Dec
22
2021
Guide to Options Spreads: Definition & Types

Guide to Options Spreads: Definition & Types

By | Growing Wealth, invest, Investing | Comments Off on Guide to Options Spreads: Definition & Types

Options spreads are multi-legged trading strategies used to limit risk while also capturing the potential for profits. Traders using an option spread simultaneously buy multiple options with the same underlying asset with different strike prices, different expiration dates, or both.

Understanding options spreads can help you decide whether these strategies will work for your portfolio, and which one to use in a given situation.

Credit and Debit Spreads

The difference between credit spread options and debit spreads is that an options trader sells one (credit), and buys the other (debit). When a trader sells an option, they receive a premium (a credit) to their account. Conversely, when they buy an option, they pay a premium to open the position, resulting in a debit to their account.

Recommended: What Investors Should Know About Spread

3 Common Option Spread Strategies

In options spread strategies, the trader buys and sells multiple options pegged to the same underlying asset or security. The type of options that the trader buys and sells are all of the same type (i.e., they’re all call options or put options), and they either have different strike prices or expiration dates.

Recommended: Popular Options Trading Terminology to Know

There are several different types of option spreads. Here’s a look at a few common ones:

1. Vertical Spread Options

A vertical spread is an options strategy in which the options have the same expiration date but different strike prices. There are four types of vertical spread options that investors use depending on whether they are bullish or bearish and whether the spread is a debit or credit.

Bull Call Spreads

A bull call spread strategy involves buying a call option, and then also selling another call at a higher strike price. The call spread options have the same underlying asset and expiration date.

Investors using this bull spread options strategy anticipate an increase in the value of the underlying asset. With this strategy, a trader caps their potential losses to the net premium they paid for the options (essentially hedging their risk). Their maximum gain is capped at the differences in strike prices, minus the net premium paid.

For example, a trader buys a call option on Stock X at a strike price of $10, for a premium of $2. They also sell a call option with an identical expiration date at a strike price of $12, receiving a premium of $1. This is referred to as a “debit” spread, as the trader pays a net premium (of $1 in this case) to buy into their position.

Bear Call Spreads

The opposite of a bull call spread, a bear call spread benefits when the underlying asset’s value decreases. If we stick with Stock X from our previous example, a trader using a bear call spread would anticipate that Stock X’s value is going to decrease.

As such, the trader sets up the spread by selling a call option, and buying another call option at a higher strike price—the inverse of the bull call spread method. This is a “credit” spread,, so the trader can not gain more than the net premium the trader received for the position. Their potential loss is capped at the differences in strike prices.

Example: A trader sells a call option on Stock X at a strike price of $10, and buys another call at a strike price of $12.

Bull Put Spreads

A bull put spread is similar to a bull call spread, but it involves puts rather than calls. Using a bull put spread, a trader anticipates an increase in the underlying asset’s value. In our example, the trader would sell a put option at a strike price of $10, and simultaneously buy another at a lower strike price, say, $8.

The trader can not lose more than the difference between the strike prices or gain more than the premium received.

Bear Put Spreads

A bear put spread is the inverse of a bull put spread. In our example, the trader would buy one put option at a $10 strike price, and simultaneously sell another put at a lower strike price, like $8.

The trader can not lose more than the net premium the trader paid to take the position (again, because this is a “debit” spread) or gain more than the difference in strike prices.

2. Horizontal Spreads

Horizontal spreads (also called “calendar spread options”) involve options with the same underlying asset, the same strike prices, but different expiration dates. The main goal of this strategy is to generate income from the time decay effects, or volatility of the two options.

There are also two main types of horizontal spreads.

Call Horizontal Spreads

A call horizontal spread is a strategy which a trader would employ if they believe that the underlying asset’s price would hold steady. In this case, the trader would buy a call with an expiration date on January 15th, for example, and sell another call with a different expiration date, like January 30th.

The trader can also reverse these positions, by selling a call option that expires on January 15th, and selling another that expires on January 30th. The two positions with differing expiration dates act as buffers, reigning in potential losses (the premium paid) and gains.

Put Horizontal Spreads

Put horizontal spreads similar to call horizontal spreads, except that traders utilize puts instead of calls.

3. Diagonal Spreads

Finally, we have diagonal spreads, which incorporate elements from both vertical and horizontal spread strategies. That is, diagonal spreads involve the same option types and underlying asset (the same as before), but with differing strike prices and differing expiration dates.

Diagonal spreads—with different strike prices and expiration dates—allow for numerous combinations of options, making them a fairly advanced strategy. They can be bearish, and bullish for example, while also using calls or puts, with different time horizons (long or short).

Other Options Spreads

While we’ve covered the main types of options spread strategies, there are a few more you may run into.

Butterfly Spread Options

A butterfly spread incorporates multiple strike prices, and can utilize either calls or puts. It also combines a bull and bear spread across four different options.

An example would be a trader buying a call at a certain strike price, selling two more calls at a higher strike price, and then buying another call at yet an even higher strike price—of equal “distance,” or value, from the two central calls. This results in a cap on losses and gains, with the trader realizing gains depending on volatility levels of the underlying asset.

Box Spread Options

A box spread option strategy involves a bear put and a bull call with identical strike prices and expiration dates. Under very specific circumstances, traders can use the strategy to create profitable arbitrage opportunities.

The Takeaway


There are several different options spreads strategies that traders use to limit their losses and achieve potential gains based on their projections about the price of a specific asset. Options strategies can get complicated, but you don’t need to invest in derivatives in order to build a portfolio.

Whether you’d rather start slow or dive into derivatives, a user-friendly options trading platform like SoFi can help in your investing journey. SoFi’s platform offers an intuitive design and access to educational resources about options. You’ll have the ability to trade from either the mobile app or web platform.

Trade options with low fees through SoFi.

Photo credit: iStock/damircudic

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Dec
21
2021
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What to Know About Investing in Cryptocurrency

By | Growing Wealth, invest, Investing | No Comments

Since the launch of Bitcoin in 2009, thousands of different cryptocurrencies have entered the market, providing investors with an intriguing — and sometimes confusing — array of choices.

While investing in crypto may offer growth potential, cryptocurrencies as a whole have proven to be a volatile asset class, posting double-digit percentage gains and losses — sometimes within a single day. While such wild price swings have generated lucrative returns for some, others have suffered painful losses.

It’s important for investors to understand the fundamentals and risks of the cryptocurrency market before they start investing. Here’s a closer look at some basics.

Cryptocurrencies 101

Some consider cryptocurrencies to be a form of currency, while others see them as a store of value similar to gold. While the Securities and Exchange Commission (SEC) has yet to decide whether cryptocurrencies can be considered securities or commodities, the reality is that these new instruments have revolutionized the way we think of finance and financial markets.

Not that anyone could have predicted that in 2008, when a person or group using the pseudonym Satoshi Nakamoto published a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Despite the mystery surrounding Nakamoto’s identity, bitcoin successfully launched in January of 2009.

The first altcoins — a term that refers to “alternatives to bitcoin” — were released in 2011, including Litecoin.

News reports tied use of bitcoin and other cryptocurrencies to illegal activity on the dark web. Some major scams and company failures, including the theft of hundreds of thousands of bitcoin on the crypto exchange Mt. Gox, contributed to volatility in the market’s early years.

However, by 2017, mainstream interest in bitcoin and other cryptocurrencies skyrocketed, sending its price close to $20,000. Despite ongoing price fluctuations, by 2021 bitcoin was not only the oldest crypto on the market but still the largest by market cap.

In November 2021, bitcoin would reach an all time high of nearly $69,000 and a total market cap of nearly $1.1 trillion, while the entire crypto market surpassed some $2 trillion in market value.

However, worries of a regulatory crackdown caused many crypto prices to fall in December 2021, as SEC Chair Gary Gensler indicated that many crypto might qualify as securities and thus fall under SEC regulations.

Blockchain 101

Not every cryptocurrency is built using blockchain technology, but some of the largest ones are. A blockchain is an unchangeable record of transactions. These transactions don’t have to be monetary in nature. Blockchains can be used to create contracts, to track the movement of products, to record votes, to prove that property transfers took place, and much more.

Cryptocurrencies and blockchains work hand in hand. For example, here’s how Bitcoin mining works: new coins are created through the process of maintaining the accuracy of its blockchain. Miners use computing power to solve complex cryptographic equations. As these equations are solved, they prove that all of the transactional information on the bitcoin blockchain is accurate.

As a reward for maintaining the blockchain, Bitcoins are created and given to the miners. The bitcoin blockchain is public and decentralized. This means that anyone can view any transaction between two bitcoin addresses. However, you don’t know who owns those addresses.

The decentralization of the blockchain means that there isn’t a single individual, company, or government in charge of Bitcoin and the blockchain. Changes to the blockchain code can be proposed and adopted by the miners. However, 51% or more miners must opt into a change in order for it to be implemented, otherwise Bitcoin forks into two markets.

Cryptocurrency Risks

Every investment comes with risks, and cryptocurrencies are no exception. Here are some the biggest ones investors should be aware of:

1.    Price Volatility: As mentioned, the price of Bitcoin halved within the span of a couple weeks in 2021. While the stock market is known for being a volatile asset class, the turbulence in share prices is nowhere near that of cryptocurrency prices. The market is still highly speculative, making it prone to big price swings and increasing the risk of investors locking in losses.

Recommended: Why is Bitcoin So Volatile?

2.    Theft: One of the choices investors have to make after buying cryptocurrencies is whether to store the coins and tokens in a hot wallet or cold wallet. Hot wallets are digital storage tools. The risk to them is that they’re more vulnerable to hacks and theft. Take for instance the Mt. Gox incident that occurred in 2011. While the cryptocurrency market has come a long way in terms of security since then, theft and hacks are still a risk.

3.    Fraud and Scams: The buzzy nature of the cryptocurrency industry unfortunately means that scammers are also drawn to the market. In 2021, the Federal Trade Commission (FTC) reported that between October 2020 and May 2021, more than 7,000 people reported losses of more than $80 million from bogus investment opportunities.

4.    Forgotten Keys: While the cold wallet storage solution can prevent hacks, some users of this method have fallen into the unfortunate situation of not remembering their wallet password – or “keys” in crypto lingo. That means there could be fortunes that individuals are not able to cash in on. Of the existing 18.5 million Bitcoin in circulation in January 2021, about 20% was estimated to be “lost” or trapped in a wallet.

5.    Regulatory Oversight: Chinese regulators stoked volatility in the cryptocurrency market in 2021, after clamping down on crypto mining operations and ordering payment firms to not do business with companies in the industry. U.K. regulators have also banned a leading crypto exchange. More crypto rules and regulation, including from countries like the U.S., are also expected, which could cause repercussions for usage and prices.

Basic Cryptocurrency Terminology to Know

As cryptocurrency has been growing over the past decade, industry jargon has developed. This terminology is important to know when starting to purchase and store cryptocurrencies. Here are some of the most commonly used words in the crypto space:

Address

If you’re using bitcoin, you have a public “address” where people can send you bitcoins. If you send someone bitcoins, they will see that they received them from your public address. Anyone can look up that public address and see how many bitcoins are in it.

You also have a private address, which is how you secure your bitcoins. Never give anyone your private address. Addresses are generally made up of a string of alphanumeric characters.

Altcoin

Any cryptocurrency that is not bitcoin is called an altcoin.

Crypto

Crypto is simply a shorter name for cryptocurrency.

Decentralization

As mentioned above, blockchain isn’t owned or controlled by anyone, making it decentralized. Many people in the blockchain space feel that decentralization creates more fairness.

Distributed Ledger

A dispersed recording of replicable, synchronized data. In the case of cryptocurrencies, the blockchain is a distributed ledger shared across many different computers and networks.

Exchange

Websites where you can purchase and sell cryptocurrencies are called exchanges.

Fork

A “fork” is when a blockchain permanently splits into a new version. This can take place when miners vote on a change, when a group takes over 51% of the network and changes the blockchain, or if there’s a bug or more commonly a new set of consensus rules come into existence.

FUD

Fear, uncertainty, doubt. FUD describes the emotions that can create panic and cause people to make decisions that affect the market.

Start buying Bitcoin, Ethereum,
and Litecoin today.

HODL

HODL is the philosophy of holding onto and not selling cryptocurrencies. A misspelling of “hold,” this was a joke that became a common term.

ICO

ICO is short for initial coin offering. An ICO is held when a company is raising funds and sells tokens to public or private buyers who then become backers of the project.

Mining

The computing process used to create crypto tokens. Not all cryptocurrencies are created using mining, but it is a common method.

Multisig

There are ways that you can set up a cryptocurrency transaction which require multiple people to sign off on the transaction for it to go through. This is called a multisig transaction.

Peer to Peer

A peer-to-peer (more commonly abbreviated as “P2P”) system doesn’t have a central controller; instead, users interact directly with one another. For example, there are peer-to-peer exchanges where you can sell your bitcoins directly to someone in your local area.

Pumping

When cryptocurrency information gets sensationalized in the media to raise its price or popularity, this is called pumping.

Smart Contract

Smart contracts are coded contracts written into blockchains that allow automated transactions to be executed.

Wallet

Cryptocurrencies are stored in virtual “wallets.” If you keep your cryptocurrencies on an exchange, that exchange controls your wallet. You can also use a digital wallet such as an app on your phone or computer.

One popular form of cryptocurrency wallet is a hardware wallet, which is like a flash drive that stores your cryptocurrencies offline but allows an easy connection to your computer for transacting. There are also paper wallets, which are (believe it or not) simply written records of your public and private addresses for your cryptocurrency. Online wallets are called hot wallets, while offline wallets are called cold wallets or cold storage.

Whale

A person who owns a significant amount of a cryptocurrency. When that person trades it they can actually affect the market price. These people are called whales.

The Top 10 Largest Cryptocurrencies

There are more than 7,000 cryptocurrencies on the market today, according to estimates. Each of them offers different characteristics in their transaction times, liquidity, privacy, and other factors.

Below are the top 10 biggest by market cap, as of July 23, 2021, according to data from CoinMarketCap, which calculates cryptocurrency market caps by taking the price of a digital currency and multiplying it by the number of coins in circulation.

For instance, with Bitcoin, the world’s biggest cryptocurrency by market cap, the price is $32,439.03 and the circulation supply is 18,764,331 on July 23, 2021. Multiplying the two numbers gets a market cap of about $609 billion. CoinMarketCap does this with the biggest cryptocurrencies and then ranks by the market cap of each.

Recommended: Top 30 Crypto By Market Cap

1. Bitcoin

As the first to market, Bitcoin (BTC) continues to be the most popular and highest valued crypto. Any new industry development — including physical ATMs and crypto credit cards — generally works with Bitcoin first.

Major companies now accept Bitcoin, but Bitcoin has a scalability issue, in that it currently can only process seven transactions per second. Visa®, by contrast, can process a maximum of 24,000 per second. Work is being done to improve this transaction speed, but for now Bitcoin may not be the best long-term store of currency to buy your latte with.

2. Ethereum

Although ethereum (ETH) is a cryptocurrency — also known as ether — its main appeal stems from its software platform. The Ethereum network allows for the creation of smart contracts and decentralized applications to be built on it. The cryptocurrency is used to develop and run applications on the software platform, and by investors purchasing other tokens using ether.

3. Tether

Tether (USDT) was the first cryptocurrency marketed as a “stablecoin” – virtual money designed to maintain a fixed value. In the case of Tether, the value of the coin is pegged to a fiat currency – the U.S. dollar. Hence, its ticker is USDT.

In February 2021, the New York attorney general’s office settled a two-year investigation on tether and its sister crypto exchange Bitfinex. Tether had claimed that all its tokens were backed on a one-to-one basis by U.S. dollars in cash reserves.

4. Binance Coin

Binance is the world’s largest cryptocurrency exchange–popular because of its low trading fees. Binance Coin (BNB) is the cryptocurrency “native” to the exchange, which means that it was designed specifically to be used in the Binance ecosystem. Binance Coin launched in 2017 with an ICO.

Binance tries to incentivize investors to use Binance Coin by allowing them to get a 25% discount on trading fees if they use BNB to pay for trades.

5. Cardano

While Cardano lacks some features, it’s considered by some market participants to be a work in progress and has potential to be a cheaper alternative to Ethereum in being a basis for DeFi and NFT projects.

A key feature of ADA is that it has a proof-of-stake blockchain. This means the complicated proof-of-work calculations and high electricity usage required for mining coins like Bitcoin aren’t necessary. Instead, all ADA coins are pre-mined. That could make Cardano appealing to investors who have been critical of the environmental costs of cryptocurrencies like Bitcoin.

6. Ripple

Ripple (XRP) was created to be used by existing banking institutions. Ripple network can process 1,500 transactions per second. Unlike Bitcoin and many other cryptocurrencies, XRP is not on a blockchain network. Instead, it’s based on what’s called a “hash tree.”

In 2020, the Securities and Exchange Commission sued Ripple and its executives for allegedly misleading investors in XRP by selling more than $1 billion of the virtual tokens without registering with the regulator.

7. USD Coin

USD Coin (USDC) is a stablecoin powered by Ethereum blockchain that is pegged to the U.S. dollar. After the stablecoin Tether came under regulatory trouble for how much it actually backs in reserves, Circle has said its reserves are evaluated and audited by Chicago-based accounting firm Grant Thornton LLP.

In March 2021, Visa announced that it would allow the use of USDC to settle transactions on its payment network–a sign of mainstream acceptance of the crypto market.

8. Dogecoin

Dogecoin had a meteoric rise in 2021, surging through the month of May. The cryptocurrency was started as a joke by its founders in 2013. One of Dogecoin’s most notable features is that it has a Shiba Inu dog on its symbol.

Dogecoin enjoyed popularity in a pattern similar to the way meme stocks did in 2020. Tesla CEO Elon Musk was an advocate of Dogecoin, touting it on social media. On June 1, cryptocurrency exchange Coinbase said it would accommodate Dogecoin, signalling more mainstream acceptance of the cryptocurrency.

9. Polkadot

Polkadot’s coin is called dot (DOT). Polkdot’s creator Gavin Wood is also the co-founder of Ethereum. He wrote the original white paper for Polkadot in 2016.

Central to Polkadot are “parachains” — blockchains that can run higher transaction throughput than Ethereum through design. “Parallel blockchains” — transactions that are spread across multiple computers, similar to parallel processing — have also been touted as having potential as an alternative to Ethereum.

10. Binance USD

Binance USD (BUSD) is a stablecoin that is issued by Binance, the world’s largest cryptocurrency exchange. It’s pegged to the U.S. dollar on a one-to-one basis. It runs on the Ethereum network so can be accepted everywhere for payments or loans where other ERC-20 tokens are.

The Takeaway

Cryptocurrencies can be purchased on major cryptocurrency exchanges or crypto trading platforms. While the digital-asset market is new, trendy and could be a growth opportunity, it’s important for investors to understand that it’s also highly speculative and that all the issues related to safety and security haven’t been worked out.


On SoFi Invest®, investors can trade cryptocurrencies with as little as $10. Their first purchase of $50 or greater will get them a bonus of up to $100 in bitcoin. See full terms at sofi.com/crypto. Cryptocurrencies like Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and Ethereum Classic can be traded 24/7. Plus, SoFi takes security seriously and uses a number of tools to keep investors’ crypto holdings secure.

Get started trading crypto on SoFi Invest today.



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.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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

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.

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

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

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Dec
18
2021
What Is the Put/Call Ratio?

What Is the Put/Call Ratio?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is the Put/Call Ratio?

The put to call ratio (PCR) is a mathematical indicator that investors use to determine market sentiment. The ratio reflects the volume of put options and call options placed on a particular market index. Analysts interpret this information into either a bullish (positive) or bearish (negative) near-term market outlook.

The idea is simple: the ratio of how many people are betting against the market versus how many people are betting in favor of the market, should provide a gauge of the general mood investors are in.

A high put-call ratio is thought to be bearish (because more investors are taking short positions) while a low put-call ratio is thought to be bullish (because more investors are taking long positions). Investor Martin Zweig invented the put-call ratio and used it to forecast the 1987 stock market crash.

What are Puts and Calls?

Puts and calls are the most basic types of options contracts. Options contracts give holders the right, but not the obligation, to buy or sell a specific number of shares of a given security by a certain date (the expiration date) at an agreed upon price (the strike price). For both puts and calls, one options contract is usually for 100 shares of the underlying security.

The seller of an option is also sometimes called the writer. Options writers receive a fee, called a premium, in exchange for the risk of having to buy or sell shares when the holder of the option chooses to exercise their contract.

There are many factors that influence an option’s premium, and many ways to calculate the value and the risk of options, including the Black-Sholes, trinomial, and Monte Carlo simulations.

Those interested in trading calls and puts and other options strategies may want to research the details further with our options trading guide.

For now, we’re concerned with the basics of call vs. put options so we can better understand the put-call ratio and what it means.

Puts

A put option (or “put”) gives its owner the right to sell a certain number of shares at a predetermined price by a certain date. Investors may also refer to puts as “short positions” because they represent bearish bets on a security’s future.

An investor who buys a put has the option to sell the stock at some point leading up to the expiration date of the contract. Investors may use puts in a variety of ways within the portfolio. For example, a protective put allows an investor who already owns the underlying asset to benefit even if the price of that stock asset goes down.

Calls

A call gives its owner the right to buy a certain number of shares at a predetermined price by a certain date. Calls are also referred to as long positions because they represent bullish bets on a security’s future.

An investor who buys a call has the option to buy the stock at some point leading up to the expiration date.

Recommended: Popular Options Trading Terminology to Know

What Is Put Call Ratio?

The put-call ratio is a measurement of the number of puts versus the number of calls traded on a given security over a certain timeframe. The ratio is expressed as a simple numerical value.

The higher the number, the more puts there are on a security, which shows that investors are betting in favor of future price declines. The lower the number, the more calls there are on a security, indicating that investors are betting in favor of future price increases.

Analysts most often apply this metric to broad market indexes to get a feel for overall market sentiment in conjunction with other data point. For example, the Chicago Board Options Exchange put-to-call ratio is one of seven factors used to calculate the Fear & Greed Index by CNN Business.

The put-call ratio can also be applied to individual stocks by looking at the volume of puts and calls on a stock over a certain period.

Recommended: Buying Options vs Stocks: Trading Differences to Know

How to Calculate the Put-Call Ratio

The put-call ratio equals the total volume of puts for a given time period on a certain market index or security divided by the total volume of calls for the same time period on that same index or security. The CBOE put call ratio is this calculation for all options traded on that exchange.

There can also be variations of this. For example, total put open interest could be divided by total call open interest. This would provide a ratio for the number of outstanding puts versus the number of outstanding calls. Another variation is a weighted put-call ratio, which calculates the dollar value of puts versus calls, rather than the number.

Looking at a put call ratio chart can show you how that ratio has changed over time.

Put-Call Ratio Example

Suppose an investor is trying to assess the overall sentiment for a stock. The stock showed the following volume of puts and calls on a recent trading day:

Number of puts = 1,400

Number of calls = 1,800

The put call ratio for this stock would be 1,400 / 1,800 = 0.77.

How to Interpret the Put-Call Ratio

A specific PCR value can broadly be defined as follows:

•   A PCR of less than 1 implies that investors are expecting upward price movement, as they’re buying more call options than put options.

•   A PCR of more than 1 implies that investors are expecting downward price movement, as they’re buying more put options than call options.

•   A PCR equal to 1 indicates investors expect a neutral trend, as purchases of both types of options are at the same level.

However, while PCR has a specific, mathematical root, it is still open to interpretation, depending on your options trading strategy. Different investors might take the same value to have different meanings.

