InvestGen Archives | Page 61 of 62

Jan

2022

What Are Binary Options? How to Trade Binary Options

What Is Binary Options Trading? How to Trade Binary Options

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

Binary options are a type of trading option in which investors either end up making up to $100 or they make nothing. Once the investor enters into the options contract, they don’t have to do anything else.

Below, we’ll give you the full rundown about binary options, including what they are, how they work, how to trade binary options, how to make money with binary options, and finally, why it’s so important to understand their ins and outs before making any moves.

What Are Binary Options?

A traditional binary option is a type of options contract, in which investors bet whether the price of the underlying stock will be above or the option’s strike price. In industry terms, they’re either “in the money,” or “out of the money.” Prices, of course, can be hard to predict, which is what makes binary options something of a gamble.

Here’s a fairly straightforward example: You think that the price of Stock X will be $10 or more on January 4, at 4 PM ET. You acquire a binary option contract with that stipulation — the other party on the contract holds the other position, that the price of Stock X, on the agreed upon time and day, will be less than $10.

When the clock strikes 4 pm ET on January 4, Stock X’s price is either $10, or it’s less than $10. Depending on what it is, one person is “victorious.” There’s no middle ground.

International traders may offer other variations of binary options as well.

How Binary Options Work

The inner workings of traditional binary options requires a baseline knowledge of their key elements. That includes a few things:

• The strike price. This is the price at which the option will execute, and when it comes to binary options, is the fulcrum point at which traders must choose a position — above, or below.

• The underlying asset, security, or market. This is the security (stock, commodity, etc.) upon which the options contract is based. Since options are derivatives, they’re tied to an underlying asset.

• The expiration date. The day and time when the contract executes.

• The expiration price. The price of the underlying asset when the contract executes.

These elements (along with a few other minor ones) comprise a basic binary options contract. Now, as far as how the option actually works, it’s pretty simple.

In effect, an options trader buys a binary option contract from another party who has taken the opposite position. That is, if you were to buy a contract with the position that the option’s underlying asset will exceed the strike price on the agreed expiration day and time, the other trader would have the equal and opposite position — they’re betting that the underlying asset’s value will not exceed the strike price when it expires.

When the clock does strike midnight, so to speak, on the expiration date, one of the two positions will have made the correct choice. The value of the underlying asset will either be above or below the strike price. The successful trader then receives a payout.

That payout is either $100, or nothing, regardless of how much higher or lower the value of the security is compared to the strike price. It’s like betting $100 on a World Cup match — your team either wins, in which you get your buddy’s $100, or your team loses, and you have to fork over $100.

Like all options, pricing on binary options reflects the time value of money, and their price, though always less than $100, will fluctuate depending on their current price and the length until expiration.

How Binary Options Trading Works

If you have any experience investing online, it should be pretty easy to get started. But before you do that, of course, you’ll want to make sure that you know what you’re getting into. That means doing some homework about how binary options work, the risks involved, and considering whether binary options trading jives with your overall strategy.

With all of that in mind, actually trading options contracts is almost as simple as trading stocks. You’ll want to find a binary options broker (which are usually specialized brokers such as
Nadex , Pocket Option , and BinaryCent ), open and fund an account, and from there, start executing trades.

Pros and Cons of Binary Options Trading

As with any type of investment or trade, binary options have pros and cons. Here’s a quick look at them:

Binary Options: Pros and Cons

Pros	Cons
Risks are capped	Rewards are capped
Fast and efficient	Highly speculative
Known payouts	Fraud Concerns

Pros of Binary Options

There are some positives to trading binary options.

• Limited risks. Traders can only lose so much if they end with the short straw.

• Efficient process. Binary options trading is usually a fast, efficient, and easy process, and they expire quickly.

• Known payouts. Since binary options are capped at $100, you know in advance what’s at stake. It’s always nice to know where things might land, right?

Cons of Binary Options

There are also some potential disadvantages to trading binary options.

• Limited gains. There’s only so much “winning” a trader can do with a given binary options contract.

• Speculative nature. You may get the feeling that you’re simply placing a bet at the roulette table when trading binary options, so prepare for that.

• Unregulated markets. Some brokerages and exchanges that offer binary options operate outside of the United States, and away from regulators. That could increase the risk of fraud.

