Growing Wealth Archives

Apr

2025

Guide to Moneyness in Options

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

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Moneyness in options refers to the relationship between an option’s strike price and 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.

Key Points

• Moneyness describes the relationship between an option’s strike price and the underlying asset’s price.

• Options can be in-the-money, out-of-the-money, at-the-money, or near-the-money.

• In-the-money options have both intrinsic and time value.

• Out-of-the-money options only have time value.

• Moneyness impacts trading strategies and option pricing.

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. The strike price is the price at which an investor can buy or sell a derivative contract.

Option moneyness may change as the underlying stock price fluctuates. A call option that is out-of-the-money one day could become in-the-money if the stock price rises.

Moneyness may also change throughout the trading day depending on price fluctuations in the underlying stock.
Moneyness of options plays a role in constructing options trading techniques, such as 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.

Traders who are bullish on a stock may consider purchasing call options that are out-of-the-money, as these could experience significant percentage gains if the stock price rises sharply. They also drop the most if the price moves against the position.

In-the-money options may be more effective for traders anticipating moderate price movements. Due to leverage, ITM options can result in greater potential returns or losses compared to directly 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 calculated as the difference between the stock’s market price and the option’s strike price. The intrinsic value of an in-the money put is the strike price of the option less the price of buying 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.

Time value is influenced by multiple factors, including volatility and time until expiration. Learning about the option Greeks can help traders inform their 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.

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 the differences between in-the-money vs. out-of-the-money options is essential for pricing and risk.

In-the-Money (ITM)

In-the-money options have intrinsic value, and may also retain some time value depending on time expiration and implied volatility. 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, the contract holder 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 anticipates that the share price may rise prior to expiration, potentially giving the option 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 compared to in-the-money and at-the-money options, as they have a higher probability of expiring worthless.

At-the-Money (ATM)

At-the-money options have strike prices that match the market price of the underlying stock. These options, like out-of-the-money options, have no intrinsic value. At-the-money options typically cost more than out-of-the-money options, but less than in-the-money options.

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

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 a trader expects a stock price to decline significantly in a short time frame, they may consider purchasing an out-of-the-money put option, as its value could increase if the stock price drops sharply.

Moneyness becomes increasingly important in complex options strategies, as multiple option legs can have different moneyness levels. Understanding this relationship is key to managing risk and 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 describes the relationship between an option’s strike price and 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.

Beyond its role in pricing, moneyness also influences an option’s risk profile and profit potential. Understanding how options move between in-the-money, at-the-money, and out-of-the-money can help traders develop strategies that align with their market outlook and risk tolerance.

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

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

Explore SoFi’s user-friendly options trading platform.

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. A call option is in-the-money when the underlying asset price exceeds 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 refers to the relationship 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” illustrates how implied volatility varies with an option’s moneyness.

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q125-068

Apr

2025

Leap Options: What Are They? Pros & Cons

LEAPS Options: What Are They? Pros & Cons

By Samuel Becker | Growing Wealth, invest, Terminology | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

LEAPS are long-term options contracts that have an expiration period between one and three years, versus less than a year for standard options. LEAPS is an acronym, which stands for “long-term equity anticipation securities.”

LEAPS 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

Like standard options, purchasing a LEAPS contract gives the investor the right — but not the obligation — to buy or sell the underlying asset at a set price (the strike price) before the contract expires.

LEAPS options are a variation on standard options contracts, offering extended expiration periods that some investors may include among their 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 involves selecting a contract with a longer expiration date — typically more than one year out — compared to standard options. Traders begin by identifying a target asset, choosing a strike price, and deciding whether to purchase a call or put option.

From there, it’s a matter of evaluating the contract’s premium, expiration timeline, and how the option fits into a broader investment strategy. Because LEAPS contracts extend over a longer period, they may be better suited towards investors with a long-term market outlook.

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?

One potential advantage of trading LEAPS options is their longer time frame, which results in slower time decay and allows their value to more closely track 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 their potential for outsized returns — though they also carry risks, including the potential for total loss of the premium and exposure to long-term volatility.

What Are the Cons of LEAPS Options?

On the flipside, 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.

Purchasing LEAPS options requires a higher upfront investment than shorter-term options, increasing potential capital risk.

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 buy a LEAPS option for a specific desired asset.

Plus, because LEAPS tend to cost more than shorter-term options, they can also magnify potential losses if the trade doesn’t perform as expected.

