Nov
13
2022
Binary Options Trading vs Gambling: How to Tell Them Apart

Options Trading vs Gambling: How to Tell Them Apart

By | Growing Wealth, invest, Investing | Comments Off on Options Trading vs Gambling: How to Tell Them Apart

Gambling is typically defined as risking something of value on an uncertain event. While common forms of gambling include the lottery, blackjack, or sports betting, the line between gambling and investing can be blurrier than you might think. Like some forms of gambling, binary options and other forms of options involve risking money for a possible reward.

However, there are some important differences between options trading and gambling, and it’s important to know what they are. That can help you decide whether your options trading behavior is investing or gambling.

What Is Options Trading?

Options trading is the trading of contracts that give a purchaser the right — but not always the obligation — to buy or sell a security, like a stock or exchange-traded fund (ETF), at a fixed price within a specific period of time. Since options contracts fluctuate in value, many traders can buy or sell the contracts before expiration for a profit or loss, just like they would trade a stock or bond.

Options are financial derivatives, meaning an option contract’s value is derived from the value of an underlying asset.

There are two main types of options: call and put options. A call option gives the holder the right — but not always the obligation — to buy an underlying asset. A put option gives the holder the right — but not always the obligation — to sell an underlying asset. In general, if you think the underlying asset price will go up, you would buy a call option. But if you believe the underlying asset price will go down, you would buy a put option.

You can buy and sell both call and put options, so no matter how you think the stock might perform, you can find an option strategy that suits you.

There are many strategies for trading options, depending on your outlook on the underlying asset. Options can be a way to hedge risk or increase leverage for a given investment.

💡 Recommended: Options Trading 101: An Introduction to Stock Options

Weekly Options

Most options contracts expire monthly, on the 3rd Friday of each month. However, many underlying securities also have options that expire weekly. These options are referred to as weekly options. Weekly options often have lower liquidity and higher volatility, since there is less time to smooth out the ups and downs of stock movement.

Is Options Trading Gambling?

There are many risks in playing the market, so investors should be cautious with their investments and have a risk mitigation plan in place before making any type of stock or option trade. While trading options is not generally considered gambling in and of itself, there are some risks associated with trading options like there are with gambling.

Are Weekly Options Gambling?

Weekly options — along with day trading — are another form of investing in the stock market that shares some characteristics with gambling. If you find yourself rapidly making trades in weekly options without a system in place, trading from social pressure, or because of excitement, you may be gambling rather than investing.

Mitigating Risk When Trading Options

Risk management is one of the most important parts of a solid investment strategy. If you are trading options, it’s crucial to have a plan for handling risk. One way that you can protect your capital and manage risk when trading options is through the use of protective collars. Protective collars can reduce your risk from larger-than-expected moves but also can reduce your overall gains.

How to Tell if You Are Investing or Gambling

There are no hard-and-fast rules to determine the difference between investing and gambling, but here are a few questions you can ask yourself to help tell the difference.

Trading Due to Social Pressure

If you find yourself trading options due to social pressure, that can signify that your activities are closer to gambling than investing. It can be common — especially in a bull market — for people to talk about investing with friends and co-workers. If you find that you are trading just because all of your friends are doing it, but you’re not in a financial position to bear the risk of trading, that may be a sign that you should reconsider trading stocks or options.

Trading Without a System

A good indicator that you are investing rather than gambling is that you have a system for how and when you trade. An investment system can include things like how to identify stocks to buy, technical and fundamental indicators, or a risk mitigation plan for what to do when a trade moves against you. If you are trading based on hunches and chance, that may indicate that you’re gambling and not investing.

Trading Because It Can Be Exciting

There’s no denying that excitement comes with making money, but if that excitement is the primary reason you’re trading, that is more akin to gambling than actual investing. It can be hard to separate emotions from rational thinking when making stock and option trades, which is another reason to have a trading strategy in place.

Investing With SoFi

There are no hard-and-fast rules that determine whether any particular trading behavior is investing or gambling. Instead, you might think about the reasons why you are investing. If you are trading options for the excitement, to fit in with others, or without a system, that may be a sign that your activity is closer to gambling than actual investing.