Contrarian investors, for example, typically believe that the majority is wrong. The best move is to act contrary to what others are doing, in this view. If everyone else is buying something, contrarians believe it might be a good time to sell, or vice-versa. A contrarian investor might therefore perceive a high put/call ratio to be bullish because it suggests that most people believe prices will be heading downward soon.

Momentum investors believe in trying to capitalize on prevailing market trends. “The trend is your friend,” they might say. If the price of something is going up, it could be best to capitalize on that momentum by buying, in this view. A momentum investor could believe the opposite, and that a high PCR should be seen as bearish because prices could be trending downward soon.

To take things a step further, a momentum investor might short a security with a high put-call ratio, hoping that since most investors appear to already be short, this will be the right move. On the other hand, a contrarian investor could do the opposite and establish a long position, based on the idea that what most people expect to happen is the opposite of what’s actually coming.

The Takeaway

The put-call ratio is a simple metric used to gauge market sentiment. While often used on broad market indexes, investors may also apply the PCR to specific securities. Calculating it only involves dividing the volume of puts by the volume of calls on the market for a security.

The put-call ratio is one factor you might consider as you start trading options. A platform like SoFi’s allows you to get started with options trading, thanks to its intuitive and user-friendly design. Investors can also reference a library of educational resources about options.

Trade options with low fees through SoFi.

Photo credit: iStock/PeopleImages

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Dec
09
2021

Investing in Bitcoin ETFs

By | Growing Wealth, invest, Investing | Comments Off on Investing in Bitcoin ETFs

The first three bitcoin ETFs (exchange-traded funds) became available in the U.S. in October and November of 2021. All three are tied to bitcoin futures contracts; they aren’t tied to bitcoin’s daily market price.

Bitcoin spot ETFs have existed in Canada and Europe for years, and there are several applications for spot ETFs in the U.S., but the Securities and Exchange Commission (SEC), which regulates financial markets, has not yet approved them here.

Keep reading to learn more about the advantages of a bitcoin-based ETF, the controversy in bringing these new funds to market, and whether bitcoin futures ETFs might suit your investment strategy.

Why a Bitcoin ETF?

In order to understand the evolution of the first bitcoin ETFs, it’s important to grasp the significant changes crypto has brought to the field of finance.

Ever since the launch of Bitcoin in 2009 as the world’s first decentralized, digital currency, investors’ appetite for cryptocurrency has only grown. And no wonder: In just over a dozen years, the market has gone from a single coin to thousands of alt coins, tokens, and blockchain platforms that promise to revolutionize everything from our monetary systems to supply chains, art, and more. As of December 6, 2021, the total market capitalization of all cryptocurrencies was about $3 trillion, with no signs of slowing.

For some crypto speculators, the rewards have outweighed the potential downsides of this highly volatile market. But for many retail investors, putting their money into coins and exchanges that are largely unregulated has seemed fraught with risk.

Recommended: What Is Bitcoin and How Does It Work?

Buying bitcoin or any form of crypto has also presented challenges to by-the-book investors, who need to embrace new skills in order to execute even a basic crypto trade — from setting up a crypto wallet to understanding how to use and store public and private keys. As many readers know, investors who lose the private keys that give them access to their crypto assets essentially lose those assets. By some estimates, as much as 20% of bitcoin has been lost due to investors losing those all-important keys.

Thus, the idea of creating more traditional investments like bitcoin ETFs was appealing on many levels. A bitcoin ETF offered a way to give investors exposure to the world’s oldest and biggest cryptocurrency, while mitigating some of the potential risks and logistical challenges of buying and owning crypto. And bitcoin ETFs and mutual funds could be traded from standard brokerage accounts.

So why has it been so complicated to launch a bitcoin ETF?

Bitcoin ETFs: The History

Before an ETF can be listed on a U.S. exchange, it must be approved by the SEC. Thus far, however, the regulatory agency has taken a firm stand against bitcoin and other crypto-related funds because bitcoin, being unregulated itself and traded on exchanges that are largely unregulated as well, can be susceptible to fraud and manipulation.

Crypto entrepreneurs Cameron and Tyler Winklevoss, known for their Gemini digital currency exchange (among other things), were among the first to petition to launch a bitcoin ETF, but it was rejected owing to bitcoin’s potential vulnerabilities. In its 2017 denial of the petition, the SEC wrote: “Based on the record before it, the Commission believes that the significant markets for bitcoin are unregulated.”

Crypto as currency, security, or commodity?

The approval of crypto-related funds was further hampered by a debate over how cryptocurrencies should be categorized — a question that would determine how the market was regulated. Although most crypto are referred to as currencies, in fact cryptocurrencies aren’t widely used as legal tender to pay for goods or services (although that seems to be changing).

In a statement by SEC chair Gary Gensler in September 2021, he indicated that many types of crypto should be considered securities, raising concerns in the industry about the level of oversight that could follow, given that securities are regulated by the SEC.

