Mar
07
2022
bitcoin coin

5 Most Private Cryptocurrencies

By | Growing Wealth, invest, Investing | Comments Off on 5 Most Private Cryptocurrencies

Bitcoin is one of the most secure cryptocurrencies, with a hash rate that climbed to an all-time high in January 2022. But transactions made on the Bitcoin blockchain are transparent and can be seen by anyone using widely-available blockchain explorer websites.

While future upgrades to the Bitcoin core code could make transactions more anonymous, for now any Bitcoin transaction can potentially be traced back to its source. This has led developers on a quest to create the most private cryptocurrency.

Top Privacy Coins and How They Work

There are a variety of technological methods that cryptocurrencies use to anonymize transactions. Which method works best to create the most secure cryptocurrency is a subject of heated debate within the community.

For investment purposes, it should be noted that all of these coins are highly speculative, risky, and can require opening a digital currency exchange account to trade them. As a general rule, the smaller the market capitalization and daily trading volume, the higher the risk.

Here are some of the top privacy coins available on the market today.

1. Bytecoin (BCN)

Bytecoin , which is based on the CryptoNote technology, claims to be the “first private untraceable currency.” CryptoNote was created with the goal of making transactions both a) untraceable and b) un-linkable.

Untraceable means observers cannot tell who sent a transaction to a specific recipient, while un-linkable means that observers cannot tell whether or not any two transactions were sent to the same source. The untraceable aspect is accomplished through ring signatures.

These ring signatures make its transactions opaque, meaning observers can’t see who sent the transaction, how much it was for, or who received it. Ring signatures basically string transactions together in a way that makes it difficult (but not entirely impossible) to tell them apart from each other.

To achieve un-linkable transactions, CryptoNote uses one-time keys. With ring signatures, it’s still possible to see incoming transactions to a single public key (wallet address). To fix this, CryptoNote automatically generates one-time keys whenever someone receives coins. It’s based on an encryption method known as the Diffie-Hellman Key Exchange, which allows for the sharing of secret data between two parties.

When someone sends Bytecoin to another Bytecoin address, the sender creates a unique code that gets used in the transaction. This unique code makes it look like the coins were sent to a different crypto wallet each and every time.

As of late February 2022, BCN had a market cap of $30.2 million and daily trading volume of about $30,695.

2. Monero (XMR)

Like Bytecoin, Monero is a private cryptocurrency that has privacy features built into all its transactions. XMR is actually a hard fork of BCN. That means Monero uses the same privacy tech as Bytecoin and shares most of the underlying characteristics.

When Bytecoin was created in 2012, 80% of the total supply was already in existence, as opposed to most mineable cryptocurrencies that begin with very little supply in existence.

This led seven of the developers working on Bytecoin to create a new coin by hard forking the BCN network. They called this new coin Bitmonero, which was then changed simply to Monero, which means “coin” in Esperanto.

As of late February 2022, Monero is worth over $2.7 billion with a daily trading volume of about $128 million.

3. Zcash (ZEC)

Zcash uses a technology called “zk-SNARKs,” short for zero-knowledge succinct non-interactive arguments of knowledge.

The exact details are about as complicated as the name makes it sound. What matters is that zk-SNARKs allow one party to prove to another that something is true without revealing anything specific, making this solution ideal for private crypto transactions.

However, privacy is not a default feature of Zcash, meaning that transactions are not automatically made anonymously. Zcash allows for four different types of transactions with varying levels of privacy.

The pros of Zcash is that it has some of the strongest privacy protocols on the market and the second-highest market cap of any coin on this list. The con might be the different types of transactions leading to confusion among users, some of whom might assume all Zcash transactions to be private.

As of late February 2022, Zcash is valued at $1.5 billion with a daily trading volume of about $265 million.

Up to $100 in bitcoin2 – just for you.

With 30 coins available, our app offers a secure way to trade crypto 24/7.

4. Dash (DASH)

Dash was the first private cryptocurrency created in 2014. Originally called DarkCoin, the coin eventually rebranded itself as DASH, short for “digital cash.”

As the name implies, Dash is meant to be used as a medium of exchange. Transactions can clear in a second and can cost less than a penny.

In addition to the typical crypto miners, Dash uses something called “masternodes.” These central masternodes receive 45% of all DASH mining rewards in exchange for performing essential functions on the network, including making transactions private and processing them quickly.

One of the potential cons of DASH is that these masternodes make the network more centralized than some other crypto networks.

As of late February 2022, DASH is valued at more than $968 million with $176 million in daily trading volume.

5. Verge (XVG)

Verge describes itself as a “cryptocurrency designed for people and everyday use.” Verge was created in 2014 as DogeCoinDark. Like Dash, DogeCoinDark rebranded itself shortly after its inception, changing its name to Verge.

Verge uses a technology called the Wraith Protocol to make transactions private. Wraith Protocol anonymizes transactions through the Tor Network.

By routing internet connections through multiple anonymous nodes around the world, The Tor Browser works to hide IP addresses. Wraith Protocol uses this tech for the purpose of anonymizing cryptocurrency users. This feature is optional and must be turned on.

Some benefits of Verge include fast transactions, low fees, and the potential to scale and be used by more people. The big drawback is that most of the total supply of XVG is already in circulation, so the coin will likely lose value in the long-term due to inflation, just like Bytecoin.

As of late February 2022, Verge is valued at around $155 million with a daily trading volume of around $6.4 million.

The Takeaway

Privacy coins have only existed since 2012, and didn’t really burst onto the scene in a big way until 2014. The tech is even newer than Bitcoin, and the landscape is constantly changing.

Monero is thought to be one of the most private cryptocurrencies, so much so that it has been the subject of scrutiny by regulatory agencies. But some privacy enthusiasts argue that coins like Zcash have better privacy protocols and that they might be the most secure cryptocurrencies. The subject is still up for debate.

Looking to get into cryptocurrency? With SoFi Invest® you can buy cryptocurrency from more than two dozen crypto coins including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin. Investor information is kept secure and never shared with any third parties beyond what is detailed in our privacy policy.

Trade crypto and get up to $100 in bitcoin! (Offer is available through 12/31/23; terms apply.)

SoFi Invest®

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

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

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

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

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

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2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100
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Feb
22
2022
Bollinger Bands Explained

Bollinger Bands Explained

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

What Are Bollinger Bands?

Bollinger Bands® are popular tools used in technical analysis of securities. They are a set of three bands that measure the relative high or low of a security’s price in relation to previous trades.

These defined trend lines are the simple moving average (SMA) of the price of the security plus plotted lines two standard deviations away from the SMA. The bands are plotted positively and negatively from the SMA, which measures the volatility of a security, and the trader can adjust them based on their particular use case. When the security becomes more volatile the bands widen, when it becomes less volatile they get closer together.

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

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

How Do Bollinger Bands Work?

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

Period is found by calculating the simple moving average of the security a trader is interested in. The calculation generally uses a 20-day SMA, an average of a security’s closing prices over a 20 day period — or roughly a month of trading days. The first data point on the graph would be the average of the first 20 days being tracked. The second data point would be the next 20 days, and so on.

That line shows the SMA over time, and the Bollinger Bands are then placed above and below it by calculating the standard deviation of the security’s price along each data point. The standard deviation is a calculation of the average variance of the SMA value, which shows how far apart values are from the SMA.

The standard deviation is calculated by first finding the square root of the variance, which is the average of the squared differences of the mean. After finding the square root of the variance, that number is generally multiplied by two, although the number can be adjusted. The resulting value is then added and subtracted from each SMA data point to form the upper and lower Bollinger Bands.

Key Things to Know About Bollinger Bands

A few key things to understand about Bollinger Bands:

•   When volatility is low, the bands get closer together. This indicates that volatility may increase in the future and therefore there could be a significant price movement up or down.

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

•   Generally the security’s price movements stay within the two bands. And once they touch one band they start moving towards the other band. But the price can also bounce off the band multiple times or it can cross over the band. If the price hits one of the bands and then crosses over the SMA line, that is an indicator that it is heading toward the opposite band’s price level.

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

Formula for Bollinger Bands

Below is the formula to plot Bollinger Bands:

BOLU=MA(TP,n)+m∗σ[TP,n]

BOLD=MA(TP,n)−m∗σ[TP,n]

where:

BOLU=Upper Bollinger Band

BOLD=Lower Bollinger Band

MA=Moving average

TP (typical price)=(High+Low+Close)÷3

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

m=Number of standard deviations (typically 2)

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

How Do You Read Bollinger Bands?

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

Trends can last for minutes, hours, days, weeks, months, and even years, so traders should understand how to set up the bands based on the timeline of their trading strategy. Here are some patterns and indicators traders might want to learn.

Uptrends

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

Downtrends

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

The Squeeze

When the bands are close together, this is known as a squeeze. The squeeze happens when the security has low volatility, but it indicates that the security will probably have increased volatility in the future. Traders look for high volatility periods to find trading opportunities, so the squeeze indicates that those opportunities may be showing up soon.