But if you understand the strategy and are willing to take the risk, you might have good reason to try options trading. With SoFi’s intuitive and approachable design, investors have the ability to trade options from the web platform or mobile app. And because options trading isn’t always straightforward to understand, there’s a library of educational resources about options offered.

Pay low fees when you start options trading with SoFi.

FAQ

What are the reasons to consider trading options?

For experienced investors, there are a lot of reasons to trade options. One reason can be to hedge an existing investment. Another possible reason is to get additional leverage; you can make (or lose) more money with a smaller investment using options.

What are the reasons to not trade options?

Options trading does carry some risk for investors, which can be one reason not to trade options. Options are also typically more volatile than their underlying stock, and some options strategies run the risk of losing your entire investment or even putting you in a position where you owe more than you have available. If you are just starting your investment journey, it might be a better idea to get practice by making less risky investments to gain experience.

Can you lose money from options trading?

Like nearly all investments, options trading carries the risk of losing money. Some options trading strategies run the risk of losing 100% of your investment. If you buy a call option and the stock closes at expiration below your strike price, your option will expire worthless. If you sell call options, you can even be in a position of losing a potentially unlimited amount.

Photo credit: iStock/fizkes

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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Nov
09
2022

Learning Finance Without a Finance Background

By | Family Finances, Life & Career, money | Comments Off on Learning Finance Without a Finance Background

An advanced financial degree isn’t a requirement for taking control of your finances. In fact, you can learn all you need to know about finance without a financial education background at all — if you’re willing to put in the work (and sometimes spend a little money).

Learning about how the realm of money works can boost your financial literacy and may improve how well you spend, save, and invest your hard-earned cash.

So let’s take a look at some of the easiest ways to learn finance on your own time, including:

•   Reading books and blogs

•   Consuming video and audio content

•   Attending online and in-person classes and seminars

Why Being Sound in Finance Is Important

Even if you don’t want to become an accountant or manage clients’ investment portfolios, learning about finance is an important practice for everyone. Knowing financial basics like how to build a budget, how to pay off debt, how bank accounts work, and even how to do basic investing in stocks and bonds can be key to your financial stability. You’ll likely become a smarter consumer and savvier money manager, not turning a blind eye to your bank and IRA statements.

With more understanding of your finances, you’ll have more control over them. Financial literacy can help you avoid (or get out of) debt, save for important goals like a wedding or vacation, and increase your net worth through investments and home ownership. This can benefit the financial health and well-being of your family, too.

8 Ways to Learn About Finance

Wondering how to learn finance without enrolling in a four-year degree? Here are some of the easiest ways to teach yourself about finance. Dive in, and you may be rewarded with knowing how to manage your own money confidently and find your way to financial freedom:

1. Taking an Online Course

Taking an online course is one of the best ways to learn finance — and you can even do it in sweatpants. LinkedIn offers several finance and accounting courses that are ideal if you are working toward becoming a practicing financial professional, but you can also find free or affordable financial literacy classes for the average person.

Popular options for online financial courses include Coursera, edX, and Udemy. Just be sure to find courses aimed at non-finance pros. Many universities, including MIT and the University of Michigan, offer some courses for free; you’ll just have to pay if you want the certificate of completion.

2. Reading Books

There’s no way around it: If you want to learn about finance at a deeper level, you’ll probably benefit from cracking open a book. Your local library probably offers shelves of books on finance (maybe even digital versions for your e-reader), but you can also order books online or shop at second-hand bookstores.

Goodreads is a great place to research personal finance books. Some of the best core books for learning about finance, especially for beginners, include:

•   Get a Financial Life by Beth Kobliner

•   I Will Teach You to Be Rich by Ramit Sethi

•   Your Money or Your Life by Vicki Robin and Joe Dominguez

•   The Simple Path to Wealth by JL Collins.

Recommended: 10 Personal Finance Basics

3. Listening to Podcasts

If reading isn’t your thing, you can instead try learning finance via podcasts (or audiobooks). Listening to the top money podcasts means you can use your time efficiently: Stream the podcast during your commute to and from work, while exercising or walking the dog, or even while cooking dinner.

Some podcasts are aimed at beginners while others have more targeted audiences, usually those interested in investing.