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, noting that trading LEAPS is essentially the same as trading options, but with longer expiration periods:

If you believed that a certain stock was going to see 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 that stock with a long-term expiration date.

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

If the stock declines in price, the put option’s value may increase, allowing you to sell it for a profit before the contract expires. Or, on the other hand, you can wait for the stock 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 different strategies for trading options, and many can be applied to trading LEAPS.

One basic LEAPS options trading strategy is to buy calls when bullish on an asset, 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 because they offer longer exposure to its price movements, 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 alongside standard options to benefit both from short- and long-term market activity. If, for instance, you thought a stock was going to experience a value decline in the next few months, but suspect that it may bounce back and increase in value over two or three years’ time.

You could buy a standard put option with a long-term LEAPS call option to express both short-term caution and longer-term optimism.

The Takeaway

The chief difference between LEAPS options and standard options is that they have longer-than-normal expiration periods of one to three years versus less than a year for traditional options. Investors may use LEAPS to express long-term views on a stock or index without committing the full capital required to own the asset outright.

LEAPS are similar to standard options, however, 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.

Options trading can be complex and high risk, whether trading LEAPS or short-term options, so investors interested in options should carefully consider their risk tolerance and investment goals before incorporating them into a portfolio.

Explore SoFi’s user-friendly options trading platform.

🛈 While SoFi does not offer LEAPS options at this time, investors may purchase put and call options on SoFi’s options trading platform.

Photo credit: iStock/dusanpetkovic

SoFi Invest®

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

SOIN-Q125-066

Apr

2025

Strategic Overview: What Is a Cash-Secured Put?

By Laurel Tincher | Growing Wealth, invest, Investing, Terminology | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

A cash-secured put is an options strategy where a seller writes (sells) a put option while setting aside enough cash to buy the stock if assigned.

This strategy is suitable for investors with a neutral-to-bullish outlook, believing a stock may drop in price over the short term but increase in the long term. Some investors use cash-secured puts to buy a stock at a lower price, while others use the strategy to generate income from the option premium.

The Details of Selling a Cash-Secured Put

A put option gives the buyer the right to sell a stock at a specific price (the strike price) by a certain date. The seller takes on the obligation to buy the stock at that price if the option is exercised.

In a cash-secured put strategy, the seller collects a premium when the option is sold and sets aside enough cash to buy the stock if assigned. This approach is typically used to generate income or to acquire shares of a stock at a lower price. For a cash-secured put, sellers choose a put that is at- or out-of-the-money, such as one with a lower strike price than the current stock price.

Selling cash-secured puts is a moderately bullish options trading strategy that involves selling a put option with the expectation that it will either expire worthless or the underlying security temporarily drops in price, providing an opportunity for the seller to purchase the security at the lower price. In many cases, the seller hopes the stock will dip just enough for the option to be exercised, allowing them to buy the stock at a lower cost.

Recommended: The Meaning of a Bullish Market

What to Consider With Cash-Secured Puts

Cash-secured puts are geared towards sellers who want to purchase the underlying stock at a lower, predetermined price if the option is exercised. Sellers earn a premium immediately when they sell the cash-secured put. This strategy is typically used by sellers aiming to acquire a stock at a lower price if assigned, while also collecting a premium if the option expires.

If the market price of the security is lower than the strike price at the exercise date, the seller is obligated to purchase the security at the strike price — which, in the case of a cash-secured put, enables the seller to acquire the desired stock at a lower price. This happens only if the put buyer chooses to exercise the option early, which is uncommon but possible. There is a small risk of early assignment, which could require the seller to purchase the stock before the expiration date if the price drops significantly below the strike price. While uncommon, the put buyer can choose to exercise the option early, which would require the seller to purchase the stock before the expiration date.

If the market price of the security is higher than the strike price at the exercise date, the put option typically expires worthless, and the investor retains the premium. In this case, the seller has earned the premium amount and profited from the trade, as they say in options terminology. There is a rare but possible risk of early assignment, usually if the stock price falls sharply, which could require the investor to buy shares sooner than expected.

Sellers are required to have enough cash in their trading account to cover the full purchase amount. This cash amount must be kept in their brokerage account for the duration of time they hold the put, which is why it’s called a cash-secured put.