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

Breakouts

The SMA line doesn’t always stay between the Bollinger Bands — it can also move above or below the bands. Around 90% of price changes do happen between the bands, so if the price has a breakout above or below the bands it’s a significant event. However, breakouts are not used as trading signals and are not indicators that the security price will move in a particular direction in the future.

Bollinger Band Trading Strategies

Financial analyst Arthur Merrill, who identified a set of 16 trend patterns that have M patterns and W patterns. Here are two key patterns.

M Top

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

W Bottoms

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

Combining Bollinger Bands With Other Indicators

John Bollinger recommended that traders use Bollinger Bands in conjunction with other non-correlated indicators, such as the relative strength indicator (RSI) and the Stochastic Oscillator, in order to gain a comprehensive understanding of the security being assessed. While Bollinger Bands help traders understand price volatility and can show opportunities for upcoming trades, they aren’t strong indicators of potential upcoming price movements.

Drawbacks of Bollinger Bands

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

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

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

•   The standard settings of 20-day SMA and 2 standard deviations is an arbitrary measurement that doesn’t convey relevant information for every security and trading situation, so it’s important that traders understand how to adjust the band calculations for their particular situation.

Using Bollinger Bands for Crypto Trading

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

The Takeaway

Bollinger Bands are a useful tool for technical analysis of stocks, which measure the relative high or low of a security’s price in relation to previous trades over typically the past 20 trading days. One of many trend indicators, Bollinger Bands are also sometimes used in crypto trading.

If you’re looking to get started trading options, SoFi offers an intuitive and approachable options trading platform. Investors are able to make trades from the mobile app or web platform, and they can access a library of educational resources about options.

Trade options with low fees through SoFi.

Photo credit: iStock/blackCAT

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.

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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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Feb
22
2022
Guide to Jade Lizards

Guide to Jade Lizards

By | Growing Wealth, invest, Investing | Comments Off on Guide to Jade Lizards

A Jade Lizard is an advanced options strategy that requires taking three different positions. It is a slightly bullish strategy typically used by traders who want to profit from high levels of market volatility.

Traders who use the Jade Lizard strategy must monitor their position and have a plan for exit to avoid the potential for significant losses. The maximum profit for a Jade Lizard strategy is the initial premium received when opening the trade.

What Is a Jade Lizard Option Strategy?

With a Jade Lizard trade, you will enter into three different options positions on the same underlying stock through your brokerage account. The first two positions require selling a call spread, which involves selling a call option at one strike price and buying a call option with the same expiration at a higher strike price. The third and final option position is a put at an even lower strike price.

With a Jade Lizard, these options are usually at out-of-the-money strike prices. The strikes should be selected such that the total premium received from selling the call spread and selling the put option are greater than the width of the call spread. Don’t worry — if it’s not clear what that means, we’ll illustrate in the example that follows.

How Does a Jade Lizard Work?

A Jade Lizard option trade is a neutral to bullish options strategy, which means that you should anticipate the price of your underlying stock to stay the same or go up. With a Jade Lizard options strategy, you are hoping to capture the premium that comes with higher levels of implied volatility, so the ideal environment to execute the trade is one where volatility is elevated.

Setting Up a Jade Lizard

When you set up a Jade Lizard, you should initially be collecting premium from both the call spread and put that you are selling. The key concept of setting up a Jade Lizard is that you want the total amount of premium that you collect initially to be more than the width of your call spread.

As an example, say that stock ABC is trading around $60. You could sell a 58/62/63 Jade Lizard, at these hypothetical prices, on options expiring in 30 days:

•   Sell ABC 62 Call for 1.25

•   Buy ABC 63 Call for 0.90

•   Sell ABC 58 Put for 0.75

Your net credit is $1.10 ($1.25 minus $0.90 plus $0.75), so you collect $110 for each contract that you implement (since one contract typically controls 100 shares of the underlying stock). In our example, you have no risk should the stock move to the upside. To illustrate how, suppose the stock trades above 63 on expiration day. The put option expires worthless, and your maximum loss on the call spread is $100, which is less than the $110 you collected up front. On the other hand, you do have nearly unlimited downside risk if the underlying stock goes to 0. This is the main reason that the Jade Lizard options strategy only makes sense for stocks where you have a neutral to bullish outlook.

Maximum Profit

You will achieve your maximum profit if the options expire with the underlying stock having a price in between the strike price of your put option and the strike price of your lower call option. In our example above, if the stock closes between $58 and $62, then all three options expire worthless and your profit is the $1.10 in initial premium that you collected.

Maximum Loss

In a Jade Lizard strategy, you have nearly unlimited downside exposure, since you are selling a put option. A put option increases in value as the price of the underlying stock goes down. Since you are short the put option, as the stock price goes down you could be on the hook for the difference between the strike price of the put and the price of the underlying stock.

Breakeven Point

The breakeven point for a Jade Lizard on the downside is the difference between the strike price of the put option and the initial premium collected. In our earlier example, we collected $1.10 in net premium, so our breakeven point is $56.90 (the difference between $58.00 and $1.10).

There is also a potential breakeven point to the upside. Ideally with a Jade Lizard, you collect more in initial premium than the width of your call spread. In our example, we collected $1.10 in initial premium and our call spread is only $1 wide (between $62 and $63).

So if the stock closes anywhere above $63 when the options expire, your put will be worthless and your call spread will cost you $1 to close out, or $100 per set of contracts. That will leave you with a profit of $10 per set of contracts.

Exit Strategy

The exit strategy for a Jade Lizard involves purchasing back the options you sold using a buy to close order. When setting up the trade, it’s a good idea to set target profit at which you would buy back the options.

In our example, where we received $1.10 per share, you might look to close out the Jade Lizard when you could buy your options back for around $0.55 per share, 50% of the initial premium you received. The options may decline in value due to movement of the underlying stock, or time decay as the options get closer to their expiration.

Maintaining a Jade Lizard

A Jade Lizard is not a set-it-and-forget-it options strategy. Because of the unlimited downside risk, you’ll want to monitor your position, especially if the price of the underlying stock starts to go down. In that scenario, you may want to close out your position or roll down the strike prices of your short call spread.

Pros and Cons of the Jade Lizard Strategy

Here are some pros and cons of the Jade Lizard strategy:

Pros of the Jade Lizard strategy

 Cons of the Jade Lizard strategy
No risk of losses from upward price movement in the underlying Significant risk of downward price movement in the underlying
Immediate collection of the net premium Profits capped to the amount of premium initially received

Alternatives to Jade Lizards

One alternative to the Jade Lizard strategy is a strategy called the Big Lizard. With a Jade Lizard, you typically sell out-of-the-money options. With a Big Lizard strategy, the options that you sell are at-the-money, meaning that their strike price is close to the price of the underlying stock.

Investing With SoFi

The Jade Lizard strategy is an advanced strategy that options traders use when they have a bullish to neutral outlook on a stock. The strategy’s maximum upside is equal to the premium received when opening the trade, while the downside risk is essentially uncapped.

Learning about different options strategies can be a great way to further understand the stock market and how to invest. From there, you might consider an options trading platform like the one offered by SoFi. This platform has an intuitive and approachable design and allows investors to trade options from the mobile app or web platform. And if you aren’t done learning, there are educational resources about options available to explore.

Trade options with low fees through SoFi.

FAQ

How are Jade Lizards managed?

When opening a Jade Lizard options strategy, you want to make sure to keep an eye on the underlying stock until the options’ expiration date. Since a Jade Lizard comes with no upside risk, you should especially monitor negative moves in the stock price. In that case, you could close out your position or roll your call spread to a lower stock price, earning more premium.

How do reverse Jade Lizards differ from Jade Lizards?

In a reverse Jade Lizard, also known as a twisted sister option, you sell a put spread, being long the put option with the lower stock price. Additionally you sell a call with a higher strike price.

As the name suggests, a reverse Jade Lizard is the opposite of a regular Jade Lizard, and makes sense when you have a neutral to bearish outlook on a stock. You have risk of losses due to downard price movement and unlimited loss potential from upward price movement, due to the short call.

What is the maximum payoff of a Jade Lizard?

The maximum payoff or profit of a Jade Lizard is capped to the total initial premium that you receive when you open the position. This is equal to the amount you get for selling the put and short leg of the spread minus the amount of premium for the long leg of the call spread.

Photo credit: iStock/ipopba

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Feb
22
2022
What Does At the Money Mean in Options Trading?

What Does At the Money Mean in Options Trading?

By | Growing Wealth, invest, Investing | Comments Off on What Does At the Money Mean in Options Trading?

An at-the-money (ATM) option is one where the strike price is at or very near the current price of the underlying stock itself. At the money options have no intrinsic value.

