in a particular direction in the future.

Bollinger Band Trading Strategies

Financial analyst Arthur Merrill, who identified a set of 16 trend patterns that have M patterns and W patterns. Here are two key patterns.

M Top

The M top pattern indicates that the security price may decrease to a new low. It forms an M pattern at the upper band, where the price nearly hits or hits the upper band but doesn’t cross over it, then decreases to below the low in the center of the M pattern.

W Bottoms

W patterns can be used to identify W Bottoms, which is when the second low is lower than the first low but neither low goes below the lower band. If the security rises above the high in the center of the W, this is an indicator that the price will likely reach a new high.

Combining Bollinger Bands With Other Indicators

John Bollinger recommended that traders use Bollinger Bands in conjunction with other non-correlated indicators, such as the relative strength indicator (RSI) and the Stochastic Oscillator, in order to gain a comprehensive understanding of the security being assessed. While Bollinger Bands help traders understand price volatility and can show opportunities for upcoming trades, they aren’t strong indicators of potential upcoming price movements.

Drawbacks of Bollinger Bands

There are a number of caveats to consider when it comes to Bollinger Bands. In particular, they are best used with other stock indicators, to form a fuller picture.

•   They show old security price data with equal importance to new data, so data that is outdated may be counted with too much importance.

•   They are more of reactive indicators than predictive indicators, so they show current market conditions and can indicate trends, but are not strong indicators of what will happen to a security’s price in the future.

•   The standard settings of 20-day SMA and 2 standard deviations is an arbitrary measurement that doesn’t convey relevant information for every security and trading situation, so it’s important that traders understand how to adjust the band calculations for their particular situation.

Using Bollinger Bands for Crypto Trading

Bollinger Bands have become a popular tool for crypto traders to track volatility and trends. They can be used for trading crypto in a similar way to stocks, but some traders choose to use a 28 or 30 SMA instead of 20, to better represent a month of trading days, since the crypto markets are open 24/7.

The Takeaway

Bollinger Bands are a useful tool for technical analysis of stocks, which measure the relative high or low of a security’s price in relation to previous trades over typically the past 20 trading days. One of many trend indicators, Bollinger Bands are also sometimes used in crypto trading.

If you’re looking to get started trading options, SoFi offers an intuitive and approachable options trading platform. Investors are able to make trades from the mobile app or web platform, and they can access a library of educational resources about options.

Trade options with low fees through SoFi.

Photo credit: iStock/blackCAT

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.
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.

SOIN1021489

Read more
Feb
22
2022
What Is Buy to Cover & How Does It Work?

What Is Buy to Cover & How Does It Work?

By | Growing Wealth, invest, Investing | Comments Off on What Is Buy to Cover & How Does It Work?

Buy to cover refers to when investors purchase shares in a stock that they had previously shorted. This is a form of margin trading that involves higher risk than more traditional buying and selling.

In this article, we’ll take a look at the buy to cover order, how it fits into short selling and margin trading, and when you might want to use a buy to cover order.

Buy to Cover Meaning

Traditionally, you buy a stock on which you have a bullish outlook, and sell to close out your position. In an ideal situation, you buy low and sell high, securing the difference between the purchase price and the sale price as your profit. If you think a stock is currently overpriced, you might sell the stock before you have actually purchased it, via a short sale. This requires temporarily borrowing the shares, usually from your broker or dealer. Then, once the stock (hopefully) goes down, you purchase the shares, closing out your position.

Buying to cover is that after-the-fact purchase of shares that you previously shorted. When you do a short sale by selling first, you will eventually need to repay your short sale by purchasing shares.

What Is a Buy to Cover Limit?

When placing a buy-to-cover order, there are two ways that you can close your position. The first is a market order, in which you simply close the position at the first available market price. The other method involves using a buy-to-cover limit order, in which you set a maximum price at which you’re willing to purchase the share.

One advantage of the latter approach is that you know exactly the price that you’ll get for your shares. This can help you when planning your overall strategy. A drawback, however, is that if the market moves against you, your order may not get filled.

How Does Buy to Cover Work?

A buy-to-cover order works much in the same way as a traditional buy order. The main difference is the order in which you make your buy and sell transactions. In a traditional buy order, you purchase shares that you intend to later sell. With a buy-to-cover order, you’re buying shares to cover a sale that you previously made.

Example of a Buy to Cover Stock

Here’s a buy to cover stock example to help illustrate how the process works:

•   Let’s say that you think stock ABC is overpriced at $50.

•   You sell short 100 shares of ABC, borrowing $5,000 on margin from your broker.

•   After a few days, stock ABC’s price has dropped to $45.

•   You issue a buy to cover order for 100 shares of ABC, paying $4,500.

•   Your profit is $500 — the difference between the amount you receive from the short sale and the amount you pay to close the position.

Sell Short vs Buy to Cover

“Selling short” and “buying to cover” are two sides of the same transaction. If you think that a particular stock or investment is likely to go down in price, you can use a short sale to first sell shares that you’ve borrowed on margin, generally from your broker or dealer.

When you’re ready to close out your short sale transaction, you can place a buy-to-cover order. This will purchase the shares that you sold originally, either at the market price or with a buy-to-cover limit order at a particular price. If the stock has gone down in price as you expected, you will profit from selling high and then buying low.

Buy to Cover and Margin Trades

Using a buy to cover order is intricately tied in with both short selling and margin trading. When you sell short, you are using margin trading to borrow shares to sell that you don’t yet own.

When you are ready to close out your position, you issue a buy-to-cover order, purchasing the shares you need to correspond to the shares that you earlier sold on margin. Keep in mind that if the stock moves against you after your short sale (the stock’s price goes up instead of down), you face a margin call, in which your broker forces you to either liquidate your position or add extra money to cover your position.

The Takeaway

A buy to cover is a purchase order executed to close out a short sale position. In a traditional sale, you purchase a stock first and then later sell the shares. When you sell short, you place a buy-to-cover order to close your position.

Trading options can be tricky, so it’s important to study up as you invest, which is where an options trading platform like SoFi’s comes in handy. It provides access to a library of educational resources about options. Plus, the platform’s intuitive and approachable design gives investors the ability to trade options from the mobile or web platform.

Trade options with low fees through SoFi.

Photo credit: iStock/Ridofranz

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.
SOIN1121489

Read more

CATEGORIES

  • All
  • No categories
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2024 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender