Mar
04
2025
What Are Over-the-Counter (OTC) Options? Pros & Cons

What Are Over-the-Counter (OTC) Options? How Do They Work?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Are Over-the-Counter (OTC) Options? How Do They Work?

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

Over-the-counter (OTC) options are a type of customized derivative not listed on public exchanges. That means they are typically not available for purchase through standard brokerage accounts.

Instead, investors trade OTC contracts directly, between the buyer and the seller, without using a third-party platform.

Key Points

•   Over-the-counter (OTC) options are privately traded options that allow for customized terms, unlike public exchange-traded options.

•   The primary advantage of OTC options is their ability to be tailored to meet specific goals and needs of the parties involved.

•   A significant disadvantage of OTC options is their illiquidity, as they lack a secondary market, making them harder to sell and often more costly.

•   Pricing of OTC options depends on factors such as the underlying asset’s volatility, time to expiration, and interest rates.

•   Trading OTC options through platforms offers flexibility in terms and conditions but involves higher costs and risks due to lack of standardization and liquidity.

OTC Options Definition

As a quick refresher, options are derivatives that give holders the right to buy or sell stocks or other assets. An options holder holds the right, but not the obligation, to buy or sell the underlying asset at a certain price, on or before a specific date.

While most options trade through brokers via exchanges, over-the-counter options trade privately, between a buyer and a seller. Over the counter options are sometimes tied to an exotic asset — a stock that may not be available for purchase through most brokers’ platforms.

OTC options are not standardized, and allow both parties to define expiration dates and strike prices on their own.This can make them appealing to those with a more complex options trading strategy.

How Does OTC Trading Work?

OTC securities include any types of investments that do not appear on U.S. exchanges. That can include stocks in foreign companies and small or mid-sized domestic companies; it can also include OTC options and futures. Some brokerages do allow investors to trade OTCs on their platforms, though not all do, and there may be additional fees charged by the broker to do so.

With that in mind, if you plan on investing in the OTC market, you may need to do some research beforehand to ensure that the brokerage account allows for OTC trading. SoFi’s options trading platform does not currently support OTC trading.

What is the Difference Between OTC Options and Stock Options?

OTC options and regular old stock options, or listed or exchange-traded options, have some key differentiators worth reviewing. Here is a short rundown of those differences:

OTC Options vs Stock Options

OTC Options

 Stock Options
Customized Standardized
Illiquid Liquid
No secondary market Secondary Market

1. Customization

A typical listed stock option is a standardized contract. The exchange, then, is determining expiration dates, strike prices, lot sizes, and other details. By standardizing contracts, exchanges can, as a result, increase the liquidity of the options contract.

Customization is the main and perhaps biggest difference between typical exchange-traded or listed stock options and OTC options. OTC options are customized with the terms hashed out by the involved parties.

2. Liquidity

OTC options are largely illiquid compared to their vanilla cousins. That’s because they’re more or less bespoke contracts — they’ve been customized according to the criteria set forth by the parties involved.

The customizations OTC options come with may not be appealing to many traders and, as a result, may not be quite as easy to sell. In other words, there’s less demand for tailor-made options contracts like those in the OTC market, meaning they’re less liquid, and often more costly.

3. Secondary Markets

Another key difference between vanilla stock options and OTC options is the secondary market — or lack thereof, in the case of OTC options.

Primary markets are where investors buy fresh securities, when they’re first offered. Secondary markets are what most investors engage in when they’re buying or selling securities. These include exchanges such as the New York Stock Exchange.

While the primary market for OTC options is where parties meet to come to terms and develop an options contract, there is no secondary market. In many cases, OTC options can only be closed through an offsetting transaction — a new trade with the original counterparty — that cancels out the existing position.

What are the Risks of Trading OTC Options?

Given the complex and bespoke nature of OTC options, trading them can come with some serious risks. Chief among those risks is the fact that OTC options lack the protection provided by clearinghouses on regulated exchanges, which essentially “guarantees” that the contractual obligations are fulfilled.

That means that typical exchange-traded options are overseen, like other derivatives, by regulating authorities like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The guarantee cements into place that contract buyers can exercise their options, knowing that the counterparty will fulfill their obligation, thus avoiding counterparty risk.

Essentially, a contract is a promise between two parties. If one party decides not to follow through on their end of the deal, when it comes to a traditional stock option, then the exchange will ensure that everything is smoothed out. But OTC options lack that protection from the exchanges.

Pros & Cons of OTC Options Contracts

Like just about every financial tool, instrument, or security out there, OTC options have their benefits and disadvantages.

Pros

The biggest and most obvious advantage to OTC options is that they’re tailored for specific parties. That means that the parties engaged in the options contract get precisely the terms that they want and a contract that fits with their specific goals.

Further, the OTC market allows for trading of both securities and derivatives (like options) for small companies (exotic options) that aren’t listed on the typical exchanges. This provides traders more investment choices, but introduces additional risks.Effectively, the OTC market, and OTC options, provide investors with more investment choices. That can increase the risk — but also the potential rewards — of such securities.

Cons

The drawbacks of OTC options concern the lack of standardization of contracts (which may be a con for some investors), and the illiquid nature of the market. Plus, that illiquidity can add additional costs. And, again, there’s no secondary market for OTC options.

The big thing investors should remember, too, is that there can be a lack of information and transparency in the OTC market. Many OTC securities, including stocks, lack readily available and reliable information. This increases their risk profiles.While with standard options, you can find data and availability through your broker’s portal, such information can be harder to come by for OTC options.

The Takeaway

There are some benefits to trading OTC options, but it requires a thorough understanding of how the market works and the risks that it presents.

While investors are not able to trade OTCs on the SoFi platform at this time, they can buy call and put options to try to gain exposure to exchange-traded stock movements or potentially manage risk.

That said, going over-the-counter can open up a whole new slate of potential investments.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is the difference between OTC and exchange options?

OTC options are traded over-the-counter (or, OTC), and may not be available to purchase through some brokerages or platforms. Exchange options, conversely, are traded on exchanges, and should be more widely accessible to investors.

How are OTC options priced?

Several factors influence the price of OTC options, and those could include the volatility of the underlying asset, the time to expiration, and applicable interest rates.

Photo credit: iStock/g-stockstudio

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN-Q125-112

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Mar
04
2025
Bollinger Bands Explained

Bollinger Bands Explained

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

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

Bollinger Bands are a popular technical analysis tool that helps traders assess price trends and market volatility. By measuring how far a security’s price moves above or below its average, Bollinger Bands provide insights into whether the price is relatively high or low compared to recent trading activity, indicating whether the security is overbought or oversold.

These bands can be applied to various assets, including options and stocks, making them versatile for different trading strategies. Although Bollinger Bands are often used to spot potential opportunities, they often work best when combined with other indicators to confirm trends and reduce the risk of false signals.

Key Points

•   Bollinger Bands are technical analysis tools that measure a security’s price relative to its moving average and volatility.

•   The bands consist of three lines: a simple moving average and two standard deviation lines.

•   Bollinger Bands help identify overbought or oversold conditions and potential price reversals.

•   This tool is more effective when used with other indicators like RSI and MACD.

•   Bollinger Bands can be useful for day trading but are not predictive on their own.

What Are Bollinger Bands?

Bollinger Bands are a popular tool used in the technical analysis of securities. They are a set of three bands that measure a security’s relative price in comparison to its moving average and recent price volatility.

The center line is typically the 20-day simple moving average (SMA) of a security’s price, plus plotted lines two standard deviations away from the SMA. The bands are plotted positively and negatively from the SMA, which is what measures the volatility of a security, and the trader can adjust them based on their particular use case. These bands expand during periods of volatility and contract during periods of lower volatility, visually demonstrating market conditions.

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

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

How Do Bollinger Bands Work?

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

Period is found by calculating the simple moving average of the security a trader is interested in. The calculation generally uses a 20-day SMA, an average of a security’s closing prices over a 20-day period — or roughly a month of trading days.

The first data point on the graph would be the average of the first 20 days being tracked. The second data point would be the next 20 days, and so on.

That line shows the SMA over time, and the Bollinger Bands are then placed above and below it by calculating the standard deviation of the security’s price along each data point. The standard deviation measures how much a security’s price deviates from its average, reflecting price volatility against its SMA, representing price volatility.

The standard deviation is calculated by first finding the square root of the variance, which is the average of the squared differences of the mean. The standard deviation is typically multiplied by two to create the bands, but traders can adjust this multiplier based on their strategy. The resulting value is then added and subtracted from each SMA data point to form the upper and lower Bollinger Bands.

Key Things to Know About Bollinger Bands

Bollinger Bands adjust dynamically to market conditions, expanding and contracting based on volatility. Here are a few things to keep in mind when using them:

•   When volatility is low, the bands get closer together. This contraction reflects a lower volatility period, which may precede future price movements.

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

•   Generally the security’s price movements stay within the two bands. And once they touch one band they start moving towards the other band. But the price can also bounce off the band multiple times or it can cross over the band. If the price touches one band and crosses the SMA, traders may watch to see if it moves toward the opposite band.

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

Formula for Bollinger Bands

Below is the formula to plot Bollinger Bands:

BOLU=MA(TP,n)+m∗σ[TP,n]

BOLD=MA(TP,n)−m∗σ[TP,n]

where:

BOLU=Upper Bollinger Band

BOLD=Lower Bollinger Band

MA=Moving average

TP (typical price)=(High+Low+Close)÷3

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

m = Number of standard deviations (typically 2)

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

Recommended: 7 Technical Indicators of Stock Trading
​

How Do You Read Bollinger Bands?

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

Trends with Bollinger Bands can vary based on the asset and trading strategy, lasting anywhere from minutes to years. Traders should understand how to set up the bands based on their timeline. Here are some patterns and indicators traders might want to learn.

Uptrends

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

Downtrends

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

The Squeeze

When the bands are close together, this is known as a squeeze. The squeeze happens when the security has low volatility, but it indicates that the security will probably have increased volatility in the future. Traders look for high volatility periods to find trading opportunities, so the squeeze reflects decreased volatility and often precedes periods of higher volatility, though it does not predict price direction.

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

Breakouts

The SMA line doesn’t always stay between the Bollinger Bands — it can also move above or below the bands. Around 90% of price changes do happen between the bands, so if the price has a breakout above or below the bands it’s a significant event. Breakouts can signal significant price movement outside the bands, however, but they are not reliable predictors of future trends on their own.

Bollinger Band Trading Strategies

Financial analyst Arthur Merrill identified a set of 16 trend patterns, including M patterns and W patterns, that traders can use to recognize potential price reversals. Here are two key patterns.

M Top

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

W Bottoms

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

Recommended: How to Analyze Stocks: 4 Ways

Combining Bollinger Bands With Other Indicators

John Bollinger recommended that traders use Bollinger Bands in conjunction with other non-correlated indicators, such as the relative strength indicator (RSI) and the Stochastic Oscillator, in order to gain a comprehensive understanding of the security being assessed.

Although Bollinger Bands help traders understand price volatility and can show opportunities for upcoming trades, they aren’t strong indicators of potential upcoming price movements.

Drawbacks of Bollinger Bands

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

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

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

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

Using Bollinger Bands for Crypto Trading

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

The Takeaway

Bollinger Bands are a useful tool for technical analysis in options trading, which measure the relative high or low of a security’s price in relation to previous trades over, typically, the past 20 trading days.

Options traders may use Bollinger Bands to help inform their strategies, whether they’re trying to benefit from stock movements or manage risk.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

What do Bollinger Bands tell you?


Bollinger Bands show how a security’s price moves over time, and whether it’s relatively high or low compared to its recent average. They also help gauge volatility: when the bands are far apart, the price is more volatile. When they’re close together, it’s less volatile.

Are Bollinger Bands good for day trading?


Yes, Bollinger Bands can be helpful for day trading because they show short-term price trends and volatility, helping traders spot potential opportunities for quick trades.

How reliable are Bollinger Bands?


Bollinger Bands are useful for identifying trends and volatility, but they’re not foolproof. They work best when combined with other indicators to confirm signals and reduce false predictions.

What indicator pairs well with Bollinger Bands?


The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) pair well with Bollinger Bands to confirm trends and spot potential reversals.

Photo credit: iStock/blackCAT

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN-Q125-098

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Mar
04
2025
What Is a Naked Call Options Strategy?

What Is a Naked Call Options Strategy?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Naked Call Options Strategy?

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

A naked call, or uncovered call, is generally considered a high-risk option strategy. Naked calls are when an investor sells or writes call options for an underlying security they don’t own. The seller is anticipating that the underlying stock price will not increase before the call’s expiration date, which may require them to purchase shares that are higher than the market price to close the position.

It is almost always safer for traders to sell calls on a stock they already own — known as a “covered call” position — than those they don’t. This way, if the stock price increases sharply, the trader’s net position is hedged. Naked calls, on the other hand, may be considered speculative trades. You keep the premium if the underlying asset is at or in the money at expiration, but you also face the potential of seeing unlimited losses if the option to buy is exercised.

Key Points

•   Naked call options involve selling calls without owning the underlying asset, aiming to profit from time decay.

•   This strategy carries high risk, with potential for unlimited losses if stock prices rise sharply.

•   Covered calls, using owned assets, are a less risky alternative to naked calls.

•   Exiting a trade can be done by buying back options or shares to close the position.

•   Risk management and liquidity are essential to handle adverse price movements and margin requirements.

Understanding Naked Calls

When a trader sells or writes a call option, they are selling someone else the right to purchase shares in the underlying asset at the strike price. In exchange, they receive the option premium. While this immediately creates income for the option seller, it also opens them up to the risk that they will need to deliver shares in the underlying stock, should the option buyer decide to exercise.

For this reason, it is generally much less risky to use a “covered call strategy” and sell an option on an underlying asset that you own. In the case of stocks, a single option generally represents 100 shares, so the trader would want to own 100 shares for each option sold.

Trading naked calls, on the other hand, is among the more speculative options strategies. The term “naked” refers to a trade in which the option writer does not own the underlying asset. This is a neutral to bearish strategy in that the seller is betting the underlying stock price will not materially increase before the call option’s expiration date.

In both the naked and the covered scenarios, the option seller gets to collect the premium as income. However, selling a naked call requires a much lower capital commitment, since the seller is not also buying or owning the corresponding number of shares in the underlying stock. While this increases the potential return profile of the strategy, it opens the seller up to potentially unlimited losses on the downside.

How Do Naked Calls Work?