Options traders must understand the difference between the three types of options “moneyness: “at the money,” “in the money,” and “out-of-the money.”

What Is At the Money?

At the money means that a given option’s strike price is identical to the price of the underlying stock itself. Both a call option and a put option can be at the money at the same time, if their strike price is the same as the price of the stock.

In this age of decimal stock pricing, it is rare for an option’s strike price to exactly equal the price of the underlying stock — so the at-the-money strike is usually considered the one closest to the stock’s price.

Understanding At the Money

Usually, an option that is at the money will have a delta of around 0.50 for an at the money call option and -0.50 for a put option. This means that for every $1 of movement of the underlying stock, the option will move about 50 cents.

Some options traders employ more complicated strategies, such as an at the money straddle, which involves buying or selling both an at-the-money call and an at-the-money put with the same expiration date.

At the Money vs In the Money vs Out of the Money

Usually there is one option strike price considered at the money, with any other strike prices being either in the money (ITM) or out of the money (OTM). The difference between ITM and OTM is that an in-the-money option is one that has intrinsic value, meaning it would be profitable to exercise it today.

For calls, being in the money means a strike price lower than the stock’s price. For put options, a strike price that is higher than the stock’s price is considered in the money.

Out-of-the money options are just the opposite. They have no intrinsic value, and if an option is out of the money at expiration it will expire worthless.

Consider the following call or put options for stock ABC with a current price of 55.

Option

 Strike price

 ATM / ITM / OTM
ABC Call option 55 At the money
ABC Put option 55 At the money
ABC Call option 70 Out of the money
ABC Put option 70 In the money
ABC Call option 40 In the money
ABC Put option 40 Out of the money

Recommended: Call vs. Put Options: The Differences

At the Money and Near the Money

An option is considered near the money usually if it is within 50 cents of the price of the underlying stock. However, it is common for investors to use the terms “near the money” and “at the money” interchangeably.

This is because stocks are priced to the nearest cent, while option strike prices are usually only to the nearest dollar or half-dollar, depending on the magnitude of the underlying stock price. So it is rare for a stock to have an option that exactly matches any specific strike price.

Pricing At-the-Money Options

Because an at-the-money option has a strike price exactly the same as the price of the underlying stock, it has no intrinsic value. Any value in an ATM option is made up of extrinsic value or time value. While you could make more money with an option than just by purchasing the stock if the stock moves in the direction you anticipate, you also stand to completely lose your investment if the stock moves against you.

At the Money and Volatility Smile

The volatility smile refers to the phenomenon that implied volatility is generally lower for at-the-money options than it is for options that are in the money or out of the money. The term “volatility smile” reflects a graph of implied volatility against the strike price of an option, which appears as an upwards-opening parabola, similar to a smile.

Pros and Cons of Trading At-the-Money Options

Here are some pros and cons of trading at-the-money options:

Pros of trading at-the-money options

 Cons of trading at-the-money options
Less-expensive than at-the-money options More expensive than out-of-the-money options
Can protect you from downside risk on stocks you already own ATM options have no intrinsic value and may expire worthless
If the stock moves in a different direction than you anticipate, you could lose your entire investment

The Takeaway

Understanding the difference between options that are at the money (ATM), in the money (ITM) and out of the money (OTM) is crucial if you want to trade options through your brokerage account. Prices with these three different types of options contracts react differently to movements in the price of the underlying stock, so make sure you buy the right one based on your overall strategy.

An options trading platform that provides educational resources about options can be a good way to continue learning as you go. SoFi offers this alongside its user-friendly options trading platform, where investors can trade options from the mobile app or web platform.

Trade options with low fees through SoFi.

FAQ

What does buying at the money mean?

When you buy an at-the-money option, you are buying an option whose strike price is at or near the price of the underlying stock. An option that is at the money generally has a delta value of around positive or negative 0.50, depending on if it is a call or a put. That means its price will move about 50 cents for every dollar that the price of the underlying stock moves.

How do at the money and in the money differ?

An at-the-money option is one whose strike price is at or near the price of the underlying stock. An in-the-money option is one with a strike price that would be exercised if the option closed today. An at-the-money call option is one whose strike is lower than the stock price, while an at-the-money put option is one whose strike price is higher than the stock price.

Is it best to buy at the money?

There are several different strategies for trading options, and the strategy you trade will help decide whether it’s a good idea to buy at the money. It can certainly be profitable to buy or sell at-the-money options, but other strategies for making money with options exist as well.