Some sellers write puts primarily to collect the options premium without intending to purchase the underlying stock. In these cases, they may write a naked put, which does not require holding cash to cover the purchase of the security, but does require sufficient margin in the account to meet potential obligations.

The seller would hope that the put expires without obligating them to buy, and they could pocket the premium amount. Cash-secured puts, again, are geared towards investors who actually want to purchase the underlying security on or before the exercise date at the price they chose when selling the put.

Cash-secured puts have both potential benefits and risks, and investors should evaluate whether this strategy aligns with their financial goals and risk tolerance.

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.

Pros & Cons of Cash-Secured Puts

Options strategies require the investor to be aware of multiple issues and cash-secured puts are no different.

What Are the Pros of Cash-Secured Puts?

Cash-secured puts offer potential income and the opportunity to buy stock at a lower price, but the strategy comes with some trade-offs. Sellers typically hope the stock dips just enough for the option to be exercised. However, if the price drops too far, the potential losses may outweigh the benefit of buying at a discount.

• The seller earns income from the initial premium paid, but may still incur losses if the underlying security’s price declines significantly.

• If the stock price is below the strike price at expiration, the seller will be assigned shares at the strike price, generally at a lower price than when the trade was initiated.

Note that if the stock price drops below the strike price and the shares are assigned, the investor will still pay the strike price for the shares. Be sure to think about what determines the stock price of the underlying security.

• If the price ends up increasing instead of decreasing, the put will expire worthless and the seller the premium and the cash set aside for the stock purchase.

• If a seller expects a short-term dip in stock price followed by long-term appreciation, cash-secured puts may offer a way to buy the stock below market value.

• If assigned, the seller’s long-term gains from holding the stock could be significant, even though the option premium itself is capped.

What Are the Cons of Cash-Secured Puts?

While cash-secured puts can offer strategic advantages, they also come with potential risks and trade-offs that sellers should consider carefully.

• The security might drop below the strike price and, in extreme cases, could even fall to $0. Although rare, corporate bankruptcies do occur. In this case, the investor would still be obligated to purchase the security at the higher strike price, and would then hold a worthless security. However, even if the security plummets, the investor would still earn the premium amount, and their losses would be less than if they’d simply purchased the security instead of selling the put option.

• When entering the trade, the investor must be prepared to accept the strike price no matter what happens in the market before the exercise date.

◦ Maximum loss = (strike price – $0) x 100, minus any premium received

◦ Maximum gain = premium amount

◦ This assumes the seller is assigned and the stock becomes worthless. This is unlikely but possible (e.g.,if the company goes bankrupt)

• A cash-secured put allows the investor to wait for a dip in the security’s price. If the stock price does not drop to the strike price before expiration, the put option expires worthless, and the investor does not acquire the stock. At that point, they will decide whether to buy at the current market price or pursue a different trade.

If a seller knows they want to purchase the security they may want to consider other investing strategies or simply purchase the security at the current market price instead of using the cash-secured put strategy.

• The seller must hold enough cash to cover the cost of the security for the duration of the trade. This means they can’t invest that cash into other trades.

• From a short-term perspective, the potential losses from a cash-secured put option trade are high and the potential gains from the put option itself are low.

Tips for Employing a Cash-Secured Put Strategy

There are several ways to refine a cash-secured put strategy based on market conditions and individual goals.

• If a seller is bullish on a security, they should choose an out-of-the-money put option with a strike price below the current market price of the stock.

• When a seller sets a strike price that is far out-of-the-money, they receive a lower premium and the option is less likely to be exercised.

• Sellers who are very bullish on a security in the short term should choose other investing strategies. Cash secured-put options are best if the investor has a neutral to slightly bullish view of the security.

• It’s best to sell cash-secured put options when implied volatility of a security is high, because this results in higher option premiums. One way to find securities with high implied volatility is to look for stocks that have recently declined. Some price drops may be short-term, but it’s important for sellers to research whether a stock is more likely to bounce back before using this strategy.

• Due to the risk of a security’s price dropping more than the investor expects in the short term, it’s best to only sell put options for companies that the investor has researched.

• Investors generally sell puts with 30-90 day time frames, though some investors choose to sell weekly put options.

The Takeaway

Cash-secured puts are one possible way to generate income while an investor waits for a stock to drop to their desired entry price. Selling cash-secured puts is a moderately bullish options trading strategy that involves selling a put option with the hope that it either expires, or the underlying security temporarily drops in price and lets the investor purchase the security at the lower price.

