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Oct

2022

Guide to Short Put Spreads

By Dan Miller | Growing Wealth, invest, Investing, Terminology | Comments Off

A short put spread, sometimes called a bull put spread or short put vertical spread, is an options trading strategy that investors may use when they expect a slight rise in an underlying asset. This strategy allows an investor to potentially profit from an increase in the underlying asset’s price while also limiting losses. An investor may utilize this strategy to protect against any downside risk; the investor will know their total potential loss before making the trade.

When trading options, you have various strategies, like short put spreads, from which you can choose. The short put spread strategy can be a valuable trade for investors with a neutral-to-bullish outlook on an asset. Which options trading strategy is right for you will depend on several factors, like your risk tolerance, cash reserves, and perspective on the underlying asset.

What Is a Short Put Spread?

A short put spread is an options trading strategy that involves buying one put option contract and selling another put option on the same underlying asset with the same expiration date but at different strike prices. This strategy is a neutral-to-bullish trading play, meaning that the investor believes the underlying asset’s price will stay flat or increase during the life of the trade.

A short put spread is a credit spread in which the investor receives a credit when they open a position. The trader buys a put option with a lower strike price and sells a put option with a higher strike price. The difference between the price of the two put options is the net credit the trader receives, which is the maximum potential profit in the trade.

The maximum loss in a short put spread is the difference between the strike prices of the two puts minus the net credit received. This gives the trading strategy a defined downside risk. A short put spread does not have upside risk, meaning the trade won’t lose money if the price of the underlying asset increases.

A short put spread is also known as a short put vertical spread because of how the strike prices are positioned — one lower and the other higher — even though they have the same expiration date.

How Short Put Spreads Work

With a short put spread, the investor uses put options, which give the investor the right — but not always the obligation — to sell a security at a given price during a set period of time.

An investor using a short put spread strategy will first sell a put option at a given strike price and expiration date, receiving a premium for the sale. This option is known as the short leg of the trade.

Simultaneously, the trader buys a put option at a lower strike price, paying a premium. This option is called the long leg. The premium for the long leg put option will always be less than the short leg since the lower strike put is further out of the money. Because of the difference in premiums, the trader receives a net credit for setting up the trade.

💡 Recommended: In the Money vs Out of the Money Options

Short Put Spread Example

Say stock ABC is trading around $72. You feel neutral to bullish toward the stock, so you open a short put spread by selling a put option with a $72 strike price and buying a put with a $70 strike. Both put options have the same expiration date. You sell the put with a $72 strike price for a $1.75 premium and buy the put with a $70 strike for a $0.86 premium.

You collect the difference between the two premiums, which is $0.89 ($1.75 – $0.86). Since each option contract is usually for 100 shares of stock, you’d collect an $89 credit when opening the trade.

Recommended: Guide to How Options Are Priced

Maximum Profit

The credit you collect up front is the maximum profit in a short put spread. In a short put spread, you achieve your maximum profit at any price above the strike price of the option you sold. Both put options expire worthless in this scenario.

In our example, as long as stock ABC closes at or above $72 at expiration, both puts will expire worthless and you will keep the $89 credit you received when you opened the position.

Maximum Loss

The maximum loss in a short put spread is the difference between the strike prices of the two put options minus the credit you receive initially and any commissions and fees incurred. You will realize the maximum loss in a short put spread if the underlying asset’s price expires below the strike price of the put option you bought.

In our example, you will experience the maximum loss if stock ABC trades below $70, the strike price of the put option you bought, at expiration. The maximum loss will be $111 in this scenario, not including commissions and fees.

$72 – $70 – ($1.75 – $0.86) = $1.11 x 100 shares = $111

Breakeven

The breakeven on a short put spread trade is the price the underlying asset must close at for the investor to come away even; they neither make nor lose money on the trade, not including commissions and investment fees.

To calculate the breakeven on a short put spread trade, you subtract the net credit you receive upfront from the strike price of the short put contract you sold, which is the option with the higher strike price.

In our example, you subtract the $0.89 credit from $72 to get a breakeven of $71.11. If stock ABC closes at $71.11 at expiration, you will lose $89 from the short leg of the trade with a $72 strike price, which will be balanced out by the $89 cash credit you received when you opened the position.

Set-Up

To set up a short put spread, you first need to find a security that you are neutral to bullish on. Once you have found a reasonable candidate, you’ll want to set it up by entering your put transactions.

You first sell to open a put option contract with a strike price near where the asset is currently trading. You then buy to open a put option with a strike price that’s out-of-the-money; the strike price of this contract will be below the strike price of the put you are selling. Both of these contracts will have the same expiration date.

