InvestY Archives | Page 92 of 97

Oct

2022

Getting a High-Limit Credit Card: How It Works

Having a high credit limit can be a good idea for a variety of reasons. First of all, if your credit limit is too low, it may make it hard to use your card for your regular monthly expenses. Having a high credit limit can positively impact your credit score as well. You’ll just make sure that having a credit card with a high limit doesn’t influence you to spend more than your budget allows.

Before you move forward with securing a high-limit credit card, you’ll want to know your options for how to get a high-limit credit card. If you’re worried about securing the highest credit card limit possible, there are a couple factors you’ll want to take into account, too.

What Is a High-Limit Credit Card?

For reference, the average credit card limit for Americans was $30,365 in 2020, according to data from the credit bureau Experian. So if you have a credit card with a limit above that average, you may consider that to be a high-limit credit card.

In general, however, there isn’t a specific dollar amount that makes a credit card a “high-limit” credit card. What’s considered a high credit card spending limit for some people may not be a high limit for others with a different financial situation. Keep in mind that higher credit limits generally require excellent credit to qualify for, meaning a score of 800 and up.

How Can a Higher Credit Limit Help You?

There are two ways that having a credit card with a higher credit limit can help your financial situation.

First, increasing your credit card limit can make it easier to manage your monthly finances. If your credit limit is at or below the amount of your average monthly expenses, you may find it difficult to manage your budget without having to make additional credit card payments.

Second, having a higher credit limit will decrease your credit utilization rate, which can have a positive impact on your credit score. Your credit utilization rate looks at how much of your available credit you’re using, and the less you’re using, the better it is for your credit score. If you increase your credit limit but don’t add to your current balances, you’ll end up using a lower percentage of your available limit.

Factors to Consider

There are a couple factors you’ll want to consider before attempting to get a high-limit credit card.

The Timing

First, make sure that the timing is right for you and your specific financial situation. Your credit card limit is determined by the financial information you provide on your credit card application, especially your income. If you’re in a situation where your income is about to increase (either due to an upcoming bonus, a change in job, or something else), you may want to wait until after your income increases before trying to get a high-limit credit card.

Your Credit Report

Credit card issuers also look at your credit report when choosing whether to issue you a credit card and how much of a credit line to extend. Make sure that you check your credit report before applying and ensure that there are no errors or discrepancies. If there are any errors, you can contact the credit bureaus to have them fixed.

Options for Getting a High-Limit Credit Card

If you think you’re well-positioned to ask for an increase, here are your potential options for how to get a credit card with a high limit — or at least a higher limit than what you currently have.

Contact Your Card Issuer

If you already have a credit card that you enjoy using and want to keep, you can try to contact your card issuer to request a higher limit. You may be able to do so by calling the number listed on the back of your credit card or sending a message online. Explain the credit limit you’re looking for and why you feel that it’s justified.

This approach may be a good idea if your financial situation has improved since you opened the card. This could be due to an increase in income, a new job, or paying down other debt.

Look Out for Automatic Increases

Many card issuers will regularly review the accounts of their cardholders. In some cases, they’ll automatically and proactively increase your credit limit if you’ve been using your credit card responsibly. This is especially common for cards with lower initial limits and cards designed for those with a less robust credit history.

If your issuer has not already increased your credit limit, you can contact them and ask for a higher limit.

Apply for a New Card

Another option is applying for a new card. If you’re not happy with your current credit card or if your current card issuer will not increase your credit limit, getting a new credit card can be another option.

Before applying, make sure that you have checked your credit report for any inaccuracies and paid down outstanding debt if possible. That will help improve your odds of getting a higher credit limit.

How High Should Your Credit Limit Be?

There is not a set amount for how high your credit limit should be. Instead, it depends on your specific financial situation.

Aim for a credit limit that is at least twice the average amount you spend on your credit card each month. That will help keep your credit utilization percentage low. And remember that the absolute best thing you can do to help your credit score is to pay your statement off in full, each and every month.

Recommended: What is the Average Credit Card Limit

Choosing the Best High-Limit Credit Card

Many premium and luxury credit cards will offer relatively high credit limits, especially if you have a high credit score and a high income. So instead of looking for the credit card that gives you the absolute highest limit, you might instead consider the overall perks and benefits of each different card. When evaluating different cards, some things to look out for include:

• Rewards: Take a look at whether a credit card offers rewards and if so, in what form. Perhaps you’d prefer to earn cash-back rewards for the simplicity over credit card points. From there, compare to see which card offers a more generous rewards rate and has better redemption options.

• Annual fees: You’ll also want to look at whether a card charges an annual rate. If it does, do the math to see if the rewards you’ll earn can offset this cost.

• Customer service: If you were ever to have an issue with your credit card, it’s important to have a reliable customer support team to turn to. When weighing which card to get, take into account the reputation of their customer support and general customer satisfaction.

• Luxury or travel perks: Beyond rewards, many credit cards also offer an array of other benefits. This can include rental car insurance, travel insurance, discounts for Global Entry or TSA PreCheck, airport lounge access, hotel stays, and more.

• Sign-up bonuses: A generous welcome bonus can also help you decide between two otherwise comparable cards. Some credit cards offer bonus cash-back rewards or points when cardholders spend a certain amount within a specific period of time after opening the card.

Recommended: What is a Charge Card

Alternatives to High-Limit Credit Cards

If you’re not able to qualify for a high-limit credit card or simply aren’t sure it’s the right route for you, there are other options to explore instead.

Recommended: How to Avoid Interest On a Credit Card

Home Equity Loan or Home Equity Line of Credit

Depending on what you’re using your credit card for and why you want a high credit limit, you might consider a home equity loan or home equity line of credit (HELOC). Both a home equity loan and a HELOC allow you to capture some of the equity in your home. You can then use that money for other expenses.

Business Line of Credit

If you have a business that’s looking for extra flexibility with accounts receivable and ongoing payments, you might consider a business line of credit. While there are business credit cards that offer high limits, you might be better off with an actual business line of credit. Business lines of credit often base their credit limits based on the monthly or annual gross or net income of the business.

Personal Loan

Another option to consider might be a personal loan, especially if you have good credit and/or a relatively high income. Qualifying for a personal loan can give you money upfront in exchange for regular monthly payments. You can then use that money for whatever projects or expenses make sense for your situation.

Recommended: When Are Credit Card Payments Due

The Takeaway

There can be advantages to having a high-limit credit card, like added flexibility in managing your monthly finances as well as the possibility of improving your credit score. Just make sure that you remain focused and diligent in paying off your statement in full, each and every month. You don’t want a higher credit limit on your credit card to encourage you to spend more.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Can you get an unlimited credit limit?

Unless you are ultra-wealthy or have a very special relationship with your credit card issuer, you’re unlikely to get a credit card with no limit at all. There are, however, some credit cards (like the American Express Platinum card) that have no preset credit card spending limit. That means that instead of a standard credit limit, your limit is flexible and may go up and down as your spending habits change.

Should I get a credit card with a higher limit?

Before deciding to get a credit card with a higher limit, you should ask yourself why you want to increase your limit. Is it to better manage your monthly finances? Are you trying to lower your credit card utilization? These can both be good reasons to increase your credit limit. But if you’re just trying to increase it to use as a status symbol or “just because,” you may want to think twice before doing it.

What is the highest credit card limit?

There isn’t a definitive and published answer for the highest possible credit limit. Credit limits are issued to individuals and businesses based on their credit history and income. It’s not unreasonable to think that there are credit cards with a six- or even seven-figure limit. As a data point, the average credit card limit for Americans was $30,365 in 2020.

How can I get a higher credit limit?

The best way to see if you qualify for a higher credit limit is to contact your issuer. You can call the number on the back of your card or reach out via your online account. If you’ve been regularly using your card and paying your bill in full, your issuer may agree to increase your limit. If your income or other financial situation has changed, that’s another reason to contact your issuer and see if you can get a higher credit limit.

Photo credit: iStock/Prostock-Studio

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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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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Sep

2022

Crypto Credit Card vs Crypto Debit Card Explained

Crypto Credit Card vs. Crypto Debit Card: Key Differences

By Dan Miller | Credit, credit card, Growing Wealth | Comments Off

Cryptocurrency — sometimes referred to as blockchain technology — is a hybrid between a currency and an investment. There are many different types of cryptocurrencies, with Bitcoin being the most well-known. As the popularity of cryptocurrency continues to increase, banks and other issuers are coming out with crypto credit cards and crypto debit cards.

While these two types of cards both allow cardholders to earn cryptocurrency, there are some key differences between a crypto credit card vs. crypto debit card. It’s important to understand how they differ so you can make the right choice for your financial situation.

Recommended: What is a Charge Card

What Is a Crypto Credit Card?

The term crypto credit card usually refers to a type of credit card that allows cardholders to earn cryptocurrency as a reward. Cryptocurrencies are often more volatile than other types of rewards you can earn, so make sure you’re prepared for that level of volatility before signing up for a crypto credit card.

Just like with any other credit card, crypto credit cards draw from a line of credit. Cardholders must pay back their balance in full each month in order to avoid incurring interest charges. Purchases and payments on crypto credit cards are usually made with U.S. dollars, though some cards may allow cardholders to use cryptocurrency held in an associated account.

Recommended: How to Avoid Interest On a Credit Card

How Crypto Credit Cards Work

Crypto credit cards earn rewards in a very similar way to most other rewards credit cards. With each purchase you make using the card, you’ll earn cryptocurrency.

As an example, say your crypto credit card earns 3% back at restaurants. If you make a $100 restaurant purchase, your crypto wallet will get credited with $3 of cryptocurrency.

Pros and Cons of Using a Crypto Credit Card

Especially given the volatility of cryptocurrency, there are a number of upsides and downsides to take into consideration before using a crypto credit card:

Pros of Using a Crypto Credit Card	Cons of Using a Crypto Credit Card
Can earn cryptocurrency rather than other types of rewards	Fewer crypto credit card options than other types of rewards credit cards
Easier way to start investing in cryptocurrency	Cryptocurrencies can be volatile and/or lose value
Cryptocurrency may increase in value	Can’t control the timing of your crypto investment

What Is a Crypto Debit Card?

A crypto debit card is a type of debit card that withdraws crypto directly from your wallet to make purchases. However, when you make a purchase, the merchant gets paid in fiat currency, which means a conversion must take place from your type of cryptocurrency into U.S. dollars.