If you’re a beginner, check out:

•   So Money

•   Financial Grownup

•   Freakonomics

Students may benefit from The College Investor; The Dave Ramsey Show is popular with people working to get out of debt; and investors who want to learn more about the market should queue up What’s News, Jill on Money, or Planet Money.

4. Utilizing YouTube and Other Visual Media

Podcasts are great for on-the-go learning, but if you want to sit and watch financial content so you can take notes, YouTube is a great place to start. Here are some of our top recommendations for financial literacy video content:

•   The Financial Diet or Two Cents for general personal finance content

•   Wealth Hacker for investing and passive income advice

•   Bigger Pockets for real estate investing.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.50% APY on your cash!

5. Hiring a Financial Professional

While learning about how to use a checking and savings account is important, more complex topics like debt consolidation or investing in the stock market may be too intimidating for some.

If you find yourself too busy to learn or just struggling with the concepts, consider hiring a financial professional. Some financial professionals offer specific services like tax preparation and wealth management; you can also hire a financial consultant who can offer advice on all areas of your finances, from paying down student loan debt to building an emergency savings to refinancing a mortgage. This process, beyond providing guidance, can also help you build knowledge about the areas of finance about which you are most curious.

Recommended: What Is Financial Therapy?

6. Taking an In-Person Class or Seminar

How to learn about finance if you find yourself easily distracted during online courses? In-person classes at a local college or even seminars and workshops in your area could be a good option.

You can check out nearby universities and community colleges to see what classes they offer. If you have hired a financial advisor, they might be able to recommend upcoming seminars in your area. Finally, your local library may also host workshops.

7. Subscribing to Business and Investing Publications

Beginners can likely get by on podcasts and YouTube content, but once you advance to more complex investing concepts, it’s a good idea to subscribe to business and investing publications, whether in print or digitally. Popular financial magazines include Barron’s, The Economist, Kiplinger’s, Forbes, and Money. The Wall Street Journal is a popular resource for monitoring investments.

Many investment apps now offer access to news about the market. If you are using an app rather than a traditional investment firm, see what information they offer access to before signing up for any subscriptions.

Recommended: 5 Ways to Achieve Financial Security

8. Follow a Finance Blog

If a newspaper delivered on your doorstep feels too archaic, you can instead use finance blogs to learn basic topics and stay on top of changing news. One good place to start: See what your bank or investment management firm offers. Many have top-notch blogs covering an array of topics.

You may also find blogs that suit your particular needs, whether that’s understanding annuities, managing finances for a single-paycheck family, or estate planning. If you read a book on money that you like or listen to a podcast that you find valuable in one of your key areas of interest, search for more intel on the expert involved. They may well have a finance blog that can deepen your knowledge.

Managing Finances With SoFi

A key player in your financial knowledge and well-being is the bank you choose as your partner. SoFi can be a smart choice when you’re shopping for a new bank account. Our Checking and Savings lets you conveniently spend and save in one place, while sharing a suite of tools to help you monitor and manage your money. What’s more, when you open an account with direct deposit, you’ll earn a competitive APY and pay no account fees, which can help your money grow faster. Qualifying accounts can also access their paychecks up to two days early.

Start on your path to financial freedom with SoFi.

FAQ

Is finance easy to learn?

Finance can be easy to learn if you are willing to seek out informative content from books, podcasts, videos, blogs, and even professionals and then invest some time soaking up knowledge. Learning about finance requires dedication and sometimes a little investment — but knowing how to manage your money can pay off in the long run.

What should I learn first about finance?

Some of the most fundamental personal finance concepts include building a budget, opening a bank account, and understanding your credit score. Once you have mastered those more basic concepts, you can then focus on things like retirement planning, debt consolidation, and real-estate and stock-market investing.

Can I make finance a career without a degree?

Having a degree of some kind (ideally in finance but even in mathematics or other allied areas) is very helpful for building a career in finance. Completing internships and/or industry courses outside of a college setting can put you on the right path, though you may still need a certification for a specific job in finance. For example, Certified Public Accountants and Certified Financial Advisors have completed specific programs to earn their credentials. That said, self-taught individuals might be able to build careers in creating personal-finance educational content, like podcasts and blogs.

Photo credit: iStock/fizkes

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.

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.

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Nov
01
2022
Credit Cards Are for Spending, Not Saving, Right? Not Necessarily.

Credit Cards Are for Spending, Not Saving, Right? Not Necessarily.

By | invest, Investing, Preparing for Retirement | Comments Off on Credit Cards Are for Spending, Not Saving, Right? Not Necessarily.

Whether you’re new to saving for retirement or an old pro, you can use your credit card for funding your IRA or other retirement accounts.

How exactly does this work?

5 Steps for Using a Credit Card To Save for Retirement

Step 1: Learning About IRAs & Other Retirement Funds

If you don’t already have a retirement account, it’s a good idea to familiarize yourself with the different types that are available. You may want to consider opening an IRA, stocks, or a mutual fund — a package of stocks and bonds that includes many different companies — to help offset risk.

💡 Recommended: Understanding the Different Types of Retirement Plans

Step 2: Finding the Right Credit Card

Once you’ve figured out how and where you want to invest, you can begin your search to find the right credit card; specifically, a cash-back credit card. These cards offer a percentage back (most offer about 2%) for every dollar you spend. But instead of putting that money directly into your regular bank account or using “points” (which usually don’t have as much value) to shop or get discounts, you can flip that money into your shiny new retirement fund, where it will earn compound interest.

💡 Recommended: How to Choose a Credit Card That Fits You

Step 3: Putting Your Cash-back Rewards To Work

As with any credit card, it’s important to keep your spending in check so that you can pay it off every month. After all, paying interest pretty much negates the whole cash-back thing. But it can be a good idea to put big purchases on your card (as long as you can pay it off that month).

So if you need a new computer for work, you can buy it with your credit card. Bonus: Your card may offer insurance on such a purchase. So it’s a good idea to read the fine print and find out.

Same goes for paying rent with your credit card, as long as your landlord doesn’t charge a fee for credit card payments. Your monthly bills too. The average American pays about $8,600 a year in bills (not including rent or mortgage). If you have to pay for these services anyway, why not earn a few hundred dollars a year by paying them with your credit card?

Again, in order to really benefit from these cash-back rewards, it’s important to pay off your credit card bill every month. Paying interest will just eat into your rewards.

💡 Recommended: Guide to Cash-Back Rewards

Step 4: Mixing & Matching Your Cash-back Cards

Some cards give you a flat cash-back rate. Others offer tiered rewards for specific purchases like groceries, gas, or dining out. If you want to get the most cash-back rewards possible, it’s a smart idea to look at your spending. Figure out what areas you spend the most on each month, and choose a card (or multiple cards) that offer the best rewards for those categories.

Step 5: Automating Your Payments & Investments

To make sure you don’t give in to temptation, you may want to consider automating the cash-back payments to your retirement fund. While you’re at it, you can automate your monthly bill payments so you don’t have to lift a finger to earn those cash-back rewards. You can do the same with your monthly credit card payment to ensure you always pay it on time.

💡 Recommended: Guide to Investing With Credit Card Rewards

The Takeaway

The keys to saving successfully for retirement are to start early, pay off debt quickly, and be consistent with investments. That’s especially true if you want to retire early. And while credit cards can be dangerous when used carelessly, they can obviously offer a great advantage for people who can pay off their credit card bills every month.

If you want to get started on saving for your retirement with a credit card, you can check out SoFi’s very own credit card, which offers 2% cash-back rewards points. Pair it with a SoFi IRA, and you’re in business.

FAQ

How do credit cards help save money?

Credit card companies are essentially providing you with free loans, but only if these two things are true: First, you pay off your bills in full every month to avoid accruing interest. And second, you’re paying no annual fee. In that case, you can say that credit cards are saving you money.

Can I fund my IRA with a credit card?

Yes, you can actually fund your IRA with a credit card. The way it works: Investment companies like Schwab, Fidelity, and Morgan Stanley partner with credit cards offering cash back. The cash back you earn on those cards can be directly deposited into your IRA with that company. You’d have to spend $300,000 to earn $6,000 in cash back — the 2022 IRA limit for people under 50 — but it’s possible.

How do I contribute to an IRA?

The first step is to open an IRA account, either through your employer, a bank, traditional investment company, or online financial institution. Then make one or more deposits up to the annual limit. Deposits can come directly from your paycheck, an online transfer, or even a cash-back credit card.

Photo credit: iStock/RgStudio




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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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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Oct
30
2022
What Are Bull Put Spreads & How Do They Work?

Bull Put Spread: How This Options Strategy Works

By | Going to College, invest, Investing, Terminology | Comments Off on Bull Put Spread: How This Options Strategy Works

A bull put spread is an options trading strategy that someone may use when they have a moderately bullish view of an asset, meaning they think the price will increase slightly. The strategy allows you to profit from an increase in an underlying asset’s price while limiting losses if an asset’s price declines.

Bull put spreads and options trading are not for everyone, but learning the ins and outs of this strategy may help your financial portfolio.

What Is a Bull Put Spread?

A bull put spread is an options trading strategy that involves buying a put option and selling another put option on the same underlying asset with the same expiration date, but at different strike prices. The trade is considered a neutral-to-bullish strategy, since it’s designed so the maximum benefit occurs when an asset’s price moderately increases.

To execute a bull put spread, a trader will simultaneously sell a put option at a specific strike price (the short leg of the trade) and buy a put option with a lower strike price (the long leg of the trade).

The trader receives a premium for selling the option with a higher strike price but pays a premium for buying the put option with a lower strike price. The premium paid for the long leg put option will always be less than the short leg since the lower strike put is further out of the money. The difference between the premium received and the premium paid is the maximum potential profit in the trade.

The goal of the bull put spread strategy is to finish the trade with the premium earned by selling the put (sometimes referred to as writing a put option) and lose no more than the premium paid for the long put.

A bull put spread options trading strategy is sometimes called a short put spread or a credit put spread.

💡 Recommended: Options Trading 101: An Introduction to Stock Options

How a Bull Put Spread Works

Bull put spreads focus on put options, which are options contracts that give the buyer the right – but not always the obligation – to sell a security at a given price (the strike price) during a set period of time.

The bull put spread strategy earns the highest profit in situations where the underlying stock trades at or above the strike price of the short put option – the put option sold with the higher strike price – upon expiration. This strategy, therefore, works best for assets that the traders of a bull put spread believe will trade slightly upwards.

The strategy provides a way to profit from a stock’s rising price without having to hold shares. An options strategy like this also caps downside risk because the maximum loss is the difference between the strike prices of the two puts minus the net premium received.

Even though the risk is limited, there can still be times when it makes sense to close out the trade.

💡 Recommended: How to Trade Options: An In-Depth Guide for Beginners

Max Profit and Risk

A bull put spread is meant to profit from a rising stock price, time decay, or both. This strategy caps both potential profit and loss, meaning its risk is limited.

The profit of a bull put spread is capped at the premium you receive by selling the short leg of the trade, minus the premium you spent to buy the long leg put option. You achieve this maximum profit if the underlying asset finishes at any price above the strike price of the short leg of the trade.

Maximum profit = premium received for selling put option – premium paid for buying put option

The maximum losses (i.e., the risk) of a bull put spread is the difference between the strike price of the short put option and the strike price of the long put option, minus the net premium you received.

Maximum loss = strike price of short put – strike price of long put – net premium received

The breakeven point of a bull put spread is the price the underlying asset trades at expiration so that the trader will come away even. The breakeven point will equal the difference between the net premiums you receive up front and the strike price of the short put option. At the breakeven, the trader neither makes nor loses money, not including commissions and fees.

Breakeven point = strike price of short put – net premium received

Bull Put Spread Example

Alice would like to use a bull put spread for XYZ stock since she thinks the price will slowly go up a month from now. XYZ is trading at $150 per share. Alice sells a put option for a premium of $3 with a strike price of $150. At the same time, she buys a put option with a premium of $1 and a strike price is $140. Both put options have the same expiration date in a month.

Alice will collect the difference between the two premiums, which is $2 ($3 – $1). Since each option contract is usually for 100 shares of stock, she’d collect a $200 premium when opening the bull put spread.

Maximum Profit

As long as XYZ stock trades at or above $150 at expiration, both puts will expire worthless, and she will keep the $200 premium she received at the start of the trade, minus commissions and fees.

Maximum profit = $3 – $1 = $2 x 100 shares = $200

Maximum Loss

Alice will experience the maximum loss if XYZ stock trades below $140 at expiration, the strike price of the long leg of the trade. In this scenario, Alice will lose $800, plus commissions and fees.

Maximum loss = $150 – $140 – ($3 – $1) = $8 x 100 shares = $800

Breakeven

If XYZ stock trades at $148 at expiration, Alice will lose $200 from the short leg of the trade with the $150 stock price. However, this will be balanced out by the initial $200 premium she received when opening the positioning. She neither makes nor loses money in this scenario, not including commissions and fees.

Breakeven point = $150 – ($3 – $1) = $148

Bull Put Spread Exit Strategy

Often, trades don’t go as planned. If they did, trading would be easy, and everyone would succeed. What sets successful traders apart from the rest of the pack is the ability to make winning trades, mitigate risk, and limit losses.

Having an exit strategy can help by providing a plan to cut losses at a predetermined point, rather than being caught off guard or simply “waiting” and “hoping” that the market turns around in your favor.

An exit strategy may be a little complicated for a bull put spread. Before the expiration date, you may want to exit the trade so you don’t have to buy an asset you may be obligated to purchase because you sold a put option. You may also decide to exit the position if the underlying asset price is falling and you want to limit your losses rather than take the maximum loss.

To close out a bull put spread entirely would require that the trader buy the short put contract to close and sell the long put option to close.

💡 Recommended: Buy to Open vs Buy to Close

Pros and Cons of Bull Put Spreads

The following are some of the advantages and disadvantages of bull put spreads:

Bull Put Spread Pros

 Bull Put Spread Cons
Protection from downside risk; the maximum loss is known at the start of the trade The gains from the strategy will be limited and may be lower than if the trader bought the underlying asset outright
The potential to profit from a modest decline in the price of the underlying asset price Maximum loss is usually more substantial than the maximum gain
You can tailor the strategy based on your risk profile Difficult trading strategy for novice investors

Impacts of Variables

Several variables impact options prices, and options trading terminology describes how these variables might change in a given position.

Because a bull put spread consists of a short put and a long put, the way specific changes in different variables impact the position can be different than other options positions. Here’s a brief summary.

1. Stock Price Change

A bull put spread does well when the underlying security price rises, making it a bullish strategy. When the price falls, the spread performs poorly. This is known as a position with a “net positive delta.” Delta is an options measurement that refers to how much the price of an option will change as the underlying security price changes. The ratio of a stock’s price change to an option’s price change is not usually one-to-one.

Because a bull put spread is made up of one long put and one short put, the delta often won’t change much as the stock price changes if the time to expiration hasn’t changed. This is known as a “near-zero gamma” trade. Gamma is an estimation of how much the delta of a position will change as the underlying stock price changes.

2. Changes in Volatility

Volatility refers to how much the price of a stock might fluctuate in percentage terms. Implied volatility (IV) is a variable in options prices. Higher volatility usually means higher options prices, assuming other factors stay the same. But a bull put spread changes very little when volatility changes, and everything else remains equal.

This is known as a “near-zero vega” position. Vega measures how much an option price will change when volatility changes, but other factors are unmoved.

3. Time

Time decay refers to the fact that the value of an option declines as expiration draws near. The relationship of the stock price to the strike prices of the two put options will determine how time decay impacts the price of a bull put spread.

If the price of the underlying stock is near or above the strike price of the short put (the option with a higher strike price), then the price of the bull put spread declines (and makes money) as time goes on. This occurs because the short put is closest to being in the money and falls victim to time decay more rapidly than the long put.

But if the stock price is near or below the long put’s strike price (the option with a lower strike price), then the price of the bull spread will increase (and lose money) as time goes on. This occurs because the long put is closer to being in the money and will suffer the effects of time decay faster than the short put.

In cases where the underlying asset’s price is squarely in-between both strike prices, time decay barely affects the price of a bull put spread, as both the long and short puts will suffer time decay at more or less the same rate.

4. Early assignment

American-style options can be exercised at any time before expiration. Writers of a short options position can’t control when they might be required to fulfill the obligation of the contract. For this reason, the risk of early assignment (i.e., the risk of being required to buy the underlying asset per the option contract) must be considered when entering into short positions using options.

In a bull put spread, only the short put has early assignment risk. Early assignment of options usually has to do with dividends, and sometimes short puts can be assigned on the underlying stock’s ex-dividend date (the date someone has to start holding a stock if they want to receive the next dividend payment).

In the money puts with time value that doesn’t match the dividends of the underlying stock are likely to be assigned, as traders could earn more from the dividends they receive as a result of holding the shares than they would from the premium of the option.

For this reason, if the underlying stock price is below the short put’s strike price in a bull put spread, traders may want to contemplate the risk of early assignment. In cases where early assignment seems likely, using an exit strategy of some kind could be appropriate.

Start Investing Today With SoFi

Trading options isn’t easy and can involve significant risk. Many variables are involved in options trading, some of which have been notorious for catching newbie traders by surprise. While we’ve answered the fundamental question “what is a bull put spread” here, new investors looking to implement this strategy will still have a lot to learn.

For investors ready to dive into bull spreads and other options trading strategies, SoFi’s options trading platform is a good place to start, thanks to its intuitive design. Investors can trade options from the mobile app or web platform. Plus, they can check out educational resources about options if any questions arise.

Trade options with low fees through SoFi.

Photo credit: iStock/kate_sept2004

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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Oct
14
2022

5 Common Recession Fears and How to Cope

By | Growing Wealth, invest, Investing, Life & Career | Comments Off on 5 Common Recession Fears and How to Cope

The onset of the 2022 recession has affected many Americans, sparking fears about possible job loss, paying for basic necessities, and seeing their investments suffer. These worries are normal, and fortunately there are ways to cope in the short-term.

The first step is overcoming the fear itself. While it’s normal to be worried about a recession — how long it might last, how dire the consequences might be — the truth is that the financial world is cyclical. This recession will end, as others have ended, and a bull market will follow.

💡 Recommended: SoFi’s Recession Help Guide

5 Common Recession Fears

In many ways, the best mantra during a recession might be the saying: “Keep Calm and Carry On.” That’s because when it comes to making financial decisions, emotions are rarely your friend. As a vast and growing body of financial behavioral research suggests, when people make impulsive choices about money, things rarely turn out well.

1. What If This Recession Lasts for Many Years?

While it’s possible that a recession could last for a long time, it helps to have some historical context.

How long do recessions last? Since the end of World War II, there have been 11 recessionary periods — including the short, sharp decline in early 2020 sparked by the pandemic. While that one only lasted a couple of months, U.S. recessions have averaged about 11 months in duration, according to data from the National Bureau of Economic Research (NBER).

There have been outliers: Notably, the Great Recession of 2008 lasted for 18 months; and the Great Depression of the 1930s lasted about four years, although the repercussions extended that financial crisis until 1938.

That said, bull markets tend to last longer than bear markets. Equally important to remember is that every financial crisis has also informed new monetary policy and new fiscal tools that help protect consumers and investors.

2. What If Unemployment Soars?

It’s true that the potential for job loss is higher during a recession, when companies may be forced to lay off some of their workforce. While this is a common occurrence — as demand for goods lessens and output drops, companies typically need to cut expenses — there is a potential upside.

NBER data shows that unemployment numbers lag a bit; joblessness typically rises to its highest level at certain points during the recession, and recovers to prior levels after the recession has ended. This means that some workers may have a window of opportunity to either look for new jobs now, or shore up their savings (in case of a layoff).

Be open and flexible to changes in responsibility. Lower your expectations around raises and bonuses. Try to bring value to the company, by going above and beyond, or by learning a new skill.

Make connections with your coworkers and network with people in your industry. It might be helpful to spruce up your resume too. That way, should you be laid off you can hit the ground running.

Take advantage of the shift to the gig economy, e.g. becoming your own boss, and relying on various income streams rather than a single full-time job. Not only are part-time positions becoming more common, it’s possible that your employer may be open to a gig arrangement, rather than completely letting go of a qualified employee.

A common rule of thumb is to keep three to six months’ worth of income in an emergency fund.

Recommended: Discover your ideal emergency fund amount with our emergency fund calculator.

3. What If You Lose Your Savings?

Emergency savings are important in any circumstances, as life is full of curveballs and unpredictable expenses. To that end, it’s smart to keep at least one month’s worth of expenses in a rainy day fund — three to six months is better, of course, but always have a cushion for life’s inevitable emergencies.

A recession, especially one where inflation is playing a big role as it is in 2022, can hit your savings hard. But it’s better to spend down your emergency fund than to panic and make financial moves you’ll later regret. At all costs, try to avoid the following:

•   Covering expenses with your credit card, and incurring debt that you have to pay off at high interest rates.

•   Taking out a home equity loan. While the interest rates may be lower on these loans, it’s still an additional monthly expense. And if your home value dips, you could put yourself in a precarious position when you need to sell.

•   Taking a loan from your 401(k). While borrowing from a 401(k) has its pros and cons, and a loan is usually better than taking an early withdrawal, there are still a number of risks. The biggest being: If you do get laid off, the entire loan could be due within a 12-month period.

In short: Build up your savings while you can, especially if you’re concerned about losing your job. And don’t be afraid to spend some or even all of that emergency money if things go south. That’s what the money is there for.

4. What If You Can’t Cover All Your Bills?

A recession can mean that money is tight, and that your bills may go up. If a job loss is looming, you may have real fears of being able to cover your expenses. Fortunately, one area where you have some control is how much money you spend.

The first step in lowering your expenses is to get to know them, especially the bills and subscriptions you pay automatically (or are on an auto-renewal system).

Take a look at your current spending habits by examining your bank statements (you can usually get a transaction history right on your phone). You don’t have to read through months of expenditures. What you spend in one month is probably similar to what you spend any other month (despite some seasonal differences).

As you examine what, where, and why you spend, note that some expenses are easier to control than others. Here are some common areas where it’s often possible to make cutbacks:

•   Food (eating out, snacks) and groceries are generally the biggest household expenses, after mortgage or rent — but they’re also easy to rein in.

•   Utilities (e.g. use less gas, oil, electricity).

•   Clothing and other “nice-to-haves” (limit spending to necessities).

•   Subscriptions (you’re likely paying for several streaming or music services you rarely use; it’s easy to forget what you signed up for a year ago).

•   Examine your insurances. Sometimes you can lower premiums by switching providers or calling and asking for a discount.

Once you trim your expenses, you may realize there are other ways you can cut back that aren’t on the above list — but not everyone has these options. You could change your commute to save money. You could take on a roommate who can split expenses.

5. What If Your Investments Lose Value?

It’s likely that your retirement account(s) and investment portfolio could lose value when the markets are down, or fluctuating. As discussed above, you don’t want to react strongly and pull your money out of the market impulsively. That’s when you lock in losses that can be hard to recover from.

If you have a financial advisor, or you’re thinking of working with one, you may want to discuss sooner rather than later how well-diversified your portfolio is. Diversification can help protect against volatility in some cases. But portfolio diversification is ideally something you do before a recession sets in.

A better approach during a recession is to stay the course. Continue to invest; continue to save for retirement. Rather than impulsively change your financial behavior, intentionally keep doing what you’ve always done. One way to do this is by using a robo advisor, which incorporates highly sophisticated technology that uses automation to help you stick to your own plan. You’ll likely find yourself in better shape when the recession ebbs and the markets rise once more.

The Takeaway

It’s natural to feel worried about the onset of a recession. Most people have fears about how long a recession could last and what the possible consequences could be in terms of their jobs, their bills, their long-term savings and even retirement.

That said, there are a number of ways to cope. While headlines may sound dire, the reality of a recession is that it may not last as long as you fear. Also, it can take some time for ordinary people to feel the impact. That can give you time to be proactive, including giving your job options (and spending habits) a careful review, beefing up your emergency savings, and reminding yourself to stay calm above all.

Making impulsive decisions — like cashing out your 401(k) or using your credit card to cover bills — may not be necessary, and will almost certainly leave you in worse shape.

Even though it feels counterintuitive, during a recession your best move is often to stay the course, which is easy when you open a robo advisor account with SoFi Invest. You can set investment goals, and SoFi’s highly regarded automated platform helps you establish a diversified portfolio with automatic rebalancing. There are no SoFi management fees, and you can get started with as little as $1.

See why SoFi is this year’s top-ranked robo advisor.

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.

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

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