Maintenance

The short put spread does not require much ongoing maintenance since your risk is defined to both upside and downside.

However, you may want to pay attention to the possibility of early assignment, especially with the short leg position of your trade — the put with the higher strike price. You might want to close your position before expiration so you don’t have to pay any potential assignment fees or trigger a margin call.

Exit Strategy

If the stock’s price is above the higher strike price at expiration, there is nothing you have to do; the puts will expire worthless, and you will walk away with the maximum profit of the credit you received.

If the stock’s price is below the lower strike price of the long leg of the trade at expiration, the two contracts will cancel each other, and you will walk away with a maximum loss.

Before expiration, however, you can exit the trade to avoid having to buy shares that you may be obligated to purchase because you sold a put option. To exit the trade, you can buy the short put contract to close and sell the long put contract to close.

Impacts of Time, Volatility, and Price Change

Changes in the price and volatility of the underlying stock and the passage of time can affect a short put spread strategy in various ways.

Time

Time decay will generally work in favor of the short put spread. As both of the legs of the short put spread get closer to the expiration, any time value that the option contracts have will erode.

Volatility

The short put spread is more or less volatility neutral. Because you are both long and short one put option contract each, volatility in the underlying stock similarly affects each leg of the contract.

Price

A short put spread is a bullish option strategy. You have no risk to the upside and will achieve your maximum profit if the underlying stock closes above the strike price of the higher put option. You are sensitive to price decreases of the underlying stock and will suffer the maximum loss if the stock closes below the strike price of the lower put option.

Pros and Cons of Short Put Spreads

Here are some of the advantages and disadvantages of using short put spreads:

Short Put Spread Pros	Short Put Spread Cons
No risk to the upside	Lower profit potential compared to buying the underlying security outright
Limited risk to the downside; maximum loss is known upfront	Maximum loss is generally larger than the maximum potential profit
Can earn a positive return even if the underlying does not move significantly	Difficult trading strategy for beginning investors

Short Put Calendar Spreads

A short put calendar spread is another type of spread that uses two different put options. With a short put calendar spread, the two options have the same strike price but different expiration dates. You sell a put with a further out expiration and buy a put with a closer expiration date.

Alternatives to Short Put Spreads

Short put vertical spreads are just one of the several options spread strategies investors can use to bolster a portfolio.

Bull Put Spreads

A bull put spread is another name for the short put spread. The short put spread is considered a bullish investment since you’ll get your maximum profit if the stock’s price increases.

Bear Put Spread

As the name suggests, a bear put spread is the opposite of a bull put spread; investors will implement the trade when they have a bearish outlook on a particular underlying asset. With a bear put spread, you buy a put option near the money and then sell a put option on the same underlying asset at a lower strike price.

Call Spreads

Investors can also use call spreads to achieve the same profit profile as either a bull put spread or a bear put spread. With a bull call spread, you buy a call at one strike price (usually near or at the money) and simultaneously sell a call option on the same underlying with the same expiration date further out of the money.

The Takeaway

A short put spread is an options strategy that allows you to collect a credit by selling an at-the-money put option and buying an out-of-the-money put with the same expiration on the same underlying security. A short put spread is a bullish strategy where you achieve your maximum profit if the stock closes at or above the strike price of the put option you sold. While this trading strategy has a limited downside risk, it provides a lower profit potential than buying the underlying security outright.

Short put spreads and other options trading strategies can be complicated for many investors. An options trading platform like SoFi’s can make it easier, thanks to its user-friendly design and offering of educational resources about options. Investors have the ability to trade options from the mobile app or web platform.

Trade options with low fees through SoFi.

FAQ

Is a short put spread bullish or bearish?

A short put spread is a neutral to bullish options strategy, meaning you believe the price of an underlying asset will increase during the life of the trade. You will make your maximum profit if the stock closes at or above the strike price of the higher-priced option at expiration.

How would you close a short put spread?

To close a short put spread, you enter a trade order opposite to the one you entered to open your position. This would mean buying to close the put you initially sold and selling to close the put you bought to open.

What does shorting a put mean?

Shorting a put means selling a put contract. When you sell a put option contract, you collect a premium from the put option buyer. You’ll get your maximum profit if the underlying stock closes at or above the put’s strike price, meaning it will expire worthless, allowing you to keep the initial premium you received when you opened the position.

Photo credit: iStock/akinbostanci

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Sep

2022

Popular Monthly Dividend Stocks

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

Many investors seek out dividend-paying stocks as a way to build wealth. Rather than rely on just share price appreciation as a way to make money in the stock market, these investors seek regular dividend payments to grow their portfolios.

While most companies that pay dividends do so every quarter, many companies make monthly dividend payments. Getting these payments on a faster recurring schedule can appeal to many investors, especially those relying on dividends for a steady income stream. But before you jump up to buy popular monthly dividend stocks, you should know more about monthly dividends and the companies that pay them.

How Does Dividend Investing Work?

A dividend is a portion of a company’s earnings that is paid to its shareholders, as approved by the board of directors. Companies usually pay dividends quarterly, but they may also be distributed annually or monthly.

Most dividends are cash payments made on a per-share basis. For example, if the company pays a dividend of 30 cents per share, an investor with 100 shares of stock would receive $30.

Some investors may utilize dividend-paying stocks as part of an income investing strategy. These investors, many of whom are older and retired, rely on the regular payment of dividends to make up for the loss of regular labor income.

Younger investors may also use a dividend investing strategy to generate income, perhaps to help pay the bills or to save for a big vacation. But those who don’t need the income may choose to reinvest the money with the idea of boosting portfolio growth. Through dividend reinvestment plans (DRIPs), investors can reinvest the dividend payouts to buy more shares. And the more shares they own, the larger their future dividends could be.

Regardless of the purpose behind dividend investing, it’s usually a slow and steady process where investors benefit from regular income or compounding returns rather than expecting a stock’s price to skyrocket.

How to Invest in Monthly Dividend Stocks

As mentioned above, companies usually pay dividends quarterly. However, several companies pay dividends monthly.

Stocks that pay dividends monthly may appeal to investors who want reliable monthly income, which may help with paying bills like mortgage and utility payments. Additionally, monthly dividend stocks may help investors who reinvest the payments realize faster compounding benefits.

To invest in monthly dividend stocks, investors may look at companies in specific industries that tend to offer regular dividend payouts, including monthly payments. These companies usually have regular cash flow to sustain consistent dividend payments.

For example, real estate investment trusts (REITs) pay out regular dividends because they receive steady cash flow through rent payments. These companies are legally required to pay at least 90% of their income to shareholders through dividends. And some REITs will pay dividends monthly.

Energy and utility companies are other industries that pay regular and relatively high dividends, including some monthly dividends.

Additionally, investors may look to exchange-traded funds (ETFs) or mutual funds that offer monthly dividend payouts. These funds will invest in various dividend-paying stocks – not just companies that pay monthly dividends – and distribute dividends every month.

Examples of Monthly Dividend Stocks

Popular Monthly Dividend Stocks (Based on Market Capitalization)
Company	Ticker	Industry	Market Cap (in billions)^*	Dividend Yield^*
Realty Income Corp	O	REIT	$41.5	4.21%
Pembina Pipeline Corporation	PBA	Energy	$26.1	5.49%
Shaw Communications	SJR	Telecommunications	$17.0	3.58%
AGNC Investment Corp	AGNC	REIT	$6.2	13.07%
Agree Realty Corp	ADC	REIT	$6.1	3.90%
*as of Aug. 31, 2022

Determining the Highest Dividend Stocks

Not all stocks that pay monthly dividends are created equal. Investors may seek stocks that pay out the highest dividends, but high dividends alone don’t mean that the stocks are wise investments.

Investors should also remember that dividends aren’t guaranteed; a company can skip or stop making payments at any time. This adds to the risk of investing in dividend stocks.

Investors may want to analyze several criteria to determine the dividend stocks ideal for a wealth-building strategy. Here are a few things investors can consider when looking for the highest dividend stocks:

Dividend Yield

Investors often analyze a stock’s dividend yield to determine if it’s a suitable investment. This metric shows how much an investor would earn from an investment based solely on dividend payouts.

Dividend yield is expressed as a percentage, representing a stock’s annual dividend payments per share divided by the stock’s current price.

Dividend yield (%) = annual dividend payout per share / stock price

Stocks that offer the highest dividend yields may appear to be the most promising; after all, it seems that a high dividend yield will result in the most generous dividend payouts. But companies with high dividend yields may be risky, especially for investors interested in the stability of dividend investing.

A stock’s dividend yield could be high because the share price is falling, which can be a sign that a company is struggling. Or, a high dividend yield may indicate that a company is paying out an unsustainably high dividend.

Investors will often compare a stock’s dividend yield to comparable companies in the same industry to determine whether a yield is attractive.

Dividend Payout Ratio

Investors will also factor in a stock’s dividend payout ratio when making investment decisions. This ratio expresses the percentage of income that a company pays to shareholders.

The dividend payout ratio is calculated by dividing a company’s total dividends paid by its net income.

Dividend payout ratio (%) = dividends paid / net income

Investors can also calculate the dividend payout ratio on a per share basis, dividing dividends per share by earnings per share.

Dividend payout ratio (%) = dividends per share / earnings per share

The dividend payout ratio can help determine if the dividend payments a company distributes make sense in the context of its earnings. Like dividend yield, a high dividend payout ratio may be good, especially if investors want a company to pay more of its profits to investors. However, an extremely high ratio can be difficult to sustain.

If a stock is of interest, it may help to check out the company’s dividend payout ratios over an extended period and compare it to comparable companies in the same industry.

Company Stability

Investors may also wish to focus on stable, well-run companies with a reputation for paying consistent or rising dividends for years. Dividend aristocrats – companies that have paid and increased their dividends for at least 25 years – and blue chip stocks are examples of relatively stable companies that are attractive to dividend-focused investors.

These companies, however, do not always have the highest dividend yields. Nor do these companies pay monthly dividends; most companies will pay dividends quarterly.

Furthermore, keep in mind a company’s future prospects, not just its past success, when shopping for high-dividend stocks.

Tax Implications

Dividends also have specific tax implications that investors should know. A “qualified dividend” is a type of dividend that qualifies for the capital gains tax rate, which is usually a more favorable tax treatment. An “ordinary dividend” doesn’t get that lower tax preference and is taxed at an individual’s income tax rate.

Investors will receive a Form DIV-1099 when $10 or more in dividend income is paid out during the year. (If the dividends are in a tax-advantaged account (an IRA, 401(k), etc.), the money will grow tax-free until it’s withdrawn.)

💡 Recommended: Ordinary vs Qualified Dividends

Pros and Cons of Investing in Monthly Dividend Stocks

As noted above, two of the most significant advantages to investing in dividend stocks are passive income (income that requires little to no effort to earn and maintain) and reinvestment (using dividend payments to buy more stocks, thus compounding returns).

Another plus for those who choose solid dividend stocks is that they may receive payments from those investments even if the market falls. That can help insulate investors during tough economic times. It might prevent investors who make regular or occasional withdrawals from their stock portfolio from selling at a low to get the money they need.

Regular dividends may also allow investors who reinvest the gains to buy stocks at a lower price while the market is down. Additionally, the stocks of mature, healthy companies that pay dividends also may be less vulnerable to market fluctuations than a start-up or growth stock.

But no investment strategy is perfect, and dividend stocks have some disadvantages.

💡 Recommended: Pros & Cons of Quarterly vs. Monthly Dividends

Dividends are not obligations; a company can decide to suspend or cut its dividends at any time. It could be that the company is truly in trouble or that it simply needs the money for a new project or acquisition. This is especially true for monthly dividend stocks; many REITs that pay monthly dividends suspended or cut dividends during the Covid-19 pandemic.

Either way, if the public sees the cut as a negative sign, the share price could fall significantly. And if that happens, an investor could suffer a double loss.

Then there’s the matter of double taxation. First, the company must pay taxes on its earnings. Then the shareholder must pay taxes again as an individual.

Finally, choosing the right dividend stock can be tricky. As noted above, the metrics for analyzing the most attractive dividend stocks are quite different from those for selecting growth stocks.

Pros and Cons of Monthly Dividend Stocks
Pros	Cons
Passive income	Monthly dividend stocks are not common
Dividend reinvestment leads to compounding returns	Share price appreciation may be limited compared to growth stocks
Investors may earn a return even when the stock price goes down	Dividend payments can suddenly be cut or suspended
Qualified dividends have preferential tax treatment	Tax inefficiency through double taxation

Things to Avoid When Investing in Monthly Dividend Stocks

When investing in monthly dividend stocks, there are a few things to avoid:

• Avoid investing in a company that pays a monthly dividend solely because it pays a monthly dividend. Many companies pay monthly dividends, but not all are suitable investments. Do your research and only invest in companies that you believe will be successful in the future.

• Avoid investing in a company or industry that you don’t understand. If you don’t understand how a company makes money, you should hesitate to invest in it.

• Avoid investing all of your money in monthly dividend stocks. Diversify your portfolio by investing in other types of stocks, bonds, funds, and other securities.

The Takeaway

It may seem ideal to invest in monthly dividend stocks to get paid every month. However, this strategy shouldn’t be the ultimate way to reach your financial goals. A well-diversified portfolio with stocks that can reliably maintain or increase dividends may be a better way to look at your dividend investing strategy.

If you’re ready to build your portfolio with dividend-paying stocks, SoFi Invest® can help. A SoFi online brokerage account allows you to buy and sell stocks and ETFs with no commissions for as little as $5. With SoFi, you can invest in dividend-paying stocks and ETFs today.

Learn more about SoFi Invest today.

FAQ

How can you get stocks that pay monthly dividends?

To invest in stocks that pay monthly dividends, you need to research financial websites and publications to find companies that pay dividends monthly. There are not many monthly dividend stocks, especially compared with stocks that pay quarterly dividends.

How can you determine the stocks that pay the highest monthly dividends?

Investors use metrics like high dividend yields and dividend payout ratios to determine the stocks that pay the highest monthly dividends. However, stocks that pay the highest monthly dividends can change over time.

How do monthly dividend stocks work?

A monthly dividend stock is a stock that pays out dividends every month instead of the more common quarterly basis. This can provide investors with a steadier stream of income, which can be particularly helpful if you rely on dividends for living expenses.

SoFi Invest®

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

Aug

2022

Institutional vs Retail Investors: What’s the Difference?

By Nina Semczuk | Growing Wealth, invest, Investing, Terminology | Comments Off

Much of the trading on Wall Street is done by institutional investors: companies or organizations that invest large sums of money on the behalf of other people. Retail, or individual investors, make up a smaller percentage of capital market investments.

In other words, the main difference between institutional vs. retail investors is size: The first category is dominated by professional financial institutions or large organizations that trade investments in large quantities (in a municipal pension fund, for example). Retail investors are made up largely of non-professional individuals (e.g. someone who trades on their own through a brokerage account).

While size and scale are two of the primary differences between institutional vs. retail investors, they each have their own advantages and disadvantages. Retail investors are afforded certain legal protections; institutional investors can have the upside in terms of research and access to capital.

Who Is Considered a Retail Investor?

Any non-professional individual buying and selling securities such as stocks or mutual funds and exchange traded funds (ETFs) — through an online or traditional brokerage or other type of account — is considered a retail investor.

The parent who invests in their child’s 529 college savings plan, or the employee who contributes to their 401(k) are both retail investors.

So in this case the term “retail” generally refers to an individual trading on their own behalf, not on behalf of a larger pool of investors. Retail here references the purchase and selling of investments in relatively small quantities.

Who Is Classified as an Institutional Investor?

By comparison, institutional investors make investment decisions on behalf of large pools of individual investors or shareholders. In general, institutional investors trade in large quantities, such as 10,000 shares or more at a time.

The professionals who do this large-scale type of investing typically have access to investments not available to retail investors (such as special classes of shares that come with different cost structures). By virtue of their being part of a larger institution, this type of investor usually has a larger pool of capital to buy, trade, and sell with.

Institutional investors are responsible for most of the trading that happens on the market. Examples of institutional investors include commercial banks, pension funds, mutual funds, hedge funds, endowments, insurance companies, and real estate investment trusts (REIT).

What Are the Differences Between Institutional Investors vs Retail Investors?

The main differences between institutional and retail investors include:

• Institutional investors invest on behalf of a large number of constituents (e.g. a municipal pension fund); retail investors are individuals who invest for themselves (e.g. an IRA).

• Size (large institutions vs. individuals) and scale of investments.

• Institutional investors typically have access to professional research and industry resources.

• Retail investors are protected by certain regulations that don’t apply to institutional investors.

Institutional Investors	Retail Investors
Professionals and large companies	Non-professional individuals
Invest in large quantities	Invest in small quantities
Invest on behalf of others	Invest for themselves
Access to industry-level sources, research	DIY
Access to preferred share classes and pricing	Access to retail shares and pricing

What Are the Similarities Between Institutional Investors vs Retail Investors?

There are very few similarities between institutional vs. retail investors except that both parties tend to seek returns while minimizing risk factors where possible.

Retail vs. Institutional Investor

Do Institutional or Retail Investors Get the Highest Returns?

There are no crystal balls on Wall Street, as they say, so there’s no guaranteed way to predict whether institutional investors always get higher returns vs. retail investors.

That said, some institutional investors may have the edge in that they have access to industry-level research as well as powerful technology and computer algorithms that enable them to make faster trades and more profitable calculations.

Does that mean institutional investors always come out ahead? In fact, retail investors who have a longer horizon also have a chance at substantial returns over time, although there are no guarantees on either side.

How Many Retail Investors Are There?

In the U.S., it’s fairly common to be a retail investor. About 58% of Americans say they own stock, according to a 2022 Gallup poll, meaning they own individual stocks, stock mutual funds, or they hold stock in a self-directed 401(k) or IRA.

Examples of retail investors include people who manage their retirement accounts online (e.g., an IRA) and those who trade stocks as a hobby.

Because individual investors are generally thought to be more prone to emotional behavior than their professional counterparts (and typically don’t have access to the resources and research of larger institutions), they may be exposed to higher levels of risk. Thus the Security Exchange Commission (SEC) provides certain protections to retail investors.

For example, the 2019 Regulation Best Interest rule states that broker-dealers are required to act in the best interest of a retail customer when making a recommendation of a securities transaction or investment strategy. This federal rule is intended to ensure that broker-dealers aren’t allowed to prioritize their own financial interests at the expense of the customer.

Another protection provided to retail investors is that investment advisors and broker-dealers must provide a relationship summary that covers services, fees, costs, conflicts of interest, legal standards of conduct, and more to new clients.

Types of Institutional Investors

The most common institutional investors are listed below.

1. Commercial Banks

Commercial banks are the “main street” banks many people are familiar with, such as Wells Fargo, Citibank, JP Morgan Chase, Bank of America, TD Bank, and countless others. Along with providing retail banking services, such as savings accounts and checking accounts, large banks are also institutional investors.

These large corporations have entire teams dedicated to investing in different markets: e.g. global markets, bond markets, socially responsible investing, and so on.

2. Endowment Funds

Typically connected with universities and higher education, endowment funds are often created to help sustain these nonprofit organizations. Churches, hospitals, nonprofits, and universities generally have endowment funds, whose funds often derive from donations.

Endowment funds generally come with certain restrictions, and have an investment policy that dictates an investment strategy for the manager to follow. This might include stipulations about how aggressive to be when trying to meet return goals, and what types of investments are allowed (some endowment funds avoid controversial holdings like alcohol, firearms, tobacco, and so on).

Another component is how withdrawals work; often, the principal amount invested stays intact while investment income is used for operational or new constructions.

3. Pension Funds

Pension funds generally come in two flavors:

• Defined contribution plans, such as 401(k)s or 403(b)s, where employees contribute what they can to these tax-deferred accounts.

• Defined benefit plans, or pensions, where retirees get a fixed income amount, regardless of how the fund does.

Employers that offer defined benefit pensions are becoming less common in the U.S. Where they do exist, they’re often linked to labor unions or the public sector: e.g. a teachers union or auto workers union may offer a pension.

Public pension funds follow the laws defined by state constitutions. Private pension plans are subject to the Employee Retirement Income Security Act of 1974 (ERISA); this act defines the legal rights of plan participants.

As for how a pension invests, it depends. ERISA does not define how private plans must invest, other than requiring that the plan sponsors must be fiduciaries, meaning they put the financial interest of the account holders first.

4. Mutual Funds

As defined by the Securities and Exchange Committee (SEC), mutual funds are companies that pool money from many investors and invest in securities such as bonds, stocks, and short-term debt. Mutual funds are thus considered institutional investors, and are known for offering diversification, professional management, affordability, and liquidity.

Typical mutual fund offerings include money market funds, bond funds, stock funds, index funds, actively managed funds, and target date funds.

The last category here is often designed for retail investors who are planning for retirement. The asset mix of these target date funds, sometimes known as target funds or lifecycle funds, shifts over time to become more conservative as the investor’s target retirement date approaches.

5. Hedge Funds

Like mutual funds, hedge funds pool money from investors and place it into securities and other investments. The difference between these two types of funds is that hedge funds are considered private equity funds, are considered high risk vehicles, and aren’t as regulated as mutual funds.

Because hedge funds use strategies and investments that chase higher returns, they also carry a greater risk of losses — similar to high-risk stocks. In general, hedge funds also have higher fees and higher minimum investment requirements. So, they tend to be more popular with wealthier investors and other institutional investors. (In some cases, they’re only available to accredited investors).

6. Insurance Companies

Perhaps surprisingly, insurance companies can also be institutional investors. They might offer products such as various types of annuities (fixed, variable, indexed), as well as other life insurance products which are invested on behalf of the investor, e.g. whole life or universal life insurance policies.

Getting Started as a Retail Investor

Institutional investors may be larger, more powerful, and run by professionals — whereas retail investors are individuals who aren’t trained investment experts — but it’s important to remember that these two camps can and do overlap. Institutional investors that run pension funds, mutual funds, and insurance companies, for example, serve retail investors by investing their money for retirement and other long-term goals.

If you’re ready to start investing as a retail investor, it’s easy when you set up an online brokerage account with SoFi Invest.