3 Potential Binary Options Frauds to Watch For

The risk of fraud is a bit more pronounced in the binary options sphere because many platforms and brokerages that allow traders to trade binary options are unregulated. That means they’re not conducting business under the authority of the Securities and Exchange Commission (SEC) or other regulators.

It’s worth noting that if you trade with a well-regarded broker, your chances of getting scammed are probably pretty slim. Even so, here are a few types of fraud that you may run into when trading binary options.

1. Identity Theft

You’re likely familiar with identity theft, and some traders have lodged complaints with regulators that certain online trading platforms have been collecting personal data (credit card numbers, etc.) and then using it as they will.

How might this play out in the wild? Let’s say you want to do some binary options trading, and after a bit of Googling, find a platform that looks fun and easy to use. You sign up, fork over some personal information, and start trading.

A while later, you might get alerts that your credit has been compromised, or something similar. This could be a sign of identity theft, and it may all stem back to when you gave your personal information to that trading platform.

It’ll require some investigation to get to the culprit (if it’s even possible), but the point is that some sites play fast and loose with personal information. Or, they may not do a good job of securing it.

As a rule, it’s generally a good idea to keep your personal data to yourself, and not upload it to unfamiliar platforms.

2. Trade Manipulation

You can’t win if the game is rigged, right? This is another common complaint lodged against certain brokerages. Specifically, some traders say the exchanges manipulate the software used to execute trades to ensure the trader ends up on the wrong side of the trade.

In effect, this would be a case of the dealer taking a peek at the next card in the deck during a game of Blackjack, seeing that you’re going to hit “21,” and replacing the winning card with another.

3. Refusing to Credit Accounts

Another common complaint is that some platforms accept customer deposits, but then don’t allow them to withdraw the funds. Platforms may cancel withdrawal requests, or ignore them, leaving traders unable to access their money.

If this happens and the brokerage or platform you’ve been dealing with is in a foreign country (or its location is unknown), you might be out of luck. Again, stick to well-known brokerages or platforms, and you’re less likely to run into these types of issues.

Binary Option Fees

The fees for trading differ depending on the platform or brokerage you’re using, so that’s something to keep in mind when deciding where you want to execute trades.

Some platforms make money through commissions, and as such, will incorporate fees into contract spreads. Others simply charge a per-contract fee. Check your preferred platform or brokerage’s pricing guidelines to make sure you’re comfortable with any applicable fees.

The Takeaway

Whether you’re interested in trading binary options or stocks and bonds, it’s important to do your homework first. That means understanding a financial instrument, be it a binary option, or a vanilla stock, before you add it to your portfolio.

An options trading platform like SoFi’s can make it easier to understand what you’re getting into, thanks to its library of educational resources about options. The platform’s intuitive and approachable design allows you to trade options through the mobile app or the web platform, depending on what you prefer.

Trade options with low fees through SoFi.

Photo credit: iStock/dinachi

SoFi Invest®

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

Jan

2022

What Is a Bull Call Spread Option? A Comprehensive Overview

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

A bull call spread, also known as a long call spread or a vertical spread, is an options trading strategy used to capitalize on moderate price increases for a stock. The strategy has two legs and involves writing one option and buying another.

Investors use a bull call spread when they’d like to take advantage of a slightly bullish trend in a stock without taking too much risk. This type of options trading strategy limits both profits and losses, making it a popular strategy for investors with limited capital and a desire for downside protection.

Recommended: A Beginner’s Guide to Options Trading

What Is a Bull Call Spread Position?

To initiate a bull call spread, options traders buy a call option at a lower strike price while selling a call with a higher strike price. Both options have the same expiration date and underlying asset.

This options strategy establishes a net debit or cost and makes money when the underlying stock rises in price. The potential profits hit a limit when the stock price rallies higher than the strike price of the short call, while potential losses hit a limit if the stock price declines beneath the strike price of the long call (the one with a lower strike price).

In a bull call spread, a trader cannot lose more than the net premium plus commissions. A trader’s maximum gain is the difference between the strike prices of the short and long call and net premium plus commissions.

Recommended: How to Sell Options for Premium

Bull Call Spread Example

Let’s say a trader establishes a bull call spread by purchasing a call option for a premium of $10. The call option has a strike price of $50 and expires in April 2022. The trader also sells (or writes) a call option for a premium of $2. The call option has a strike price of $70 and expires in April 2022. The underlying asset of both options is the same and currently trades at $50.

In establishing these options positions, the trader paid $10 (from buying the long call) and gained $2 (from writing the short call). The net amount of these two contracts adds up to a net cost of $8.

Assume that the expiration date of April 2022 has arrived.

With a stock price of $60 or above, the trader’s investment cannot gain more than $3 due to both calls being in-the-money. If the stock price were $65, for example, the investor would gain through the long call by being able to buy shares for $50 and sell at the market price of $65. They would also lose through the short call due, since they’d have to buy shares at the market price of $65 and sell to the option holder at a price of $60.

After net commissions, the trader would realize a net gain of $3.

At a price of $50 or less, the trader’s loss is limited to $7, since both calls would be out-of-the-money. At a stock price of $45, for example: the trader wouldn’t gain from the long call, and would not lose from the short call.

After net commissions, the trader would realize a net loss of $7.

Variables Impacting a Bull Call Spread

As with any options trading strategy, various potential factors can have an effect on how the trade will play out. The ideal market forecast for a bull call spread is “modestly bullish,” or that the underlying asset’s price will gradually increase.

As with all options, the price of the underlying security is only one of several factors that can impact the trade.

Stock Price Change

A bull call spread will increase in value as its underlying stock price rises and decline in value as the stock price falls. This kind of position is referred to as having a “net positive delta.”

Delta estimates how much the price of an option could change as the underlying security price changes. The change in option price is usually less than that of the stock price – the stock price could fall by $1, but the option may only fall by $0.50, for example.

Because a bull call spread contains one short call and one long call, the net delta doesn’t change much when the stock price changes on any given day. In options vocabulary, this is called “near-zero gamma.” Gamma provides an estimation of how much the delta of a position could change when the stock price changes.

Change in Volatility

Volatility refers to how much a stock price fluctuates in percentage terms. Implied volatility (IV) is a factor in options pricing. When volatility rises, opti prices often rise if other factors remain unchanged.

Because a bull call spread consists of one short call and one long call, the price of this position changes little when volatility changes (an exception may be when higher strike prices carry higher volatility). In options vocabulary, this is called having a “near-zero vega.” Vega is an estimation of how much an option price could change with a change in volatility when other factors remain constant.

Time

Time is another important variable that influences the price of an option. As expiration approaches, an option’s total value decreases, a process called time decay.

The sensitivity to time decay in a bull call spread depends on where the stock price is in relation to the strike prices of the spread. If the stock price is near or below the price of the long call (lower strike), then the price of the bull call spread declines (and loses money) as time goes on. This occurs because the long call is closer to the money and loses value faster than the short call.

On the other hand, if the price of the underlying stock is near or above the strike price of the short call (higher strike), then the price of a bull call spread rises (and makes money) as time goes on. This occurs because the short call has become closer to the money in this situation and therefore loses value quicker than the long call.

In the event that the stock price is half-way between both strike prices, time decay will have little impact on the price of a bull call spread. In this scenario, both call options decay at more or less the same rate.

Risk of Early Assignment

Traders holding American-style options can exercise them on any trading day up to the day of expiry. Those who hold short stock options have no control over when they may have to fulfill the obligation of the contract.

The long call in a bull call spread doesn’t have early assignment risk, but the short call does. Calls that are in-the-money and have less time value than the dividends that a stock pays are likely to be assigned early.

This can happen because when the dividend payout is greater than the price of the option, traders would rather hold the stock and receive the dividend. For this reason, early assignment of call options usually happens the day before the ex-dividend date of the underlying stock (the day by which investors must hold the stock in order to receive the dividend payout).

When the stock price of a bull call spread is above the strike price of the short call (the call with a higher strike price), traders must determine the likelihood that their option could be assigned early. If it looks like early assignment is likely, and a short stock position is not desirable, then a trader must take action.

There are two ways to do away with the risk of early assignment. Traders can either:

• Close the entire spread by buying the short call to close and selling the long call to close, or

• Buy to close the short call and leave the long call open.

Pros and Cons of Using a Bull Call Spread

The main advantages of using a bull call spread is that it costs less than buying a single call option and limits potential losses. In the earlier example, the trader would have had to pay a $10 premium if she had only been using one call option. With a bull call spread, she only has to pay a net of $8.

The potential losses are lower as well. If the stock were to fall to zero, our trader would realize a loss of just $8 rather than $10 (if she were using only the long call option).

The biggest drawback of using a bull call spread is that it limits potential gains as well. In the example above, our trader can only realize a maximum gain of $27 because of the short call option position. In the event that the stock price were to soar to $400 or higher, she would still only realize a $27 profit.

The Takeaway

A bull call spread is a two-leg options trading strategy that involves buying a long call and writing a short call. Traders use this strategy to try and capitalize on moderately bullish price momentum while capping both losses and gains.

As with all trades involving options, there are many variables to consider that can alter how the trade plays out. That’s why a platform like SoFi’s that offers educational resources about options can come in handy. Plus, the SoFi options trading platform allows investors to trade options through the mobile app or web platform.

Trade options with low fees through SoFi.

Photo credit: iStock/kupicoo

SoFi Invest®

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

Dec

2021

What Are Actively Managed ETFs?

By AJ Smith | Going to College, invest, Investing, Terminology | Comments Off

Exchange-traded funds or ETFs generally fall into two categories: actively managed and passively managed. Actively managed ETFs, a growing category in the ETF market, are overseen by a portfolio manager.

The goal of an active manager is to outperform a certain market index, which they use as a benchmark for their portfolio. By contrast, passive ETFs simply mirror the performance of a particular market index; they don’t aim to outperform it.

There are two types of actively managed ETFs: transparent and non-transparent. Active non-transparent ETFs are a new option that was introduced in 2019; these funds are sometimes called ANTs.

Keep reading to learn more about the distinction among different ETFs, the pros and cons, and whether investing in actively managed ETFs makes sense for you.

Table of Contents

How Actively Managed ETFs Work
Index ETFs vs Active ETFs
Mutual Funds vs Actively Managed ETFs
Pros and Cons of Actively Managed ETFs
Investing in Actively Managed ETFs
The Takeaway

How Actively Managed ETFs Work

Actively managed ETFs employ a portfolio manager and typically a team of analysts who do market research and make decisions to buy, hold, or sell the assets held within the fund. Most ETFs are designed to reflect a certain market sector or niche. They typically measure their success by using a known index as their benchmark.

For example, a technology ETF would be invested in tech companies and potentially use the Nasdaq composite index as a benchmark to measure its performance.

Despite the fact that passive (or index) ETFs strategies predominate in the industry — index ETFs represent roughly 98% of the ETF market — active strategies are gaining ground. That said, it has been historically quite difficult for active fund managers to beat their benchmarks.

Actively managed transparent and non-transparent ETFs are similar to traditional (i.e. index) ETFs. You can trade them on stock exchanges throughout the day, and investors can buy and sell in amounts as small as a single share. Broad availability and low investment minimums are an advantage that ANTs (and ETFs more generally) boast over many mutual funds.

Actively managed transparent ETFs

When exchange-traded funds first appeared some 20 years ago, only passive ETFs were allowed by the Securities and Exchange Commission (SEC). In 2008, though, the SEC introduced a streamlined approval process that allowed for a type of actively managed ETF called transparent ETFs. These funds were required to disclose their holdings on a daily basis, similar to passive ETFs. Investors would then know exactly which securities were being traded within the fund.

Many active fund managers, however, didn’t want to reveal their trading strategies on a daily basis — which is one reason why there have been fewer actively managed ETFs vs. index ETFs to date.

Non-transparent or semi-transparent ETFs

In 2019, another rule change from the SEC permitted an active ETF structure that would be partially instead of fully transparent. Under this new rule, an active ETF manager would be allowed to either reveal the constituents of their portfolio less often (e.g. quarterly, like actively managed mutual funds), or communicate their holdings more obliquely, by using various accounting methods like proxy securities or weightings.

The SEC ruling opened up a new channel for active managers, and since then the number of actively managed ETFs has grown. According to Barron’s, in just the past two years the number of actively managed ETFs has more than doubled. Nearly 60% of the ETFs launched in 2020 and 2021 were actively managed — more than all the actively managed ETFs established in the past decade.

From an investor’s perspective, the most noticeable difference between these two kinds of actively managed ETFs — transparent vs. non-transparent — would be the frequency with which these funds disclose their holdings. Both types of ETFs trade on exchanges at prices that change constantly during trading days; both rely on a team of managers to select and trade securities.

Index ETFs vs Active ETFs

So what is the difference between index ETFs and actively managed ETFs? It’s essentially the same difference that exists between index mutual funds and actively managed mutual funds.

How do index ETFs work?

Index ETFs, also called passive ETFs, track a specific market index. A market index is a compilation of securities that represent a certain sector of the market; indexes (or indices) are frequently used to gauge the health of certain industries, or as broader economic indicators. There are thousands of indexes that represent the equity markets alone, and Well-known indexes include the S&P 500®, an index of 500 of the biggest U.S. companies by market capitalization, as well as the Russell 2000, an index of small- to mid-cap companies, and many more.

Because index ETFs simply track a market sector via its index, there is no need for an active, hands-on manager. As a result the cost of these funds is typically lower than actively managed ETFs, and many active and passive mutual funds as well.

How do actively managed ETFs work?

Actively managed ETFs, often called active ETFs, rely on a portfolio manager and a team of analysts to invest in companies that also reflect a certain market sector. But these funds are not tied to the securities in any given index. The ETF manager invests in their own selection of securities, but often uses an index as a benchmark to gauge the success of their strategies.

Transparent actively managed ETFs must reveal their holdings each day.

Actively managed non-transparent ETFs, or ANTs, aren’t required to disclose their holdings on a daily basis. This protects asset managers’ strategies from potential “front-runners” — traders or portfolio managers that try to anticipate their trades. By and large, the cost of these funds is lower than transparent ETFs, and also lower than actively managed mutual funds.

Mutual Funds vs Actively Managed ETFs

All mutual funds and exchange-traded funds are examples of pooled investment strategies, where the fund bundles together a portfolio of securities to offer investors greater diversification than they could achieve on their own. In addition to the potential benefits of diversification, which may mitigate some risk factors, the pooled fund concept also creates economies of scale which helps fund managers keep transaction costs low.

That said, the structure or wrapper of mutual funds vs. passive and active ETFs, is quite different.

Fund structure

Although a mutual fund invests directly in securities, ETFs do not. With both active and passive ETFs, the fund creates and redeems shares on an in-kind basis. So when investors buy and sell ETF shares, the portfolio manager gives or receives a basket of securities from an authorized participant, or third party, which generates the ETF shares.

By comparison, mutual fund shares are fixed. You can’t create more of them based on demand. But you can with an ETF, thanks to the “in-kind” creation and redemption of shares. This means that ETF fund flows don’t create the same trading costs that might impact long-term investors in a mutual fund. And fund outflows don’t require the portfolio manager to sell appreciated positions, and thus minimize capital gains distributions to shareholders.

Pricing

The price of mutual fund shares is calculated once a day, at the end of the day, and is based on a fund’s net asset value (NAV). Investors who place a trade must wait until the NAV is calculated because most standard open-end mutual funds can only be bought and sold at their NAV.

ETFs, by contrast, are traded like stocks throughout the day. And because of the way ETF shares are created and redeemed, the NAV can vary, creating a wider or tighter bid-ask spread, depending on volume.

Fees

The expense ratio of mutual funds includes management fees, operational expenses, and 12b-1 fees. These 12b-1 fees are a type of marketing and distribution fee that don’t apply to ETFs, which trade on stock exchanges.

Thus the expense ratio for most ETFs, including actively managed ETFs, can be lower than mutual funds.

Pros and Cons of Actively Managed ETFs

As with any investment vehicle, these funds have their pros and cons.

Pros

Potentially for higher returns

One advantage of an actively managed ETF is the potential for gains that could exceed market returns. While very few investment management teams beat the market, those who do tend to produce outsize gains over a short period.

Greater flexibility and liquidity

Active ETFs could also provide greater flexibility amid market turbulence. When world events rattle financial markets, passive investors can’t do much other than go along for the ride.

A fund with active managers might be able to adjust to changing market conditions, however. Portfolio managers could be able to rebalance investments according to current trends, reducing losses, or even profiting from panics and selloffs.

Like passive ETFs, active funds also trade throughout the day (as opposed to some mutual funds who only have their price adjusted once daily), allowing investors the opportunity to do things like short shares of the fund or buy them on margin.

Cons

Higher expense ratios

One disadvantage of investing in an actively managed ETF is the potentially higher expense ratio. Active funds, whether ETFs or mutual funds, tend to have higher expense ratios. The costs associated with paying a professional or entire team of professionals combined with the fees that result from additional buying/selling of investments typically adds up to higher costs over time.

Each purchase or sale might come with a brokerage fee, especially if the securities are foreign-based. These costs exceed those of passive funds, resulting in higher expense ratios.

Performance factors

While active ETFs aim to provide higher returns, most of them don’t. It’s a widely known fact in the investment world that the majority of actively managed funds (as well as most individual investors) do not outperform the market over the long term.

So, while an active ETF may have the potential for greater returns, the risk of lower returns, or even losses, can also be greater. The chances of choosing an active fund that fails to outperform its benchmark are greater than the odds of choosing one that succeeds.

Bid-ask spread

The bid-ask spread of ETFs can vary, and while it’s more beneficial to invest in an ETF with a tighter bid-ask spread, that depends on market factors and the liquidity and trading volume of the fund. To minimize costs, it’s wise for investors to be aware of the bid-ask spread.

Investing in Actively Managed ETFs

Once an investor opens an account at their chosen brokerage, they can begin buying shares or fractional shares of actively managed ETFs.

Historically, brokerages have required investors to buy a minimum of one share of any security, so the minimum investment will most often be the current price of one share of the ETF plus any commissions and fees (many brokerages eliminated fees for buying or selling shares of domestic stocks and ETFs in 2019).

Some brokerages like SoFi Invest® now offer fractional shares, which allow for investors to purchase quantities of stock smaller than one share. This option may appeal to those looking to get started investing with a small amount of money.

It’s important to note that many ETFs pay dividends, which are payouts from the stocks held in the fund. Investors can choose to have their dividends deposited directly into their accounts as cash or automatically reinvested through a dividend reinvestment program (DRIP).

Investors with a long-term plan in mind might do well to take advantage of a DRIP, as it allows for gains to grow exponentially. For those only looking for income, DRIP might defeat the purpose of holding securities that yield dividends, however.

The Takeaway

Like mutual funds, exchange-traded funds or ETFs are considered pooled investments and generally fall into two categories: actively managed and passively managed. Actively managed ETFs, a growing category in the ETF market, are overseen by a portfolio manager. By contrast, passive ETFs simply mirror the performance of a particular market index; they don’t aim to outperform it.

Although actively managed ETFs make up only about 2% of the ETF universe, owing to regulatory changes in recent years this category has been growing. In fact there are now two types of actively managed ETFs: transparent and non-transparent. These funds offer investors the potential upside of active management, with the lower cost, tax-efficiency, and accessibility associated with ETFs. If you’re curious about actively managed ETFs, you can explore these products by opening an account with SoFi Invest®.

Learn more about investing with SoFi.

SoFi Invest®

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

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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

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

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

SOIN20170

Dec

2021

What Is the Put/Call Ratio?

By Brian Nibley | Growing Wealth, invest, Investing, Terminology | Comments Off

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

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

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

What are Puts and Calls?

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

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

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

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

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

Puts

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

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

Calls

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

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

What Is Put Call Ratio?

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

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

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

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

How to Calculate the Put-Call Ratio

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

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

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

Put-Call Ratio Example

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

Number of puts = 1,400

Number of calls = 1,800

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

How to Interpret the Put-Call Ratio

A specific PCR value can broadly be defined as follows:

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

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

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

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

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

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

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

The Takeaway

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

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

Trade options with low fees through SoFi.

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

Sep

2021

What is MANA (Decentraland Coin)? How to Buy MANA

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

There are layers to cryptocurrency. Services, products, even nascent legal systems can be built on top of and within blockchains. For example, a whole range of cryptocurrency types are built on Ethereum and its blockchain, including something that combines services, products, and legal system — in fact, it’s a whole virtual world.

That’s the idea behind LAND, a non-fungible token (NFT) that’s the basis of the “land” in Decentraland, a virtual game world built on cryptocurrency. To get LAND you need MANA, the cryptocurrency of Decentraland — and quite literally the coin of the realm. Except this realm is governed by…well not by any one person exactly. After all, it’s Decentraland, not Centraland.

What is Decentraland (MANA)?

MANA is the currency that is used in Decentraland . Decentraland is made up of LAND, non-fungible digital plots of virtual space (or land) that make up the game. The developers of Decentraland created a fixed amount of land, encouraging users to “develop” what they have and thereby creating a market for the currency used to transact with it, MANA. Also, because LAND is a type of NFT, any individual parcel can not be replicated or duplicated. LAND first went up for sale in December, 2017 and since January the land has been owned by “participants” in Decentraland.

LAND isn’t the only asset available within the Decentraland universe — one can also buy virtual goods using MANA in the Decentraland Marketplace. These include “wearables” like virtual clothing as well as names that are unique within Decentraland.

MANA Price

As of late September 2021 the price of MANA was around 70 cents.

Like many cryptocurrencies, the value of MANA is quite volatile, with the price changing substantially over time. Anticipating and dealing with the rapid and extreme change in prices is one of the basics of investing in crypto.

According to CoinMarketCap , MANA is the 78th most valuable cryptocurrency with a “market cap” or total value of just under $1.2 billion. Like many cryptocurrencies, MANA shot up in price earlier this year, jumping from 25 cents to just over a dollar in less than a month starting in late February. It fell and rose again, getting as high as $1.57 in early May.

History of Decentraland

The Decentraland white paper — the official founding document of the cryptocurrency that explains its purpose and the technical specifications for it — was published in early 2017, several months before the virtual universe and its MANA cryptocurrency came into being.

The main idea behind Decentraland is that thanks to the proliferation of cell phones and computers, many people are in a kind of “virtual world” most of the time anyway. Decentraland positions itself as a 3D as opposed to 2D interface.

True to the ethos of cryptocurrency that animates everything from how Bitcoin mining works to the skepticism around some crypto regulations, let alone crypto taxes, another animating concept behind Decentraland was that as opposed to other virtual worlds — think Second Life, World of Warcraft, Fortnite — there would be no central authority in charge of it.

The group behind the white paper got started in 2015 and started working on a 2D grid that they referred to as Decentraland’s “Stone Age”. Another prototype was the “Bronze Age” and the public launch would be its “Iron Age”. Soon after the white paper, Decentraland was able to raise over $20 million in an initial coin offering.

A total of 2.8 billion MANA tokens have been in circulation since September 2017. There’s a maximum total supply of about 2.2 billion MANA coins; this, combined with the fixed amount of LAND tokens, is designed to avoid runaway or unpredictable devaluation of the assets within Decentraland, as can be an issue with other “currencies” like airline miles, for example. Instead of devaluation through inflation, there’s actually been some increased valuation of MANA through deflation.

How Does the MANA Coin Work?

The MANA coin works as a token on the Ethereum blockchain. This means that the Decentraland token MANA requires Ethereum and its token, Ether, to be purchased and exchanged.

To do this, the first step is connecting your crypto wallet holding Ether to the Decentralized marketplace . Once you exchange Ether for MANA, you can then use MANA to purchase items within Decentraland, including parcels of land.

How and Where to Buy MANA Crypto

There are a few different ways to buy MANA — both of which will be familiar to anyone who’s looked into investing in most other types of crypto.

Centralized Exchange

On a central exchange, you can swap your fiat currency like U.S. dollars for a crypto coin, which is then stored using a crypto wallet. The following exchanges offer MANA:

• Coinbase

• Gemini

• Binance

• Kraken

• Gate.io

Decentralized Exchange

You could also purchase MANA by purchasing Ether tokens through brokers or exchanges and then swapping for MANA. It’s possible to buy MANA in this way from:

• SoFi Invest

• Kyber

The Takeaway

Decentraland has created an entire virtual world where participants can use the cryptocurrency MANA to buy parcels of LAND, an NFT that represents actual land in that world. One can also use MANA to buy and sell goods and services within Decentraland — like virtual clothing — on the Decentraland marketplace.

For investors looking to trade crypto, SoFi Invest® offers a range of cryptocurrencies including Ethereum, Bitcoin, Litecoin, Cardano, Dogecoin, and more.

Find out how to start trading crypto with SoFi Invest.

Photo credit: iStock/RichVintage

SoFi Invest®

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

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

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

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.

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

SOIN0521217

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