Although this strategy is not without risk, it can allow the investor to generate short-term income on the sale of the put, set the price (strike price) at which they will buy the stock if assigned, and enter a stock position at a lower price than when the trade is initiated.

Explore SoFi’s user-friendly options trading platform.

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

Photo credit: iStock/Vanessa Nunes

SoFi Invest®

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

SOIN-Q125-065

Apr

2025

What Are Emerging Markets?

By Ashley Kilroy | Financial Independence, Growing Wealth, invest, Investing, Terminology | Comments Off

Emerging markets or emerging market economies (EMEs) are in the process of achieving the building blocks of developed nations: they’re establishing regulatory bodies, creating infrastructure, fostering political stability, and supporting mature financial markets. But many emerging markets still face challenges that developed market countries have overcome, and that contributes to potential instability.

To further answer the question, “What are emerging markets?”, it helps to understand developed markets.

Developed economies have higher standards of living and per-capita income, strong infrastructure, stable political systems, and mature capital markets. The U.S., Europe, U.K, and Japan are among the biggest developed nations.

Because these economies wield so much power globally, many investors don’t realize that, in truth, emerging markets make up the majority of the global economy.

India, China, and Brazil are a few of the larger countries that fall into the emerging markets category. Some emerging market economies, like these three, are also key global players — and investors may benefit by understanding the opportunities emerging markets present.

What is an Emerging Market?

In essence, an emerging market refers to an economy that can become a developed, advanced economy soon. And because an emerging market may be a rapidly growing one, it may offer investment potential in certain sectors.

Internationally focused investors tend to see these countries as potential sources of growth because their economies can resemble an established yet still-young startup company. The infrastructure and blueprint for success have been laid out, but things need to evolve before the economy can truly take off and ultimately mature. At the same time, owing to the challenges emerging market economies often face, there are also potential risks when investing in emerging markets.

Investors might bear the brunt of political turmoil, local infrastructure hurdles, a volatile home currency and illiquid capital markets (if certain enterprises are state-run or otherwise privately held, for example).

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Emerging Market Examples

What constitutes an emerging market economy is somewhat fluid, and the list can vary depending on the source. Morgan Stanley Capital International (MSCI) classifies 24 countries as emerging; Dow Jones also classifies 24 as emerging. There is some overlap between lists, and some countries may be added or removed as their status changes. Greece, for example, is no longer considered a developed market but an emerging one.

India is one of the world’s biggest emerging economies. Increasingly, though, some investors see India as pushing the bounds of its emerging market status.

China

China is the second-largest economy globally by gross domestic product (GDP). It has a large manufacturing base, plenty of technological innovation, and the largest population of any country in the world.

Yet China still has a few characteristics typical of an emerging market. For example, the gross national income per capita falls below the threshold established by the World Bank for a developed country: about $12,600 per year versus the higher standard of above $13,200 per year. With its Communist-led political system, China has embraced many aspects of capitalism in its economy but investors may experience some turbulence related to government laws and policy changes. The Renminbi, China’s official currency, has a history of volatility. And finally, post-Covid, China’s economy has lagged.

India

India is another big global economy, and it’s considered among the top 10 richest countries in the world, yet India still has a low per-capita income that is typical of an emerging market and poverty is widespread.

At the same time, India was ranked as being among the more advanced emerging markets, thanks to its robust financial system, growing foreign investment, and strong industrials, especially in telecommunication and technology.

Characteristics of an Emerging Market Economy

As noted above, there isn’t a single definition of an emerging market, but there are some markers that distinguish these economies from developed nations.

Fast-Paced Growth

An emerging market economy is often in a state of rapid expansion. There is perhaps no better time to be invested in the growth of a country than when it enters this phase.

At this point, an emerging market has laid much of the groundwork necessary for becoming a developed nation. Capital markets and regulatory bodies have been established, personal incomes are rising, innovation is flourishing, and GDP is climbing.

Lower Per-Capita Income

The World Bank keeps a record of the gross national income (GNI) of many countries. For the fiscal year of 2022, lower-middle-income economies are defined as having GNI per capita of between $1,136 and $4,465 per year. At the same time, upper-middle-income economies are defined as having GNI per capita between $4,466 and $13,845. (By way of contrast, the U.S. is considered a high-income economy, with a GNI of $76,370.)