You can invest in stocks, ETFs, IPO shares, fractional shares, and more. For folks who’d like to discuss their financial goals or questions, SoFi members can connect at no cost with financial advisors.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What are the different types of investors?

Institutional investors are big companies with teams of professional investment managers who invest other people’s money. Retail investors are individuals who typically manage their own investment (e.g. for retirement or college savings).

What percentage of the stock market is made up of institutional investors?

The vast majority of stock market investors are institutional investors. Because they trade on a bigger scale than retail investors, institutional trades can impact the markets.

Are institutional or retail investment strategies better?

Institutional investors have access to more research and technology compared with retail investors. Thus their strategies may be considered more sophisticated. But it’s hard to compare outcomes, as both groups are exposed to different levels of risk.

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

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Aug

2022

Guide to Writing Put Options

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

Puts, or put options, are contracts between a buyer – known as the holder of an option – and a seller – known as the writer of an option – that gives the buyer the right to sell an asset, like a stock or exchange-traded fund (ETF), at a specific price within a specified time period. The seller of the put option is obligated to buy the asset at the strike price if the buyer exercises their option to sell.

Writing a put option is also known as selling a put option. When you sell a put option, you agree to buy the underlying asset at a specified price if the option buyer, also known as the option holder, exercises their right to sell the asset. The premium you receive for writing the put option is your maximum possible profit.

Generally, traders who buy put options have a bearish view of a security, meaning they expect the underlying asset’s price to decline. In contrast, the put option writer has a neutral to bullish outlook of a security. The put writer should be willing to take the risk of having to buy the asset if it falls below the strike price in exchange for the premium paid by the put option holder.

Writing put options is just one of numerous trading strategies investors use to build wealth, speculate, or hedge positions. While there is potential to generate income by writing put options, it can also be a risky way to enhance a portfolio’s return. Only investors with the knowledge of how to write put options and risk tolerance to take on this strategy should do so.

Writing Put Options

When writing a put option contract, the seller will initiate a trade order known as sell to open.

As mentioned above, the put option writer is selling a contract that gives the holder the right to sell a security at a strike price within a specified time frame. The put option writer will receive a premium from the holder for selling this option. If the price of the security falls below the strike price before the expiration date, the writer may be obligated to buy the security from the holder at the strike price.

There are two main reasons to write a put option contract: to earn income from the premium or to hedge a position.

A naked, or “uncovered,” put option is an option that is issued and sold without the writer setting aside any cash to meet the obligation of the option when it reaches expiration. This increases the writer’s risk.

Maximum Profit/Loss

The most a put option writer can profit from selling the option is the premium received at the start of the trade. Many traders take advantage of this profit as a way to generate regular income by writing put options for assets that they expect will not fall below the strike price.

However, this strategy can be risky because there can be significant losses if the asset’s price falls below the strike price. For example, if a stock’s price plummets because a company announces bankruptcy, the put option writer may be obligated to buy the stock when it’s trading near $0. The maximum loss will be equal to the strike price minus the premium.

Breakeven

The breakeven point for a put option writer can be calculated by subtracting the premium from the strike price. The breakeven point is the market price where the option writer comes away even, not making a profit or experiencing a loss (not including trading commissions and fees).

Writing Puts for Income

There are many options trading strategies. As noted above, many traders will write put options to generate income when they have a neutral to bullish outlook on a specific security. Because the writer of a put option receives a premium for opening the contract, they will benefit from that guaranteed payment if the put expires unexercised or if the writer closes out their position by buying back the same put option.

For example, if you believe an asset’s price will stay above a put option’s strike price, you can write a put option to take advantage of steady to rising prices on the underlying security. By keeping the option premium, you effectively add a stream of income into your trading account, as long as the underlying asset’s price moves in your favor.

However, with this strategy, you face the risk of having to buy the underlying asset from the option holder if the price falls below the strike price before the expiration date.

💡 Recommended: How to Sell Options for Premium

Put Writing Example

Let’s say you are neutral to bullish on shares of XYZ stock, which trade at $70 per share. You execute a sell to open order on a put option expiring in three months at a strike price of $60. The premium for this put option is $5; since each option contract is for 100 shares, you collect $500 in income.

If you wrote the put option contract for income, you’re hoping the price of XYZ stock will stay above $60 through the expiration date in three months, so the option holder does not exercise the option and requires you to buy XYZ. In this ideal scenario, your maximum profit will be the $500 premium you received for selling the put option.