Bitcoin and Ethereum, however, are among those considered to be commodities. Given that commodity markets are generally not as closely regulated as securities — which are subject to rules on price transparency, as well as higher standards for reporting, and market abuse oversight — some companies saw this as an opportunity.

The path to approval

Even though regulators in Canada and some countries in Europe have approved a range of bitcoin and crypto-related ETFs and mutual funds over the last few years, the SEC’s stance regarding U.S. markets only began to shift in 2021 when Chair Gary Gensler indicated an openness to ETFs tied to bitcoin futures contracts rather than the spot price of the crypto.

Because futures contracts are overseen by the Commodity Futures Trading Commission, and fall under the Investment Company Act of 1940, the SEC considered this structure to potentially offer investors more protection. The SEC approved the first bitcoin ETF in October 2021.

What Are the First 3 Bitcoin ETFs?

As of December 6, 2021, there were three bitcoin ETFs in the U.S.

On October 19, 2021, the ProShares Bitcoin Strategy ETF (BITO) became the first ETF to offer investors exposure to Bitcoin futures, with two more launched shortly after its debut. A few days after the ProShares’ ETF went public, the Valkyrie Bitcoin Strategy ETF (BTF) launched, followed by the VanEck Bitcoin
Strategy ETF (XBTF) on Nov. 15, 2021.

These funds do not invest directly in “physical” bitcoin (i.e. actual bitcoin assets) but shorter-term, cash-settled contracts that are traded on the Chicago Mercantile Exchange or CME.

Recommended: Is Crypto a Commodity or a Security?

The bitcoin ETF debate continues

Despite initial excitement and a wave of investor interest in the funds, some financial institutions are challenging the SEC’s decision to limit bitcoin ETFs to derivatives, and increasing pressure on the agency to reconsider its ruling on bitcoin spot ETFs.

Lawyers for one of the applicants, Grayscale Bitcoin Trust, argued that the SEC has “no basis for the position that investing in the derivatives market for an asset is acceptable for investors while investing in the asset itself is not.”

They also asserted that the SEC is obligated to treat like situations alike, and to do otherwise is “arbitrary and capricious,” meaning that to be fair the SEC must consider similar investments in a similar light.

What Are Bitcoin Futures?

Bitcoin futures are similar to any futures contract for an underlying asset like a commodity or stock. This allows investors to speculate on the future price of bitcoin.

Investors can purchase monthly contracts for cash settlement (rather than actual bitcoin) on the CME. Thus it’s possible to trade bitcoin futures without needing a bitcoin wallet, and holding onto a volatile asset and then being subject to potential price fluctuations.

Uses of bitcoin futures

Trading bitcoin futures may offer a number of benefits. For bitcoin miners, futures can allow them to lock in prices that ensure a return on their mining investments, regardless of bitcoin’s price trajectory.

Bitcoin investors can also use futures to hedge against their positions in the spot market.

And because bitcoin futures contracts are regulated by the Commodity Futures Trading Commission (CFTC), large institutional investors may now consider these assets as a possibility for their portfolios. Prior to this, bitcoin has been largely unregulated, making it too risky an asset for most institutional investors.

What Other Bitcoin ETFs and Funds Exist?

Investors have channeled billions of dollars into a wide and growing variety of crypto ETFs and other funds that are thriving in Canada and Europe. While some of these funds are from smaller players, in Q4 of 2021 Fidelity became the largest asset manager to launch a bitcoin spot ETF on the Toronto exchange.

In addition to crypto-related instruments, it’s possible to invest in a number of other crypto- and blockchain-related companies, including crypto exchanges and mining technology companies.

The Takeaway

For investors curious about the cryptocurrency market but not yet ready to take the plunge, a bitcoin ETF may represent a convenient option. But as of December 2021, the SEC has rejected applications to create any securities tied to the daily spot price of bitcoin, limiting bitcoin-related investments to the derivatives market.

While investing in a bitcoin futures ETF is different than investing in a “physical” or spot bitcoin fund, it may offer some advantages. But it’s wise to understand how futures work before investing in these funds. To better understand how bitcoin and other cryptocurrency works, you can get started trading right away when you open a SoFi Invest® account, which also enables you to trade stocks, ETFs, and more.

Get started on SoFi Invest today.

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.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
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.
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Nov
08
2021
What Is a Protective Put? Definition, Graphs, & Example

What Is a Protective Put? Definition & Example

By | Growing Wealth, invest, Investing | Comments Off on What Is a Protective Put? Definition & Example

A protective put is an investment strategy that employs options contracts to mitigate the risk that comes with owning a particular security or commodity. In it, an investor buys a put option on the security or commodity.

Typically, put options are used by investors who hope to benefit from a price decline in a given investment. But in a protective put strategy, the investor owns the underlying asset, and is positioned to benefit if the price of the asset goes up.