The vast majority of countries that are considered emerging markets fall into the lower-middle and upper-middle-income ranges. For example, India, Pakistan, and the Philippines are lower-middle-income, while China, Brazil, and Mexico are upper-middle-income. Thus, all these countries are referred to as emerging markets despite the considerable differences in their economic progression.

Political and Economic Instability

For most EMEs, volatility is par for the course. Risk and volatility tend to go hand in hand, and both are common among emerging market investments.

Emerging economies can be rife with internal conflicts, political turmoil, and economic upheaval. Some of these countries might see revolutions, political coups, or become targets of sanctions by more powerful developed nations.

Any one of these factors can have an immediate impact on financial markets and the performance of various sectors. Investors need to know the lay of the land when considering which EMEs to invest in.

Infrastructure and Climate

While some EMEs have well-developed infrastructure, many are a mix of sophisticated cities and rural regions that lack technology, services and basic amenities like reliable transportation. This lack of infrastructure can leave emerging markets especially vulnerable to any kind of crisis, whether political or from a natural disaster.

For example, if a country relies on agricultural exports for a significant portion of its trade, a tsunami, hurricane, or earthquake could derail related commerce.

On the other hand, climate challenges may also present investment opportunities that are worth considering.

Currency Crises

The value of a country’s currency is an important factor to keep in mind when investing in emerging markets.

Sometimes it can look like stock prices are soaring, but that might not be the case if the currency is declining.

If a stock goes up by 50% in a month, but the national currency declines by 90% during the same period, investors could see a net loss, although they might not recognize it as such until converting gains to their own native currency.

Heavy Reliance on Exports

Emerging market economies tend to rely heavily on exports. That means their economies depend in large part on selling goods and services to other countries.

A developed nation might house all the needs of production within its own shores while also being home to a population with the income necessary to purchase those goods and services. Developing countries, however, must export the bulk of what they create.

Emerging Economies’ Impact on Local Politics vs. Global Economy

Emerging economies play a significant role in the growth of the global economy, accounting for about 50% of the world’s economic growth. Moreover, it’s predicted that by 2050 three countries will have the biggest economies: the U.S., China, and India, with only one currently being a developed economy.

But, while emerging markets help fuel global growth, some of those with higher growth opportunities also come with turbulent political situations.

As an investor, the political climate of emerging market investments can pose serious risks. Although there is potential for higher returns, especially in EMEs that are in a growth phase, investors need to consider the potential downside. For example, Thailand and South Korea are emerging economies with high growth potential, but there is also a lot of political unrest in these regions.

💡 Quick Tip: Are self directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Pros and Cons of Investing in Emerging Markets

Let’s recap some of the pros and cons associated with EME investments.

Pros

• High-profit potential: Selecting the right investments in EMEs at the right time may result in returns that might be greater than most other investments. Rapidly growing economies could provide ample opportunity for profits. But as noted above, it’s impossible to guarantee the timing of any investment.

• Global diversification: Investing in EMEs provides a chance to hold assets that go beyond the borders of an investor’s home country. So even if an unforeseen event should happen that contributes to slower domestic growth, it’s possible that investments elsewhere could perform well and provide some balance.

Cons

• High volatility: As a general rule, investments with higher liquidity and market capitalization tend to be less volatile because it takes significant capital inflows or outflows to move their prices.

EMEs tend to have smaller capital markets combined with ongoing challenges, making them vulnerable to volatility.

• High risk: With high volatility and uncertainty comes higher risk. What’s more, that risk can’t always be quantified. A situation might be even more unpredictable than it seems if factors coincide (e.g. a drought plus political instability).

All investments carry risk, but EMEs bring with them a host of fresh variables that can twist and turn in unexpected ways.

• Low accessibility: While liquid capital markets are a characteristic of emerging markets, that liquidity still doesn’t match up to that of developed economies.

It may be necessary to consult with an investment advisor or pursue other means of deploying capital that may be undesirable to some investors.

Why Invest in Emerging Markets?

Emerging markets are generally thought of as high-risk, high-reward investments.

They are also yet another way to diversify an investment portfolio. Having all of your portfolio invested in the assets of a single country puts you at the mercy of that country’s circumstances. If something goes wrong, like social unrest, a currency crisis, or widespread natural disasters, that might impact your investments.

Being invested in multiple countries can help mitigate the risk of something unexpected happening to any single economy.

The returns from emerging markets might also exceed those found elsewhere. If investors can capitalize on the high rate of growth in an emerging market at the right time and avoid any of the potential mishaps, they could stand to profit. Of course timing any market, let alone a more complex and potentially volatile emerging market, may not be a winning strategy.

Recommended: Pros & Cons of Global Investments

The Takeaway

While developed nations like the U.S. and Europe and Japan regularly make headlines as global powerhouses, emerging market countries actually make up the majority of the world’s economy — and possibly, some very exciting opportunities for investors.

China and India are two of the biggest emerging markets, and not because of their vast populations. They both have maturing financial markets and strong industrial sectors and a great deal of foreign investment. And like other emerging markets, these countries have seen rapid growth in certain sectors (e.g. technology).

Despite their economic stature, though, both countries still face challenges common to many emerging economies, including political turbulence, currency fluctuations and low per-capita income.

It’s factors like these that can contribute to the risks of investing in emerging markets. And yet, emerging markets may also present unique investment opportunities owing to the fact that they are growing rapidly.

Emerging market exchange-traded funds (ETFs) might invest in different assets within a single country or spread their investments throughout multiple countries. Bonds can also play a role in an emerging market portfolio. Many countries with developing economies have used the issuance of new debt to borrow money to build out their infrastructure. That means some emerging economies could offer bonds with attractive yields. But investors need to carefully weigh the potential risks.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

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

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Apr

2025

A Comprehensive Guide to Treasury Bills (T-Bills)

By Ashley Kilroy | Financial Topics, Growing Wealth, invest, Investing, Terminology | Comments Off

U.S. government-backed securities like Treasury bills (T-bills) provide a way to invest with minimal risk. These debt instruments are one of several different types of Treasury securities including Treasury notes (T-notes) and Treasury bonds (T-bonds).

Unlike other treasuries, however, T-bills don’t pay interest. Rather, investors buy T-bills at a discount to par (the face value).

Investors looking for a low-risk investment with a short time horizon and a modest return may find T-bills an attractive investment. T-bills have minimal default risk and maturities of a year or less. But Treasury bill rates are typically lower than those of some other investments.

Key Points

• T-bills are short-term investments that offer a guaranteed rate of return.

• Investors don’t receive coupon, or interest, payments. The return is the discount rate.

• T-bills have a near-zero risk of default.

• Investors can buy T-bills directly from TreasuryDirect.gov, or on the secondary market using a brokerage account.

What Is a Treasury Bill (T-Bill)?

Treasury bills are debt instruments issued by the U.S. government. They are short-term securities and are issued with maturity dates ranging from 4 weeks to one year. It may be possible to buy T-bills on the secondary market with maturities as short as a few days.

How Treasury Bills Work

Essentially, when an individual buys a T-bill, they are lending money to the U.S. government. In general, T-bills are considered very low risk, since they are backed by the full faith and credit of the U.S. government, which has never defaulted on its debts.

T-bills are sold at a discount to their par, or face value. They are essentially zero-coupon bonds. They don’t pay interest, unlike other types of Treasuries (and coupon bonds); rather the difference between the discount price and the face value is like an interest payment.

T-Bill Purchase Example

While all securities have a face value, also known as the par value, typically investors purchase Treasury bills at a discount to par. Then, when the T-bill matures, investors receive the full face value amount. So, if they purchased a treasury bill for less than it was worth, they would receive a greater amount when it matures.

Example

Suppose an investor purchases a 52-week T-bill for $4,500 with a par value of $5,000, a 5% discount. Since the government promises to repay the full value of the T-bill when it expires, the investors will receive $5,000 at maturity, and realize a profit or yield of $500.

In the example above, the discount rate of the T-bill is 5% — and that is also the yield. But examples aside, the actual 52-week Treasury bill rate, as of Feb. 1, 2024, is 4.46%.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

T-Bill Maturities

Understanding the maturity date of a T-bill is important. This is the length of time you’ll hold the bill before you redeem it for the full face value. Maturity dates affect the discount rate, with longer maturities generally offering a higher discount/return, but interest rates will influence the discount.

The government issues T-bills at regular auctions, in four-, eight-, 13-, 17-, 26-, and 52-week terms, in increments ranging from $100 to $10 million. The minimum T-bill purchase from TreasuryDirect.gov is $100.

Some investors may create ladders (similar to bond ladders), which allow them to roll their T-bills at maturity into more T-bills. Although T-bill rates are fixed, and because their maturities are so short, they don’t have much sensitivity to interest rate fluctuations.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

How to Purchase T-Bills

You can purchase T-bills at regular government auctions on TreasuryDirect, or on the secondary market, from your brokerage account.

Buying From Treasury Direct

Noncompetitive bids: With a noncompetitive bill, the investor accepts the discount prices that were established at the Treasuries auction, which are an average of the bids submitted.

Since the investor will receive the full value of the T-bill when the term expires, some investors often favor this simple technique of investing in T-bills.

Competitive bid: With a competitive bid, all investors propose the discount rate they are prepared to pay for a given T-bill. The lowest discount rate offers are selected first. If investors don’t propose enough low bids to complete the entire order, the auction will move onto the next lowest bid and so on until the entire order is filled.

Buying and Selling on the Secondary Market

Another option is to purchase or sell T-bills on the secondary market, using a standard brokerage account.

Investors can also trade exchange-traded funds (ETFs) or mutual funds that may include T-bills that were released in the past.

Redemption and Interest Earnings on T-Bills

As noted above, although T-bills are debt instruments and an investor’s loan is repaid “with interest,” T-Bills don’t have a coupon payment the way some bonds do. Rather, investors buy T-bills at a discount, and the difference between the lower purchase price and the higher face value is effectively the interest payment when the T-bill matures.

When a T-bill matures, investors can redeem it for cash at Treasury.gov.

T-bill purchases and redemptions are now fully digital. Paper T-bills are no longer available.

Tax Implications for T-Bill Investors

Gains from all Treasuries, including T-bills, are taxed at the federal level; i.e. they are taxed as income on your federal income tax return.

Treasury gains are exempt from state and local income tax.

Comparing T-Bills to Treasury Notes and Bonds

The U.S. government offers a number of debt instruments, including Treasury Bills, Notes, and Bonds. The difference between them is their maturity dates, which can also affect interest rates and discount rates.

Treasury Notes

Investors can purchase Treasury notes (or T-notes) in quantities of $1,000 and with terms ranging from two to 10 years. Treasury notes pay interest, known as coupon payments, bi-annually.

Treasury Bonds

Out of all Treasury securities, Treasury bonds have the most extended maturity terms: up to 30 years. Like T-notes, Treasury bonds pay interest every six months. And when the bond matures the entire value of the bond is repaid.

Recommended: How to Buy Bonds: A Guide for Beginners

Considerations When Investing in T-Bills

Like any other investments, it’s important to understand how T-bills work, the pros and cons, and how they can fit into your portfolio.

What Influences T-Bill Prices in the Market?

Although any T-bill you buy offers a guaranteed yield at maturity, because T-bills are short-term debt the discount rates (and therefore the yield) can fluctuate depending on a number of factors, including market conditions, interest rates, and inflation.

The Role of Maturity Dates and Market Risk

Generally, the longer the maturity date of the bill, the higher the returns. But if interest rates are predicted to rise over time, that could make existing T-bills less desirable, which could affect their price on the secondary market. It’s possible, then, that an investor could sell a T-bill for lower than what they paid for it.

Federal Reserve Policies and Inflation Concerns

It’s also important to consider the role of the Federal Reserve Bank, which sets the federal funds target rate, for overnight lending between banks. When the fed funds rate is lower, banks have more money to lend, but when it’s higher there’s less money circulating.

Thus the fed funds rate has an impact on the cost of lending across the board, which impacts inflation, purchasing power — and T-bill rates and prices as well. As described, T-bill rates are fixed, so as interest rates rise, the price of T-bills drops because they become less desirable.

By the same token, when the Fed lowers interest rates that tends to favor T-bills. Investors buy up the higher-yield bills, driving up prices on the secondary market.

How Can Investors Decide on Maturity Terms?

Bear in mind that because the maturity terms of T-bills are relatively short — they’re issued with six terms (four, six, 13, 17, 26 and 52 weeks) — it’s possible to redeem the T-bills you buy relatively quickly.

T-bill rates vary according to their maturity, so that will influence which term will work for you.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Advantages and Disadvantages of T-Bills

Advantages of T-Bills

• They are a low-risk investment. Since they are backed in the full faith of the U.S. government, there is a slim to none chance of default.

• They have a low barrier to entry. In other words, investors who don’t have a lot of money to invest can invest a small amount of money while earning a return, starting at $100.