Many crypto debit cards also allow you to access your cryptocurrency wallet at merchants or ATMs that don’t normally accept cryptocurrency. This can give you added flexibility and access to your cryptocurrency funds.

Additionally, some crypto debit cards also can earn cryptocurrency as rewards.

How Crypto Debit Cards Work

Like a regular debit card, most crypto debit cards operate on one of the major card networks (Visa, Mastercard, etc). This allows you to use your crypto debit card anywhere that these networks are accepted. While more and more merchants are starting to accept various forms of cryptocurrency, using a crypto debit card can give you better access to your cryptocurrency wallet.

However, note that when you pay with a crypto debit card, you’re selling some of your cryptocurrency and exchanging it for dollars. Because you may be selling at a higher or lower price than what you bought it for, this constitutes a taxable event. You’ll need to do the work of keeping track for tax purposes. Additionally, you could incur a fee for the conversion.

Recommended: Can You Buy Crypto With a Credit Card

Pros and Cons of Using a Crypto Debit Card

As you can see, there are pros and cons to this type of card. Here’s what to keep in mind when choosing crypto debit cards:

Pros of Using a Crypto Debit Card	Cons of Using a Crypto Debit Card
Better access to your crypto wallet	Fewer crypto debit card than other types of rewards debit cards
Opportunity to earn rewards and/or perks	Cryptocurrencies can be volatile and/or lose value
More convenient to use than other crypto redemptions	A debit card may be less secure than a cryptocurrency wallet
	Taxes or fees may apply

Differences Between a Crypto Credit Card and a Crypto Debit Card

There are a few important differences between a credit card and debit card, and it’s important to know these differences when considering a crypto debit card vs. crypto credit card. Specifically, here are the essential differences to keep in mind:

	Crypto Credit Card	Crypto Debit Card
Rewards	Most crypto credit cards offer rewards	Fewer debit cards offer rewards
Using cryptocurrency	Purchases don’t spend from your crypto wallet	Cryptocurrency is withdrawn from your wallet with each purchase
Credit check on application	Yes	No

The Takeaway

Crypto credit cards and crypto debit cards both rely on cryptocurrency, but in different ways. A crypto debit card withdraws crypto directly from your wallet to make purchases. Purchases on a crypto credit card use a credit line issued to you in your local currency, but you may earn crypto rewards with every purchase.

If you’re looking for a non-crypto rewards credit card, you might consider a cash-back rewards credit card like the SoFi Credit Card. You can earn unlimited cash-back rewards, which you can use to invest in fractional shares, redeem for statement credit, or other financial goals you might have, like paying down eligible SoFi debt. Learn more and start earning credit card rewards today.

Apply for a SoFi Credit Card!

FAQ

Is it safe to use a crypto credit card or crypto debit card?

There are many different crypto credit cards and crypto debit cards. Look for one that is issued and branded by a reputable company. Even if you have a reputable card, know that there is still some risk, as anyone who gets your card number might also be able to access the cryptocurrency funds in your e-wallet.

Will buying crypto with a credit card amount to a cash advance?

If you want to buy crypto with a credit card, be aware that many credit card issuers will not allow you to buy directly with your card. And for those credit card issuers that do allow you to buy crypto with a credit card, the purchase may be treated as a cash advance. Cash advance transactions come with additional fees and often carry higher interest rates, so make sure you’re aware of those specifics before buying crypto with a credit card.

How are crypto credit and debit cards taxed?

Generally speaking, any time you use cryptocurrency to pay for something, you’re triggering a taxable event. This would likely include purchases made with a crypto debit card. The IRS has currently not given specific guidance on the taxability of crypto earned as a reward for purchases. Consult with your tax advisor if you’re not sure about how your crypto credit and debit cards will be taxed.

Photo credit: iStock/PeopleImages
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.

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.

¹See Rewards Details at SoFi.com/card/rewards.

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.

Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points toward active SoFi accounts, including but not limited to, your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, Student Loan Refinance, or toward SoFi Travel purchases, your rewards points will redeem at a rate of 1 cent per every point. For more details, please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

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Sep

2022

5 Ways to Get Affordable Life Insurance for Families

By Rebecca Lake | Family Finances, Insurance | Comments Off

Life insurance can provide families peace of mind and financial support in the event that the policy holder dies. If you’re the primary breadwinner for your household, then a life insurance policy can help pay funeral expenses, survivors’ day-to-day living costs, and children’s college costs.

Finding affordable life insurance starts with understanding your needs and budget. There are plenty of options you can choose from when shopping for coverage.

Why Should Families Have Life Insurance?

Life insurance is designed to pay out a death benefit to beneficiaries after the insured person dies. Life insurance can provide reassurance that should something happen to you, your dependents will be taken care of.

A life insurance policy can be a key part of personal insurance planning, which also encompasses homeowners or renters, auto, health, and disability insurance. If you have a family, life insurance can help your loved ones meet the following needs:

• Replace lost income. If the sole or main income-earner dies, life insurance can help to replace their lost income and cover day-to-day expenses.

• Pay final expenses. Funeral and burial costs can be expensive, and cremation is not necessarily any cheaper. Proceeds from life insurance can pay all of the associated costs, relieving financial stress during an already trying time.

• Clear outstanding debts. If you leave behind a mortgage, student loans, credit cards, or other debts, a life insurance policy can be used to pay them off so your loved ones aren’t stuck with overwhelming debt.

• Pay college expenses. If you have children, your life insurance policy can help pay for their higher education costs or secondary education expenses if they attend private school.

• Cover basic living expenses. Even if you leave no major debts behind, your loved ones may need money to pay for utilities, groceries, and other everyday bills.

• Fund retirement for a surviving spouse. Life insurance can help to fill a retirement planning gap for couples when a surviving spouse is not left with a nest egg.

In short, life insurance can help with a variety of expenses. Having a death benefit can help your loved ones avoid having to tap into other financial resources, or it can create a cushion if they lack other resources.

Recommended: How to Buy Life Insurance

How Much Life Insurance Do Families Need?

How much life insurance you need usually depends on your income. A general rule of thumb is to purchase a policy that’s equivalent to seven to 10 times your annual income. So if you make $100,000 a year, you’d need a policy with a death benefit of $700,000 to $1 million.

Even if one person brings in most of the income, both partners can benefit from having life insurance, especially if you have kids. If one person is the primary caregiver and they pass away, that can create new costs for the one who’s left behind.

For example, if you worked while your partner stayed home, you might need to spend money on daycare or in-home care, cleaning services, lawn care services, and other expenses to cover household tasks that they might have handled so that you can continue to work. Or if you choose to take an extended bereavement leave to care for your children, then life insurance can ensure that you’re able to meet your expenses during that time.

Recommended: How Much is Life Insurance

Types of Life Insurance for Families

There are two main types of life insurance: Term life and permanent coverage. Term life insurance is designed to cover you for a set term. For example, you might purchase a 20-year term policy. If you pass away within that term, the policy can pay out a death benefit to your family. Otherwise, the policy expires at the end of the term.

Permanent life insurance covers you for life, as long as the premiums are paid. One of the most common options for permanent life insurance is whole life. With whole life insurance, part of each premium payment is deposited into a cash value account. The account earns interest, and you can withdraw the cash you accumulate or borrow against it. When you die, the policy pays a death benefit to your loved ones, less any amounts you’ve withdrawn or borrowed against.

So which is better for families, term life vs. whole life insurance? The answer depends on your needs and budget. If you’re looking specifically for affordable life insurance for families, then term life is likely the better option. You don’t get lifetime protection or cash value accumulation, but generally, premiums for term life coverage tend to be lower than whole life.

By the way, you can typically convert term insurance to permanent insurance (such as whole life) at a higher premium if you want to keep your insurance longer than the term.

Making whole life insurance affordable is more challenging, as lifetime coverage means that your insurers are virtually guaranteed to have to pay out a claim. As such, they can charge higher premiums for the same death benefit. Age and health can also play a part in determining term life or whole insurance costs. Coverage is usually cheaper when you’re younger and healthier, so waiting to buy insurance could prove more expensive.

Recommended: What is Life Insurance

How to Get Affordable Life Insurance for Families

If you’re on the hunt for an affordable life insurance policy, it’s important to do your research to know what options are available. You may have access to life insurance already without realizing it. It’s also good to consider exactly what you need a life insurance policy to do for you and whether it makes sense to purchase coverage for children or grandparents as well.

1. Review Your Workplace Insurance Benefits

It’s possible that you may already have some life insurance in place to protect your family if your employer offers group coverage as an employee benefit. That type of life insurance covers a group of employees up to a certain benefit amount. For example, you might have $50,000 in group life insurance that your employer pays for. You may have the option to purchase additional coverage and increase the death benefit, with premiums deducted from your paychecks.

Group life insurance may not provide the full amount of coverage you need. But it can be a good starting point for getting an affordable life insurance policy if your employer is picking up the tab for the premiums. Check with your HR department or benefits coordinator to see if group life is offered at your job and how to enroll in coverage.

2. Opt for Term Life, If Possible

As mentioned, term life insurance can be a cheaper option than whole life insurance. If you’re not interested in building cash value and you don’t necessarily need lifetime coverage, term life may be preferable to whole life.

When purchasing term life insurance, think carefully about how long you’d like to keep the coverage in place. If you’re 30 years old and have two kids, for example, you might want a 20-year term policy, which could help pay for their college costs if something were to happen to you before they reach adulthood.

On the other hand, if you’re in your 40s and don’t think you’ll need coverage that long, you might choose a 10-year term policy instead. The longer the term and the larger the death benefit, the more life insurance will cost you in premiums.

Recommended: Why Life Insurance is Important

3. Weigh the Benefits of Life Insurance for Children or Grandparents

Life insurance policies for children are typically permanent life policies. You pay in premiums and part of that money builds cash value. When your child reaches adulthood, they can take over the policy or withdraw the cash value and use the money to pay for college, buy a car, or fund other financial goals. (If their health has changed this could also be the only insurance they are able to get.)

Should you buy life insurance for children? It’s an important question to ask if you’re looking for life insurance for the entire family. You can purchase life insurance for kids at fairly low premiums, and your child can decide later if they’d like to keep the policy or cash it in. Another alternative: You might be able to grow that money by investing the premiums you would have paid to life insurance into a 529 college savings account or investment account for your kids instead.

Purchasing a burial insurance policy for your aging parents can make sense if you don’t want to be facing a large bill from the funeral home while you’re grieving. Burial coverage is generally the most affordable life insurance for seniors, since it has a low death benefit. You may be able to get coverage for as little as $50 a month.

4. Choose Guaranteed Renewal

If you’re purchasing term life and you think there’s a chance that you might need coverage for longer than the initial term, consider getting a policy with guaranteed automatic renewal. Having that benefit built in means that you can renew your policy once the initial term expires, without being subjected to an increase in premiums due to age or health. Just be aware that your new premiums will likely be much, much higher.

5. Be Selective About Riders

Life insurance riders can enhance your coverage. While some may be included at no charge, others can increase your premiums by a few dollars each. Some of the most commonly added riders include:

• Accelerated death benefit

• Accidental death

• Guaranteed insurability

• Waiver of premium

• Child rider

• Critical illness coverage

• Disability coverage

Any of these riders can make your policy more comprehensive. But if affordable life insurance is the goal, then it’s important to consider whether they’re worth the added cost. Accelerated death benefit riders, for instance, pay out benefits while you’re still living to help with end of life care. That could be worth paying for if you’re concerned about developing a terminal illness. However, you won’t use that benefit if you die in an accident or from old age.

Tips for Saving Money on Life Insurance

Finding affordable life insurance can be a challenge, but it helps to have a strategy. Do your homework so you’re not buying more coverage than you need or choosing the wrong kind of policy. Here are a few more tips for saving money on life insurance as a family:

• Consider an online insurance company, which may charge lower premiums than a traditional insurer.

• Buy sooner rather than later to get the best rates available for your age and health.

• Ask your insurance company about any discounts you may qualify for.

• Get multiple life insurance quotes to compare rates across companies.

• Take care of yourself as much as possible, since staying healthy can influence your insurance rates.

With most life insurance policies, you may be asked to complete a medical exam. This exam is used to determine your health status and how much you’ll pay for premiums. You can, however, opt for a no exam policy if you’d like to get covered online without having to see a doctor.

The Takeaway

Finding affordable life insurance may seem a little overwhelming, but it doesn’t have to be. Start by reviewing your workplace benefits for group coverage that might be subsidized by your employer. Then, given a choice between term life and whole life insurance, term life is the more affordable option. Also, the sooner you purchase a policy the better, since premiums are tied to your age and health. Last, shop around for the best deal, and ask if you qualify for discounts.

You can start your search for life insurance online with SoFi. We’ve partnered with Ladder to make it easy to find affordable life insurance plans with coverage ranging from $100,000 to $8 million. You can get a quote and apply online in minutes.

Get a free life insurance quote with SoFi.

Photo credit: iStock/gradyreese

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

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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Jul

2022

10 Options Trading Strategies for Beginners

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

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

While the options market is risky and not suitable for everyone, these contracts can be a tool to make a speculative bet or offset risk in another position.

Many option strategies can involve one “leg,” meaning there’s only one contract that’s traded. More sophisticated strategies involve buying or selling multiple options contracts at the same time in order to minimize risk.

Here’s a guide that covers 10 important options trading strategies–from the most basic to the more complex and advanced.

10 Important Options Trading Strategies for Every Investor

When trading options, investors can either buy existing contracts, or they can “write” or sell contracts for securities they currently hold. The former is generally used as a means of speculation, while the latter is most often used as a way of generating income.

Here’s a closer look at important options strategies for beginner, intermediate and more advanced investors to know.

Long Calls
Long Puts
Covered Calls
Short Puts
Short Calls or Naked Calls
Straddles and Strangles
Cash-Secured Puts
Bull Put Spreads
Iron Condors
Butterfly Spreads

1. Long Calls

Level of Expertise: Beginner

Being long a call option means an investor has purchased a call option. “Going long” calls are a very traditional way of using options. This strategy is often used when an investor has expectations that the share price of a stock will rise but may not want to outright own the stock. It’s therefore a bullish trading strategy.

Let’s say an investor believes that Retail Stock will climb in one month. Retail Stock is currently trading at $10 a share and the investor believes it will rise above $12. The investor could buy an option with a $12 strike price and with an expiration date at least one month from now. If Retail Stock’s price rises to hit $12 within a month, the value or “premium” of the option would likely rise.

2. Long Puts

Level of Expertise: Beginner

Put options can be used to make a bearish speculative bet, similar to shorting a stock, or they can also function as a hedge. A hedge is something an investor uses to make up for potential losses somewhere else. Here are examples of both uses.

Let’s say Options Trader wants to wager shares of Finance Firm will fall. Options Trader doesn’t want to buy the shares outright so instead purchases puts tied to Finance Firm. If Finance Firm stock falls before the expiration date of the puts, the value of those options will likely rise. And Options Trader can sell them in the market for a profit.

An example of a hedge might be an investor who buys shares of Tech Stock C that are currently trading at $20. But the investor is also nervous about the stock falling, so they buy puts with a strike price of $18 and an expiration two months from now.

One month later, Tech Stock C stock tumbles to $15, and the investor needs to sell their shares for extra cash. But the investor capped their losses because they were able to sell the shares at $18 by exercising their puts.

3. Covered Calls

Level of Expertise: Beginner

The covered call strategy requires an investor to own shares of the underlying stock. They then write a call option on the stock and receive a premium payment.

The tradeoff is that if the stock rises above the strike price of the contract, the stock shares will be called away from them, and the shares (along with any future price rises) will be forfeit. So, this strategy works best when a stock is expected to stay flat or go down slightly.

If the stock price of Company Y stays below the strike price when the option expires, the call writer keeps the shares and the premium and can then write another covered call if desired. If Company Y rises above the strike price when the option expires, the call writer must sell the shares at that price.

4. Short Puts

Level of Expertise: Beginner

Being short a put is similar to being long a call in the sense that both strategies are bullish. However, when shorting a put, investors actually sell the put option, earning a premium through the trade. If the buyer of the put option exercises the contract however, the seller would be obligated to buy those shares.

Here’s an example of a short put: Shares of Transportation Stock are trading at $40 a share. An investor wants to buy the shares at $35. Instead of buying shares however, the investor sells put options with a strike price of $35. If the shares never hit $35, the investor gets to keep the premium they made from the sale of the puts.

Should the options buyer exercise those puts when it hits $35, the investor would have to buy those shares. But remember the investor wanted to buy at that level anyways. Plus by going short put options, they’ve also already collected a nice premium.

5. Short Calls or Naked Calls

Level of Expertise: Intermediate

When an investor is short call options, they are typically bearish or neutral on the underlying stock. The investor typically sells the call option to another person. Should the person who bought the call exercise the option, the original investor needs to deliver the stock.

Short calls are like covered calls, but the investor selling the options don’t already own the underlying shares, hence the phrase “naked calls”. Hence they’re riskier and not for beginner investors.

Here’s a hypothetical case: Investor A sells a call option with a strike price of $100 to Trader B, while the underlying stock of Energy Stock is trading at $90. This means that if Energy Stock never rises to $100 a share, Investor A pockets the premium they earned from selling the call option.

However, if shares of Energy Stock rise above $100 to $115, and Trader B exercises the call option, Investor A is obligated to sell the underlying shares to Trader B. That means Investor A has to buy the shares for $115 each and deliver them to Trader B, who only has to pay $100 per share.

6. Straddles and Strangles

Level of Expertise: Intermediate

With straddles in options trading, investors can profit regardless of the direction the underlying stock or asset makes. In a long straddle, an investor is anticipating higher volatility, so they buy both a call option and a put option at the same time. Short straddles are the opposite–investors sell a call and put at the same time.

Straddles and strangles are used when movement in the underlying asset is expected to be small or neutral.

Let’s look at a hypothetical long straddle. An investor pays $1 for a call contract and $1 for a put contract. Both have strikes of $10. In order for the investor to break even, the stock will have to rise above $12 or fall below $8. This is because we’re taking into account the $2 they spent on the premiums.

In a long strangle, the investor buys a call and put but with different strike prices. This is likely because they believe the stock is more likely to move up than down, or vice versa. In a short strangle, the investor sells a call and put with different strikes.

Here’s an example of a short strangle. An investor sells a call and put on an exchange-traded fund (ETF) for $3 each. The maximum profit the investor can make is $6 — the total from the sales of the call and the put options. The maximum loss the investor can incur is unlimited since the underlying ETF can potentially climb higher forever. Meanwhile, losses would stop when the price hit $0 but still be significant.

7. Cash-Secured Puts

Level of Expertise: Intermediate

The cash-secured put strategy is one that can both provide income and let investors purchase a stock at a lower price than they might have been able to if using a simple market buy order.

Here’s how it works: an investor writes a put option for Miner CC they do not own with a strike price lower than shares are currently trading at. The investor needs to have enough cash in their account to cover the cost of buying 100 shares per contract written, in case the stock trades below the strike price upon expiration (in which case they would be obligated to buy).

This strategy is typically used when the investor has a bullish to neutral outlook on the underlying asset. The option writer receives cheap shares while also holding onto the premium. Alternatively, if the stock trades sideways, the writer will still receive the premium, but no shares.

8. Bull Put Spreads

Level of Expertise: Advanced

A bull put spread involves one long put with a lower strike price and one short put with a higher strike price. Both contracts have the same expiration date and underlying security. This strategy is intended to benefit from a rising stock price. But unlike a regular call option, a bull put spread limits losses and can also profit from time decay.

Let’s say a stock is trading at $150. Trader B buys one put option with a strike of $140 for $3, while selling another put option with a strike of $160 for $4. The maximum profit is $1, or the net earnings from the two options premiums. So $4 minus $3 = $1. The maximum profit can be achieved when the stock price goes above the higher strike, so $160 in this case.

Meanwhile, the maximum loss equals the difference between the two strikes minus the difference of the premiums. So ($160 minus $140 = $20) minus ($4 minus $3 = $1) so $20 minus $1, which equals $19. The maximum loss is achieved if the share price falls below the strike of the put option the investor bought, so $140 in this example.

Recommended: A Guide to Options Spreads

9. Iron Condors

Level of Expertise: Advanced

The iron condor consists of four option legs (two calls and two puts) and is designed to earn a small profit in a low-risk fashion when a stock is thought to have little volatility. Here are the four legs. All four contracts have the same expiration:

1. Buy an out-of-the-money put with a lower strike price

2. Write a put with a strike price closer to the asset’s current price

3. Write an call with a higher strike

4. Buy a call with an even higher out-of-the-money strike.

If an individual makes an iron condor on shares of Widget Maker Inc., the best case scenario for them would be if all the options expire worthless. In that case, the individual would collect the net premium from creating the trade.

Meanwhile, the maximum loss is the difference between the long call and short call strikes, or the long put and short put strikes, after taking into account the premiums from creating the trade.

10. Butterfly Spreads

Level of Expertise: Advanced

A butterfly spread is a combination of a bull spread and a bear spread and can be constructed with either calls or puts. Like the iron condor, the butterfly spread involves four different options legs. This strategy is used when a stock is expected to stay relatively flat until the options expire.

In this example, we’ll look at a long-call butterfly spread. To create a butterfly spread, an investor buys or writes four contracts:

1. Buys one in-the-money call with a lower strike price

2. Writes two at-the-money calls

3. Buys another higher striking out-of-the-money call.

The Takeaway

Options trading strategies offer a way to potentially profit in almost any market situation—whether prices are going up, down, or sideways. The market is complex and highly risky, making it not suitable for everyone, but the guide above lays out different trading strategies based on the level of expertise of the investor.

Investors who are ready to dip their toe into options trading might consider SoFi’s options trading platform, where they’ll have access to a library of educational content about options. Plus, the platform has a user-friendly design.

Pay low fees when you start options trading with SoFi.

Photo credit: iStock/Rockaa
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.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Jul

2022

Exercising in Options? What Does It Mean & When to Exercise

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Investors in stock option contracts have the right to buy or sell underlying stocks (or other assets) at a predetermined price within a certain time period. When an investor decides they want to take action on their right to buy or sell, it’s called exercising. There are a number of ways investors can choose to exercise their options contract, depending on their individual goals and financial situation.

Option contracts are complex investment vehicles. They’re a multi-faceted tool that involves precise timing and are backed by lots of strategizing. While options are not for all investors, if handled by experienced traders, options could add diversity to a well-diversified portfolio.

In this article, we focus on the concept of exercising in options. What does it really mean to “exercise an option?” And how do you do it?

What Does Exercising Mean?

Exercising a stock option means that a trader purchases or sells the underlying stock associated with the options contract at the price set by the contract, which is called the strike price. This price may differ from the current market price of the stock.

Options contracts are valid for a certain amount of time. So if the owner doesn’t exercise their right to buy or sell within that period, the contract expires worthless, and the owner loses the right to buy or sell the underlying security at the strike price.

There is also an upfront fee, called a premium, that gets paid when a trader enters into an options contract. If the trader doesn’t exercise the contract, they forfeit that fee along with any other brokerage fees. Most options contracts never get exercised. Some contracts are sold instead of exercised, because the contract itself has value if it has the potential to be exercised later.

There are two main choices of types of options contracts, call options and put options. Purchasing a call option gives traders the right, but not the obligation, to purchase the underlying security at the strike price. Selling put options gives traders the right to sell the underlying security at the strike price.

Each contract is different, and there are also different types of options. American-style options let traders exercise them prior to the contract’s expiration date, while European-style options can only be exercised after the expiration date.

How Do You Exercise an Option?

Generally, traders have several choices when it comes to exercising their stock options. When a trader is ready to exercise an option, they can let their brokerage firm know. The broker will create an exercise notice to the Options Clearing Corporation (OCC) to let the individual or entity buying or selling the underlying stock know that the trader wants to execute a trade on a particular date. The option seller is required to fulfill the obligations of the contract.

The OCC assigns the exercise notice to one of their clearing members, which tends to be the trader’s brokerage firm. The broker then assigns the option to one of their customers who has written an option contract that they have not yet covered. Depending on the broker, the customer they choose may either be chosen randomly or picked on a first-in-first-out (FIFO) principle .

Holding

If a trader thinks a stock will go up in value, they can purchase options at a lower market price, then wait until the market price goes up to exercise the option. Then they purchase at their original lower price and can decide to sell at the new, higher market price. This is one of the benefits of trading stock options. However, traders can’t wait forever, because options contracts do have expiration dates.

Exercise-and-Hold

It is common for company employees to receive stock options, which give them the right to purchase company stock. They can purchase the stock and then hold onto it if they think it will rise in value. However, it’s important for employees to understand the rights they have with their options. Often, stock shares are vested for a certain amount of time, so an employee has to wait for that time to end before they are allowed to exercise the option.

Exercise-and-Sell-to-Cover

Sometimes there are fees, commissions, and taxes involved in exercising company stock options. To cover those fees, traders can exercise options, purchase shares of company stock and simultaneously sell some of those shares to cover the expenses.

Exercise-and-Sell

If a company employee wants to immediately sell their stock options after exercising their right to buy the stock, they can choose to exercise and sell. They will receive the cash amount of the current market value of the stock minus any fees and taxes.

Early Exercise

In addition to profiting off of a stock’s price increase, options traders may want to exercise early so that they can earn dividends off of the underlying security. Traders who write call options should be prepared to close out a trade at any time prior to the contract’s expiration date, especially if the contract is in-the-money. If a put option is in the money, most likely the owner will exercise it before it expires.

Advantages and Disadvantages of Exercising an Option

Exercising options presents opportunities to earn a profit, but there also are potential downsides to exercising options.

Exercising Options

Advantages	Disadvantages
Earn dividends from owning the underlying stock.	Fees, taxes, transaction costs potentially could cancel out any profit.
Sell the underlying stock for a profit.	Increases chance of risk: margin call, stock’s value could decrease.
In general, traders can make a greater profit via closing positions — by buying or selling options rather than exercising them. One of the few instances where it could be advantageous to exercise a contract is if you’d like to own the stock outright instead of basing a contract on it.	The one way that exercising a contract could actually make you lose out on money has to do with the complicated price structure of options, which consists of two components: extrinsic (time value) and intrinsic value. If you own options contracts that are in the money, then the price of those contacts will comprise both extrinsic and intrinsic value. If you sell these options, you’d benefit from both the intrinsic and the extrinsic price components. But if you exercised them instead, you would only benefit from the intrinsic value. Why? Extrinsic value serves to compensate the writer (seller) of options contracts for the risk they are taking. Once you exercise an options contract, the contract itself effectively ceases to exist, so that all extrinsic value is lost.

Advantages

Disadvantages

Earn dividends from owning the underlying stock.

Fees, taxes, transaction costs potentially could cancel out any profit.

Sell the underlying stock for a profit.

Increases chance of risk: margin call, stock’s value could decrease.

In general, traders can make a greater profit via closing positions — by buying or selling options rather than exercising them.

One of the few instances where it could be advantageous to exercise a contract is if you’d like to own the stock outright instead of basing a contract on it.

The one way that exercising a contract could actually make you lose out on money has to do with the complicated price structure of options, which consists of two components: extrinsic (time value) and intrinsic value.

If you own options contracts that are in the money, then the price of those contacts will comprise both extrinsic and intrinsic value. If you sell these options, you’d benefit from both the intrinsic and the extrinsic price components.

But if you exercised them instead, you would only benefit from the intrinsic value. Why?

Extrinsic value serves to compensate the writer (seller) of options contracts for the risk they are taking. Once you exercise an options contract, the contract itself effectively ceases to exist, so that all extrinsic value is lost.

How Do You Know Whether to Hold or Exercise an Option?

It can be difficult to know when and whether to exercise an option. There are different options trading strategies that can prove beneficial to exercising early, or to waiting or even selling the option contract itself. Many factors come into play when making the decision to exercise an option, such as

• the amount of time left in the contract,

• whether it is in-the-money and if so by how much, and

• whether the trader wants to buy, sell, or hold shares of the underlying security.

Time Value

One key thing to know about options trading is how options pricing works. Options lose value over time until they are finally worth nothing at their expiration date. If a trader owns an option that still has time left on it, they may consider selling the option or waiting to exercise it. Often it is more profitable to sell the option than to exercise it if it still has time value. If an option is in the money and close to expiring, it may be a good idea to exercise it. Options that are out-of-the-money don’t have any intrinsic value, they only have time value.

Transaction Costs

In addition to the premium a trader pays when buying an option, they must also pay transaction and commission fees to their broker. There can be fees both when exercising an option and when buying or selling the underlying shares.

Increased Chance of Risk

Buying a call option is fairly low risk because the most a trader can lose is the premium amount they paid when they bought into the contract. Exercising an option increases risk, because even if the trader profits in the short term by exercising and buying the stock at a good price, the stock could decrease in value any time. Because the trader already lost the premium amount, they would need to earn at least that amount back to break even on the trade.

Exposure to Margin Risk

To purchase the shares of the underlying security, a trader needs to use cash from their account or take out a margin loan from their broker. If they take out a loan, they increase their chances for risk and greater expenses.

Options Obligations

The owner of a long option contract has the right to buy shares of the underlying stock if they choose to exercise it. The selling trader on the other side of the contract is obligated to fulfill the contract if the owner decides to buy. If the buyer exercises their right, the seller must deliver the number of shares — generally 100 shares per contract — for the strike price set by the contract. If the buyer does exercise the contract, they are then obligated to pay the seller for those shares.

The brokerage firm gives notice to a random seller when a buyer exercises an option that fits the transaction parameters. This could happen at any time prior to the expiration date. A seller can close out their option contract early if it hasn’t been exercised yet. The process of assigning and exercising options is all automated. So if a trader sells an option, when it gets exercised the stock will automatically be removed from their account, and they receive cash in their account in return. The buyer will receive the shares in exchange for cash from their brokerage account.

The Takeaway

Stock options are a popular investing tool to gain exposure to securities with a smaller upfront cost and level of risk. If you’re interested in starting to build a portfolio, a great tool to use is SoFi Invest. The online trading platform lets you research, track, buy and sell stocks, ETFs, and other assets right from your phone — all with 24/7 convenience.

More ways to invest — all in one place. You can connect your banking and any other investment accounts to the SoFi Invest app to see all your financial information easily in one simple dashboard.

Get started trading on SoFi Invest today.

FAQ

How can you tell when to exercise an option?

It could be beneficial to exercise an option if the underlying security’s price is more than the strike price of a call option; or the underlying security’s price is less than the strike price of a put option.

How are early-exercise options different from exercise options?

Early-exercise options differ from exercise options in one way: Early exercise is possible with American-style option contracts only. You cannot do this with European-style option contracts, as they rule that you may exercise on the expiration date only.

What is a cashless exercise in options?

Also called the “same-day sale,” a cashless exercise is when an employee exercises their stock options via a short-term loan provided by a brokerage firm.

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

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.
*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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