Essentially, the investor is buying the right to also make money if the investment goes down. But while this protection is a nice thing to have, it isn’t free.

To buy the option, the investor pays a fee, called a premium. It is a way of managing uncertainty and risk (sort of like an insurance policy). An investor may take out a protective put on anything they own, including equities, currencies, commodities like oil, and index funds. But if the investment they own does go up, the investor will have to deduct the cost of the put-option premiums from their returns.

Recommended: How to Trade Options: A Beginner’s Guide

Understanding Protective Puts

Investors typically purchase protective puts on assets that they already own as a way of limiting or capping any future potential losses.

The instrument that makes a protective put strategy works is the put option. A put option is a contract between two investors. The buyer of the put acquires the right to sell an agreed-upon amount of a given asset security at a given price during a predetermined time period.

Important Options Terms to Know

There is some key options trading lingo to know, in order to fully understand a protective put.

•   The price at which the purchaser of the put option can sell the underlying asset is known as the “strike price”.

•   The amount of money the buyer pays to acquire this right is called the “premium”.

•   And the end of the time period specified in the options contract is the expiration date, or “expiry date”.

•   The strike price is also known as the “floor price”, after which the investor will not face losses on their investment. The options allow the investor to sell the underlying asset at the floor price, no matter where it is trading, which serves the purpose of wiping out the losses the investor would face below the strike price.

For complete coverage in a protective put strategy, an investor might buy put options contracts equal to their entire position. For large positions in a given stock, that can be expensive. And whether or not that protection comes in handy, the put options themselves regularly expire — which means the investor has to purchase new put options contracts on a regular basis.

How Strike Price and Premiums Affect Protective Puts

An investor can buy a protective put option contract when they buy the underlying security, or at any time while they’re holding it. But whenever they buy the put option, that option’s strike price will bear one of three relationships to the security they own.

These three relationships between a security’s price and the price of a given option are sometimes called the “moneyness.” The varieties of moneyness are:

1.    At the money (ATM): This is when the option’s strike price and the asset’s market price are the same. An option purchased ATM will offer 100% protection against losses for the duration of the option contract.

2.    Out of the money (OTM): In this situation, the option’s strike price is lower than the asset’s market price. With an OTM option, the further the strike price is below the market value, the lower the premium. An OTM put option won’t provide complete protection against loss, but it will limit the losses to just the difference between the price at which the investor bought the stock price and the option’s strike price.

3.    In the money (ITM): This is when the asset’s market price is lower than the option’s strike price. In this scenario, the option might be worth exercising in order to cover the price of the premium.

Recommended: How to Sell Options for Premiums

Protective Put Scenarios

An investor who is pursuing a protective put strategy will own the underlying security, commodity, currency or asset. If the underlying asset goes up in value and the put options related to it expire, then the investor gets to keep all of the upside growth, minus the premiums connected with the put options. To keep the protection, the investor will have to buy new put options once the original options expire.

Investors may use protective puts differently. Some investors use the strategy to cover only a portion of a long position. Others may use protective puts for the entirety of their position. When protective put coverage is the same as the amount of stock the investor owns, it is often referred to as “married put.”

Most often, investors will enter into married puts at the time they buy a given stock, though they can enter into a married put at any time they want to protect their investment.

A married ATM put effectively limits the maximum loss an investor faces to the costs connected with buying the stock, including commissions, plus the premium and other costs related to purchasing the put option.

Pros & Cons of Protective Puts

As with most investing strategies, there are both upsides and downsides to using protective puts.

Pros of Protective Puts

Protective puts allow investors to set a limit on how much they stand to lose in a given investment. Here’s why investors are drawn to them:

•   Protective puts offer protection from the possibility that an investment will lose money.

•   The protective put strategy allows an investor to participate in nearly all of an investment’s upside potential.

•   Investors can use at-the-money (ATM), or out-of-the-money (OTM) options, or a mix of the two to tailor their risks and costs.

Recommended: In the Money (ITM) vs Out of the Money (OTM)

Cons of Protective Puts

Like any form of insurance, buying protective put options comes at a cost.

•   An investor using protective puts will see lower returns if the underlying stock price rises, because of the premiums paid to buy the put options.

•   If a stock doesn’t experience much movement up or down, the investor will see a steady loss of assets as they pay the option premiums.

•   Options with strike prices close to the asset’s current market price can be prohibitively expensive.

•   More affordable options that are further away from the stock’s current price offer only partial protection and can put the investor in the position of losing money.

The Takeaway

Protective put options are risk-management strategies that use options contracts to guard against losses. This options-based strategy allows investors to set a limit on how much they stand to lose in a given investment.

Looking to start options trading? With SoFi’s options trading platform, you can trade options on the web platform or through the mobile app, thanks to an intuitive and approachable design.

Trade options with low fees through SoFi.

Photo credit: iStock/igoriss

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
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.

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