At the very least, you hope the stock does not fall below $55, or the breakeven point ($60 strike price minus the $5 premium). At $55, you may be obligated to buy 100 shares at the $60 strike price:

$5,500 market value – $6,000 price paid + $500 premium earned = $0 return

If XYZ stock falls to $50, the put option holder will likely exercise the option to sell the stock. In this scenario, you will be obligated to buy the stock XYZ at the $60 strike price and incur a $500 loss in this trade:

$5,000 market value – $6,000 price paid + $500 premium earned = -$500 return

However, the further the price of XYZ falls, your potential loss risk increases. In the worst-case scenario where the stock falls to $0, your maximum loss would be $5,500:

$0 market value – $6,000 price paid + $500 premium earned = -$5,500 return

Put Option Exit Strategy

In the example above, it is assumed that the option is exercised or expires worthless. However, a put option writer can also exit a trade in order to profit or mitigate losses prior to the contract’s expiration.

A put writer can exit their position anytime using a trade order known as buy to close. In this scenario, the writer of the initial put option will buy back a put option to close out a position, either to lock in a profit or prevent further losses.

Using the example above, say that after two months, shares of XYZ have increased from $70 to $85. The value put contract you sold, which still has one more month until expiration and a $60 strike price, has collapsed to $1 because of a share price rise and perhaps a drop in expected volatility. Rather than wait for expiration, you decide to buy to close your put position, buying back the put contract at $1 premium, for a total of $100 ($1 premium x 100 shares). You are no longer obligated to buy shares of XYZ in the event the stock drops below $60 during the next month, and you lock in a profit of $400:

$500 premium earned to sell to open – $100 premium paid to buy to close = $400 return

A buy to close strategy can also be used to mitigate substantial losses. For example, if stock XYZ’s price starts dropping, the value of puts with a $60 strike price and a similar expiration date will rise. Rather than wait for expiration and be obligated to buy shares of a stock you don’t want, potentially losing up to $5,500, you may exit the position at any time. If option premiums for this trade are now $8, you can pay $800 ($8 premium x 100 shares) to buy to close the trade. This will result in a loss of $300, a potentially more manageable loss than the worst-case scenario:

$500 premium earned to sell to open – $800 premium paid to buy to close = -$300 return

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The Takeaway

Writing a put option is an options strategy in which you are neutral to bullish on the underlying asset. Potential profit is limited to the premium collected at the start of the trade. The maximum loss can be substantial, however. Finally, there is the risk that you will be liable to buy the stock at the option strike price if the holder exercises the option. Because of all these moving parts, writing put options should be left to experienced traders with the tolerance to take on the risk.

Looking to try different investment opportunities? SoFi’s intuitive and approachable options trading platform is a great place to start. You can access educational resources about options for more information and insights. Plus, you have the option of placing trades from either the mobile app or web platform.

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FAQ

What happens when you sell a put option?

Selling a put option is the same thing as writing a put option. You profit by collecting a premium for selling the option or when the put options decline in value, which usually happens when the underlying asset price rises. A significant risk of writing a put option is that you might be required to buy shares of the underlying asset at the strike price.

How would you write a put option?

You write a put option by first executing a sell to open order. You collect a premium at the onset of the trade without owning shares of the underlying asset. This strategy can be risky, so it generally requires high-level options trading knowledge.

When would you write a put option?

If a trader believes an asset’s price will stay flat or increase over a period of time, they may choose to write a put option. If the underlying asset’s price increases, the put option’s value will decline as it nears expiration. A profitable outcome occurs when the value of the put option is zero by expiration, or if the put writer buys to close the position before expiration. The put writer will profit by keeping the premium received at the initiation of the trade.

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SOIN0422030

Aug

2022

9 ESG Metrics Investors Should Know

By Kenny Zhu | Growing Wealth, invest, Investing | Comments Off

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

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

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

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

What Are ESG Metrics?

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

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

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

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

The Importance of ESG Metrics

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

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

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

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

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

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

9 Common ESG Metrics Businesses Track

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

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

3 Common Environmental Metrics

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

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

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

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

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

3 Common Social Metrics

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

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

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

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

3 Common Governance Metrics

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

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

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

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

How Can Investors Use ESG Metrics?

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

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

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

How do Firms Report ESG Metrics?

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

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

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

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

The Takeaway

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

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

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

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

Guide to Short Put Spreads

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How Short Put Spreads Work

Short Put Spread Example

Maximum Profit

Maximum Loss

Breakeven

Set-Up

Maintenance

Exit Strategy

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Types of Institutional Investors

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3. Pension Funds

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Guide to Writing Put Options

Writing Put Options

Maximum Profit/Loss

Breakeven

Writing Puts for Income

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Put Option Exit Strategy

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FAQ

What happens when you sell a put option?

How would you write a put option?

When would you write a put option?

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