The maximum profit potential on a naked call is equal to the premium for the option, but potential losses are limitless. In a scenario where the stock price has gone well above the strike price, and the buyer of the option chooses to exercise, the seller would need to purchase shares at the market price and sell them at the lower strike price.

Hypothetically, a stock price has no upper limit, so these losses could become great. When writing a naked call, the “breakeven price” is the strike price plus the premium collected; a profit may be achieved when the stock price is below the breakeven price.

Investing in naked calls comes with significant risk and requires discipline and a firm grasp of common options trading strategies.

Writing a Naked Call

Although there are significant risks to naked calls, the process of writing them can be straightforward. An individual enters an order to trade a call option; but instead of buying, they enter a sell-to-open order. Once sold, the trader hopes the underlying stock moves sideways or declines in value.

So long as the shares remain below the strike price at expiration, the naked call writer will keep the premium (or credit) collected. However, if the company that issued the shares releases unexpected good news, or the shares simply have positive price momentum, the stock price can go upward and expose the naked call writer to potentially significant losses should the buyer exercise the call option.

There are dozens of options on stocks and exchange-traded funds (ETFs) with differing expiration dates and strike prices. For this reason, a trader must take a directional position on the underlying stock price while also accounting for the impact of time decay leading up to expiration. Keeping a close eye on implied volatility is important, too.

Closing Out a Naked Call

When the trader wants to exit the trade, they create a buy-to-close order on their short calls. Alternatively, a trader can buy shares of the underlying asset to offset the short call position.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

Naked Call Example

Let’s say a trader wants to sell a naked call option on shares of a stock. Let’s also assume the stock trades at $100 per share.

For our example, we’ll assume the trader sells a call option at the $110 strike price expiring three months from today. This option comes with a premium of $5 per share, which they receive for selling their options. This call option would be considered “out of the money” since the strike price is above the underlying stock’s current price.

Thus, the option only has extrinsic value (also known as time value). This naked call example seeks to benefit from the option’s time decay, also known as theta. At initiation, the trader sells to open the trade, and then collects the $5 premium per share.

As the option nears its expiration date, time value diminishes, and the option price may decrease if the stock price does not significantly rise. If the stock price ends below the strike price by expiration, the option could expire worthless, allowing the trader to retain the full premium as profit.

Conversely, if the stock price increases significantly — say from $50 to $60 — the traders who sold the call at a $52 strike price could face a loss of at least $8 per share ($60 market price minus the $52 strike price, less any premium received). If multiple contracts are sold, the losses can add up quickly.

For example, if the stock price rises during the contract period, the trader who sold the call option may face increasing losses as the stock moves further above the strike price.

Using Naked Calls

In general, naked calls are best suited for experienced traders who have a risk management strategy in place already.

Naked calls may appeal to traders seeking speculative opportunities, since they may profit if the underlying stock price remains stable or declines. The strategy comes with the risk of potentially unlimited losses and other considerations, such as liquidity concerns and the potential need for a margin account or leverage.

The challenge of trading naked calls is the need for sufficient liquidity to manage adverse price movements. If the underlying stock experiences unexpected positive momentum, its price may rise sharply, leading to substantial losses for the trader. This risk is compounded when a trader does not have adequate funds to cover the margin requirements associated with the position.

This strategy may require you to open a margin account with a broker so you can tap into their liquidity if necessary. Brokers typically enforce strict margin requirements for naked calls to mitigate this risk, which can result in margin calls if the account value drops too low.

Naked call strategies are most appropriate for seasoned traders who thoroughly understand options mechanics, as well as the factors that influence price movements (volatility, time decay, and underlying stock performance). These traders should implement stringent risk controls, such as predefined exit strategies and position sizing, to limit exposure.

Risks and Rewards

The potential for unlimited losses makes naked call writing a risky strategy. The reward is straightforward — keeping the premium received at the onset of the trade. Here are the pros and cons of naked call option trading:

Pros

 Cons
Potential profits from a flat or declining stock price Unlimited loss potential
Can allow time decay (theta) to work in your favor Reward is limited to the premium collected
May generate income May result in a margin call when the underlying asset appreciates

Naked Call Alternatives

One common alternative to naked calls is known as “covered call writing.” This strategy includes owning the underlying stock while selling calls against it. This can be a more risk-averse alternative to naked calls, but the trader must still have enough cash to purchase the necessary shares (unless they are using margin trading).

There are other, more complex options strategies that can help achieve results similar to naked call writing. Covered puts, covered calls, and bear call spreads are common alternatives to naked calls. Experienced options traders have strategies to manage their risk, but even sophisticated traders can become overconfident and make mistakes.

Selling naked puts is another alternative that takes a neutral to bullish outlook on the underlying asset. When selling naked puts, the trader’s loss potential is limited to the strike price (minus the premium collected) since the stock can only go to $0 — however, that loss can be significant.

The Takeaway

A naked call strategy is a high-risk technique in which a trader seeks to profit from a declining or flat stock price. The maximum gain is the premium received while the risk is unlimited potential losses. As with all option trading strategies, traders need to understand the risks and benefits of selling naked calls.

[product_push_invest_options]

Explore SoFi’s user-friendly options trading platform.

🛈 SoFi does not offer naked options trading at this time.

Photo credit: iStock/twinsterphoto

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN-Q125-096

Read more
Feb
28
2025
What Is a Bear Call Spread? How It Works

Bear Call Spread, Explained

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Bear Call Spread, Explained

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

A bear call spread is one of four basic vertical options spreads that traders put to regular use. This strategy aims to generate income in bearish or neutral markets with limited upside potential while carrying defined risks.

Traders use a bear call spread strategy to seek potential profit on a decrease in value of the option’s underlying asset. Hence, the “bear” in the strategy’s name.

As such, a trader would typically use a bear call spread when they believe the underlying asset’s value is likely to fall.

Key Points

•   A bear call spread involves selling a short call with a lower strike price and buying a long call with a higher strike price, both expiring simultaneously.

•   A bear call spread can generate a net premium, be profitable if the underlying asset’s value declines, and come with limited maximum profit or loss.

•   The performance of the strategy is influenced by stock price changes, volatility, and time until expiration.

•   The strategy is best used when anticipating a decline in the underlying asset’s value, requiring careful market analysis.

•   Consider risk management, early assignment risk, and the speculative nature of options trading.

What Is a Bear Call Spread?

A bear call spread is an options trading strategy that investors may use to potentially profit from a declining (or neutral) stock price and time decay, while also limiting the risk of loss.

With this strategy, a trader creates a spread by buying and selling two call options at the same time, attached to the same underlying asset, with the same expiration date. The key difference between the two call options is their strike price.

One call option is a long call option strategy, involving purchasing a call with a higher strike price, and the other is a short call strategy (similar to shorting a stock), involving selling a call with a lower strike price than the long call.

The bear call spread strategy benefits from the stock price staying below the lower strike price of the sold call. By selling a call option at a lower strike price and buying another at a higher strike price, the investor hopes to collect a premium for the bearish short call, while limiting potential losses through the bullish long call.

How Does a Bear Call Spread Work?

A bear call spread consists of two key positions: buying a long call and selling a short call. When the trader simultaneously purchases a long call and sells a short call (with a lower strike price), it creates a credit in the trader’s account, since the long call the trader is buying is less expensive than the short call the trader is selling. As noted above, the short call generates income for the trader by providing a premium, and the long call helps limit the trader’s potential loss.

Max Profit of a Bear Call Spread

Setting up these two call positions creates a spread, and the trader benefits when the underlying asset’s value declines. The maximum potential profit is capped at the net premium received from the sale and purchase of the call options. The investor may see the max potential profit if the stock price remains below the strike price of the sold call at expiration.

However, if the stock price rises above the strike price of the sold call, the trader may incur losses. The premium from selling the call can reduce these losses, but they could still be substantial if the strike prices move significantly higher.

Max Loss of a Bear Call Spread

If the underlying asset’s value increases, the spread can result in a loss for the trader, since the buyer of the call option may then choose to exercise the option. However, the maximum potential loss is capped at the difference between the strike prices of the two options, minus the premium received. The long call option limits loss by offsetting the risk of the short call being exercised.

Example of a Bear Call Spread Strategy

As an example, a bear call spread could involve a trader selling a short call option on a stock, which expires in one month, with a strike price of $10, for a premium of $2. The trader also buys a call option with the same expiration and a strike price of $12 for a premium of $1.

By selling the short call, they’ve received a net premium of $1. Option contracts typically control 100 shares, providing a total credit of $100. The trader has two calls with the same expiration date, but two different strike prices.

Let’s say a month goes by, and the trader’s bearish instincts have proven correct. The stock’s price declines and their call options expire below the $10 strike price of the short call. They keep the net premium of $100 and walk away with a profit.

In a downside scenario, suppose the stock climbs to $13 on expiration day. The trader closes out both contracts for a net loss of $2 per share, or $200 for each set of contracts, resulting in a $200 total loss for the strategy. This is offset by the $100 received upfront, so their net loss is just $100.

Finally, let’s analyze the break-even point. Break-even occurs at the strike price of the short call, plus the net premium received. In our example, this is the $10 lower strike, plus $1 of net premium, or $11.

Factors That Impact Bear Call Spreads

Several factors influence the outcome of a bear call spread strategy. These include the underlying asset’s price movements, market volatility, and the passage of time. Price movements influence the cost of options contracts. Market volatility impacts the extrinsic value of the contracts. The passage of time determines time decay, also known as theta.

Stock Price Change

Movement in stock price can affect a bear call significantly. This strategy benefits from a neutral to bearish market trend. When stocks rise, there is a greater chance of loss. The difference in strike prices caps both the potential profit and loss, which can therefore reduce profitability. A wider gap between the strikes can result in a lower net premium, and create higher risk exposure for the trader.

Stock Price Volatility

Volatility plays a moderate role in a bear call spread’s performance. The strategy’s maximum profit and loss are mainly influenced by the strike prices and the premiums received, rather than large price swings. That said, higher volatility generally leads to higher premiums, which can increase the income generated upfront. This also comes with a higher risk of the stock price moving beyond the strike prices, which could potentially lead to losses.

Although volatility does affect the strategy, it tends to perform best in environments with moderate or low volatility. Stable market conditions can allow the stock to stay within the expected range, which may increase the likelihood of the options expiring worthless and enabling the trader to keep the full premium as profit.

Time

Time decay plays an important role in the potential profitability of bear call spreads. As expiration approaches, the time value of the short call (i.e. lower strike) erodes more rapidly than the long call (i.e. higher strike), which benefits the position. This can work in the trader’s favor so long as the stock price remains below the short call strike, potentially turning a profit as both options lose value over time.

Benefits and Risks of a Bear Call Spread

Following are some of the potential benefits and risks associated with bear call spreads that investors should consider before using this strategy.

thumb_up

Pros:

•   Flexibility

•   Capped potential losses

•   Relative simplicity

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Cons:

•   Capped potential gains

•   Limited potential use

•   The strategy could backfire

Benefits of a Bear Call Spread

There are some advantages to bear call spreads, which is why some traders use them to attempt to manage risk and pursue potential gains.

•   Flexibility: Depending on the specific calls sold and purchased, traders can see a profit under a variety of scenarios, such as when the underlying asset’s value remains the same, or when it declines.

•   Capped potential losses: There’s a maximum that a trader can lose, which also means profits are also capped. These types of strategies are used not only to seek profits, but to also limit risk.

•   Relative simplicity: Bear call spreads are more straightforward than other advanced options trading strategies.

Risks of a Bear Call Spread

Bear call spreads can have their disadvantages.

•   Capped potential gains: Like other vertical spread strategies, potential gains are capped — in this case, at the initial net premium credited to the account.

•   Limited potential use: The strategy is most effective in neutral to bearish markets, typically with moderate to low volatility.

•   The strategy could backfire: The risk is that the underlying asset sees a dramatic rise in value, rather than a fall in value as the trader predicted, resulting in significant losses on the short position. This could mean that the trader would need to sell the underlying asset at the strike price of the short call, which may lead to a loss.

Bear Call Spread Considerations and Tips

There are a few other things worth keeping in mind when it comes to the bear call spread strategy.

•   There’s an early assignment risk: Since options can be exercised at any time, traders with short option positions should remember that they’re putting themselves at risk of early assignment — meaning they may be required to sell the underlying asset at the lower strike price if assigned.

•   The strategy can be used in variations: A bear call spread is only one of several vertical options spreads that traders can put to use. Depending on market conditions, it could be wise to use a bullish strategy instead.

•   Options trading comes with risk: It’s critical to remember that options trading is speculative. There are no guarantees, and the risk of loss is real. No matter how good any trader thinks they are at predicting the market, the risk of loss is significant. It’s important for investors to calculate the risk-reward ratio before choosing their speculative tools.

The Takeaway

A bear call spread is one of many options trading strategies a trader may employ in trying to protect themselves from losses and try to benefit from gains when they foresee a moderate decline in the underlying asset. But as with all strategies, it’s not foolproof, and there is a risk that the price of the asset might rise causing the strategy to backfire.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

How do you close a bear call credit spread?

If the stock price is moving against the position, such as the stock rising and nearing the short strike price, a trader may close the position early to limit potential losses by.

On the other hand, if the stock price stays below the short strike and both options expire worthless, the trader can simply let the position run its course, keeping the premium as profit. The decision to close often depends on the stock’s movement and how much risk the trader is willing to take.

How do you set up a bear call spread?

In order to set up a bear call spread, a trader sells a call option with a lower strike price and buys a call option with a higher strike price, both with the same underlying asset and expiration date. These two positions create the spread.

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Feb
26
2025
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How to Negotiate Your Signing Bonus

By | Building Your Career, Growing Wealth, invest, Investing, Life & Career | No Comments

Although many people believe that the negotiation process ends once they have accepted a job offer, that’s often not the case. One of the most critical aspects of the negotiation process is negotiating your signing bonus. A signing bonus is a monetary incentive that an employer agrees to pay you. This bonus is meant to entice you to accept the job offer, and is typically negotiable.

It can be beneficial to know the nuances of negotiating a signing bonus to get the most out of your job hunt. If you are offered a signing bonus, be sure to negotiate it to get the most money possible. And even if your initial job offer doesn’t include a signing bonus, it might be worth asking for one.

Understanding Why Companies Offer a Hiring Bonus

Employers aren’t obligated to offer job candidates a hiring bonus, which is sometimes called a signing bonus or sign-on bonus. However, companies may choose to extend this one-time financial benefit to attract new talent, especially in a competitive hiring landscape.

This one-time signing bonus can help an employer close the gap between a candidate’s desired pay and what the company can offer. Additionally, the hiring bonus may compensate a new hire for any benefits the candidate might otherwise miss out on by changing jobs or forgoing other job offers.

Companies may also use a sign-on bonus to incentivize an employee to stay with a company for a certain period of time. If an employee quits within an agreed-upon time after accepting the position, they may be required to pay back the bonus.

💡 Recommended: What Is a Good Entry Level Salary?

How Signing Bonuses Work

If you’re being considered for a job, the hiring company can include a signing bonus as part of the job offer. You can then decide whether to accept the bonus and the position, attempt to negotiate for a larger sign-on bonus, or walk away from the offer altogether.

Should you accept the offer, the hiring bonus can be paid out to you as a lump sum or as employee stock options. If the company pays the bonus as a lump cash sum, they may pay it out with a first paycheck, or after a specified period, like 90 days.

Like any other bonuses, salary, or wages you receive, a signing bonus is taxable. So you’ll have to report that money on your tax return when you file. If the signing bonus is paid with regular pay, it’s taxed as ordinary income. If it isn’t, then the sign-on bonus is taxed as supplemental wages. For 2024, the supplemental wage tax rate is 22%, which increases to 37% if your bonus exceeds $1 million.

Additionally, bonuses, whether they’re paid when starting a new job or as a year-end bonus, may also be subject to Social Security and Medicare tax as well as state income tax. Employers withhold these taxes and pay them to the IRS for you. So when you get your bonus, you’re getting the net amount, less taxes withheld.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Average Signing Bonus

The average signing bonus can vary greatly depending on the company, position, and location. In general, signing bonuses may range from $10,000 to more than $50,000 for management and executive positions, while entry and mid-level position hiring bonuses are usually less than $10,000.

But again, there’s no guarantee that you’ll be offered a signing bonus, or that they’ll be pervasive in your given industry.

What Industries Offer the Highest Hiring Bonuses?

The industries that offer the highest hiring bonuses tend to be in the financial and technology sectors.

However, during competitive labor markets, signing bonuses may be offered in various industries that usually don’t offer a bonus. For instance, following the Covid-19 pandemic and subsequent labor shortage, industries like healthcare, warehousing, and food and beverage offered substantial hiring bonuses to attract potential employees.

💡 Recommended: The Highest-Paying Jobs in Every State

Pros & Cons of Signing Bonuses

Receiving a sign-on bonus could make a job offer more attractive. But before you sign on the dotted line, it’s helpful to consider the advantages and potential disadvantages of accepting a bonus.

Signing Bonus Pros

A signing bonus could help make up a salary shortfall. If you went into salary negotiations with one number in mind, but the company offered something different, a sign-on bonus could make the compensation package more attractive. While the bonus won’t carry on past your first year of employment, it could give you a nice initial bump in pay that might persuade you to accept the position.

You may be able to use a signing bonus as leverage in job negotiations. When multiple companies make job offers, you could use a signing bonus as a bargaining chip. For instance, if Company A represents your dream employer but Company B is offering a larger bonus, you might be able to use that to persuade Company A to match or beat their offer.

A sign-on bonus could make up for benefits package gaps. Things like sick pay, vacation pay, holiday pay, insurance, and a retirement plan can all enhance an employee benefits package. But if the company you’re interviewing with doesn’t offer as many benefits as you’re hoping to get, a large sign-on bonus could make those shortcomings easier to bear.

Signing Bonus Cons

Since sign bonuses are taxable as supplemental wages, you might see a temporary bump in your tax liability for the year. You may want to talk to a tax professional about how you could balance that out with 401(k) or IRA contributions, deductions for student loan interest payments, and other tax breaks.

Additionally, changing jobs might mean having to repay the bonus, depending on your contract. Employers can include a clause in your job offer that states if you leave the company within a specific time frame after hiring, you’d have to pay back your sign-on bonus. If you have to pay back a bonus and don’t have cash on hand to do so, that could lead to debt if you have to get a loan to cover the amount owed.

This might cause you to get stuck in a job you don’t love. If your employer requires you to pay back a signing bonus and six months into the job, you realize you hate it, you could be caught in a tough spot financially. Unless you have money to repay the bonus, you might have to tough it out with your employer a little longer until you can change jobs without any repayment obligation.

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Reasons to Negotiate a Signing Bonus

There are several reasons it can be beneficial to negotiate a signing bonus rather than just accept whatever the employer offers.

For one, a signing bonus can help offset the costs of relocating for a new job. Additionally, a signing bonus can help you maintain your current standard of living while you transition to a new city or state. Finally, a signing bonus can allow you to negotiate for other perks and benefits, such as a higher salary, stock options, or a more generous vacation policy.

When Is a Hiring Bonus Negotiated?

A hiring bonus is typically negotiated during the job offer stage after the employer has extended a job offer to the candidate. You don’t want to get ahead of yourself and ask for a hiring bonus immediately because that could hurt your chances of getting one. You generally want to wait for the hiring manager to start the conversation.

After receiving your official job offer with your projected salary and benefits, you will be able to gauge your potential bonus opportunity; one rule of thumb is that a hiring bonus is about 10% of your annual salary. And if the hiring manager offers you a bonus initially, you might have an advantage in negotiating for a better one.

Tips on How to Ask for a Signing Bonus

If an employer doesn’t offer a sign-on bonus, you don’t have to assume it’s off the table. It’s at least worth it to make the request since the worst that can happen is they say no.

Here are some tips on how to ask for a signing bonus:

1. Know Your Value to the Company

Before asking for more money, either with a bonus or your regular salary, get clear on what value you can bring to the company. In other words, be prepared to sell the company on why you deserve a signing bonus.

2. Choose a Specific Amount

Having a set number in mind when asking for a bonus can make negotiating easier. Do some research to learn what competitor companies are offering new hires with your skill set and experience. Then use those numbers to determine what size bonus it makes sense to ask for.

3. Make Your Case

Signing bonuses are gaining steam in industries such as technology, engineering, and nursing, where there is more competition for the best job candidates. You are also sometimes in a better position to ask for a signing bonus if the company did not meet the salary you requested when interviewing — a signing bonus is an opportunity to recoup some of that difference. Regardless, it never hurts to consider asking for more money.

Just be sure to do your research first. For instance, perhaps discreetly ask your contacts whether the company might be open to offering a signing bonus, and be sure to do some research online or within your network to see how your job offer stacks up.

4. Split the Difference With Your Salary

One way to potentially have your cake and eat it, too, when it comes to signing bonuses is to use your salary to offset it. Specifically, instead of asking for a large bonus, you could ask for a smaller one while also asking for a bump in pay.

An employer may be more open to paying you an additional $2,000 a year to keep you on the payroll, for instance, versus handing out a $20,000 bonus upfront when there’s no guarantee you might stick around after the first year.

5. Get it in Writing

If a signing bonus wasn’t part of your original job offer, and you’ve negotiated for one, ensure you receive an updated contract with the bonus included.

The agreement should spell out the amount of the bonus, how it will be paid (separate check or part of your regular paycheck), and the terms of the bonus. The contract should note how long you must stay employed at the company to retain your bonus (typically one year).

How to Maximize Your Signing Bonus

After receiving a signing bonus, the next question should be: What do I do with the extra money?

There are several ways you can put a signing bonus to work. For example, if you have credit card debt, your best move might be to pay that off. This could be especially helpful if you have credit cards with high-interest rates.

You could also use a sign-on bonus to eliminate some or all of your remaining student loan debt. But if you’d rather save your bonus, you might refinance your loans and use the bonus money to grow your emergency fund. Having three to six months’ worth of living expenses saved up could be helpful in case you lose your job or get hit with an unexpected bill.

Recommended: Don’t know how much to save for unexpected expenses? Try our intuitive emergency fund calculator.

You might also consider longer-term savings goals, such as buying a car or putting money down on a home. Keeping your money in a savings account that earns a high-interest rate can help you grow your money until you’re ready to use it.

Using Your Bonus for Retirement

If you are caught up with your credit card payments and already have an emergency fund, you might consider investing your bonus for the long-term.

This could be a wise financial move considering that a $5,000 signing bonus isn’t as lucrative as negotiating a $2,000 increase in your annual salary. If you can’t negotiate the higher salary, you can at least use your bonus to invest. Investing can be an excellent way to build wealth over time.

For example, you might use part of the money to open a traditional or Roth IRA. This can help you get a head start on saving for retirement and supplement any money you’re already saving in your employer’s 401(k). And you can also enjoy tax advantages by saving your bonus money in these accounts.

💡 Recommended: Should I Put My Bonus Into My 401(k)?

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The Takeaway

There’s a lot to think about when you’re looking for a new job. You want to make sure you find a position you love that will compensate you fairly. So adding another step in the job search process may seem overwhelming. However, asking for and negotiating a signing bonus using the tips above is critical to help you get hired with the bonus you deserve.

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FAQ

What is a signing bonus?

A signing bonus, also known as a hiring bonus or a sign-on bonus, is a bonus given to employees when they are hired. A company will pay a signing bonus to help entice the employee to accept the job offer.

How can you negotiate your signing bonus?

To negotiate a signing bonus, you should be clear about what you are asking for, be reasonable in your request, and have a backup plan if your initial request is not met. It is also important to remember that the company you are negotiating with likely has a budget for signing bonuses, so be mindful of that when making your request.

What is the average signing bonus?

The average signing bonus depends on several factors, including the company, position, and location. In general, the average hiring bonus for managers and executives may range from $10,000 to more than $50,000. For lower-level employees, a signing bonus may be less than $10,000.

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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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