• They can help diversify a portfolio. Diversifying a portfolio helps investors minimize risk exposure by spreading funds across various investment opportunities of varying risks and potential returns.

Disadvantages of T-Bills

• Low yield. T-bills provide a lower yield compared to other higher-yield bonds or investments such as stocks. So, for investors looking for higher yields, Treasury bills might not be the way to go.

• Inflation risk exposure. T-bills are exposed to risks such as inflation. If the inflation rate is 4% and a T-bill has a discount rate of 2%, for example, it wouldn’t make sense to invest in T-bills—the inflation exceeds the return an investor would receive, and they would lose money on the investment.

Using Treasury Bills to Diversify

Investing all of one’s money into one asset class leaves an investor exposed to a higher rate of risk of loss. To mitigate risk, investors may turn to diversification as an investing strategy.

With diversification, investors place their money in an assortment of investments — from stocks and bonds to real estate and alternative investments — rather than placing all of their money in one investment. With more sophisticated diversification, investors can diversify within each asset class and sector to truly ensure all investments are spread out.

For example, to reduce the risk of economic uncertainty that tends to impact stocks, investors may choose to invest in the U.S. Treasury securities, such as mutual funds that carry T-bills, to offset these stocks’ potentially negative performance. Since the U.S. Treasuries tend to perform well in such environments, they may help minimize an investor’s loss from stocks not performing.

The Takeaway

Treasury bills are one investment opportunity in which an investor is basically lending money to the government for the short term. While the return on T-bills may be lower than the typical return on other investments, the risk is also much lower, as the US government backs these bills.

Invest with as little as $5 with a SoFi Active Investing account.

About the author

Ashley Kilroy

Photo credit: iStock/Marco VDM

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

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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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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.

SOIN1023135

Guide to Moneyness in Options

What Is Moneyness?

How Does Moneyness Work?

Understanding Intrinsic and Time Value of Options

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Types of Moneyness

In-the-Money (ITM)

Out-of-the-Money (OTM)

At-the-Money (ATM)

Near-the-Money

Other Moneyness Terms

What Moneyness Means to Investors

The Takeaway

FAQ

How is moneyness calculated?

How are moneyness and delta different?

How are moneyness and implied volatility related?

LEAPS Options: What Are They? Pros & Cons

LEAPS Options Defined

How to Buy LEAPS Options?

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What Are the Pros & Cons of LEAPS Options?

What Are the Pros of LEAPS Options?

What Are the Cons of LEAPS Options?

Explaining LEAPS Options Trading

What Are Some Helpful LEAPS Options Strategies?

The Takeaway

Strategic Overview: What Is a Cash-Secured Put?

The Details of Selling a Cash-Secured Put

What to Consider With Cash-Secured Puts

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Pros & Cons of Cash-Secured Puts

What Are the Pros of Cash-Secured Puts?

What Are the Cons of Cash-Secured Puts?

Tips for Employing a Cash-Secured Put Strategy

The Takeaway

What Are Emerging Markets?

What is an Emerging Market?

Emerging Market Examples

China

India

Characteristics of an Emerging Market Economy

Fast-Paced Growth

Lower Per-Capita Income

Political and Economic Instability

Infrastructure and Climate

Currency Crises

Heavy Reliance on Exports

Emerging Economies’ Impact on Local Politics vs. Global Economy

Pros and Cons of Investing in Emerging Markets

Pros

Cons

Why Invest in Emerging Markets?

The Takeaway

A Comprehensive Guide to Treasury Bills (T-Bills)

What Is a Treasury Bill (T-Bill)?

How Treasury Bills Work

T-Bill Purchase Example

T-Bill Maturities

How to Purchase T-Bills

Buying From Treasury Direct

Buying and Selling on the Secondary Market

Redemption and Interest Earnings on T-Bills

Tax Implications for T-Bill Investors

Comparing T-Bills to Treasury Notes and Bonds

Treasury Notes

Treasury Bonds

Considerations When Investing in T-Bills

What Influences T-Bill Prices in the Market?

The Role of Maturity Dates and Market Risk

Federal Reserve Policies and Inflation Concerns

How Can Investors Decide on Maturity Terms?

Advantages and Disadvantages of T-Bills

Advantages of T-Bills

Disadvantages of T-Bills

Using Treasury Bills to Diversify

The Takeaway

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

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

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

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