Photo credit: iStock/DMEPhotography

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Feb
17
2022

A Guide to Collars in Options Trading

By | Growing Wealth, invest, Investing | Comments Off on A Guide to Collars in Options Trading

A collar is an options strategy used by traders to protect themselves against heavy losses. The strategy, also known as a hedge wrapper, involves taking a long position in an underlying stock, buying an out-of-the-money put, and selling an out-of-the-money call.

Essentially with an option collar, you’re buying a protective put and a covered call at the same time on a stock that you already own or have long exposure to. While collars in options protect against heavy losses, they also limit potential gains. Read on to learn more about collar breakeven points, max loss, and max profit.

What Is a Collar Option?

In collar options strategies, an options trader limits the range of their returns by taking a long position in the underlying stock, buying a lower strike put, and selling a higher strike call. Typically, the stock price will be between the two strike prices. A trader uses a collar when they are bullish on the underlying stock but want to be protected against the risk of large losses.

A collar is also a useful option strategy when the goal is to protect unrealized gains on the stock.

How Do Collars Work?

A collar works by protecting a trader’s existing long stock position by buying a put option, limiting any further losses should the stock price fall below the strike of the put. At the same time, the sale of an out-of-the-money call helps finance the trade, making the cost of protection cheaper than purchasing a put on the underlying shares, with the trade-off that gains will be capped should the stock rise above the strike of the call. The trader constructs a collar through their brokerage when they think there could be near-term weakness in the stock but do not want to sell their stock position.

Buying a put gives the trader the right, but not the obligation, to sell the stock at the put’s strike price. Selling the call obligates the writer to sell the stock at the call’s strike if the option is assigned. Meanwhile, the trader remains long shares of the underlying stock.

Maximum Profit

The short call position in a collar option strategy caps upside, limiting the maximum potential profit. The max profit depends on if the investor established the options trade at a net debit or a net credit.

•   Net debit: Maximum profit = Call strike price – stock price – net debit, or

•   Net credit: Maximum profit = Call strike price – stock price + net credit = max profit

At a high level, the trader makes the most money when the stock price is at or above the call’s strike at expiration.

Maximum Loss

The protective put limits losses in the event the underlying share price falls below the put’s strike. So either

•   Net debit: Maximum loss = Stock price – put strike price – net debit paid, or

•   Net credit: Maximum loss = Stock price – put strike price + net credit received

Breakeven Points

Once established, a collar option has two possible break even points – again, dependent on whether the trade was executed at a net credit or debit.

•   Net debit: Break even point = current stock price + net debit, or

•   Net credit: Break even point = current stock price – net credit

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Impact of Price Changes

A collar keeps a trader’s long-term bullish stance but it protects unrealized profits from a short-term share price decline. If the underlying stock price rises, the collar provides some exposure to upside gains, capped at the short call’s strike. The real value of a collar comes if the stock price drops through the long put strike. The collar protects the trader from further losses.

Another way to look at the impact of price changes is to view it from a perspective of time – a collar can help a trader with a short-term bearish outlook but a bullish long term view. Collars have a positive Delta.

Impact of Volatility Changes

Changes in volatility have a relatively smaller impact on a collar options strategy versus other options trades because the trader has simultaneous long and short option positions. The collar trade usually has a near-zero vega.

Recommended: What Are the Greeks in Options Trading?

Impact of Time

With a collar options trade, the effect of time decay depends on how close the stock price is to the option strike prices.

Time decay works to the trader’s benefit when the underlying stock price rallies up to the short call’s strike. On the flip side, the impact of time hinders the trade when the stock price nears the long put’s strike. When the stock price is about equally between the two strikes, time decay is neutral since both option prices erode at approximately the same rate. So, while the short put value drops, the long call offsets those gains from time decay.

Pros and Cons of Collars

Pros

 Cons
Limits losses from a falling share price Limits gains from a rising share price
Allows for some upside exposure Exposes the trader to some risk of loss
Cheaper than only buying puts Can be a complicated strategy for new traders
Ownership of the stock retained

Collar Option Examples

Here’s a collar option example that will help put these concepts into context: Suppose a trader is long shares of XYZ stock that currently trades at $100. The trader worries about limits to near-term upside and wants to protect against a material share price decline. A collar strategy is a good trade to address these beliefs.

The trader sells a covered call at the $110 strike, receives a $5 premium, and buys a protective put at the $90 strike at a cost of $4. The net credit is $1 and the trader has not paid any commissions. With these two options trades, the trader has capped their upside at the call’s strike and the downside at the put’s strike. The breakeven point is $99 (the current stock price minus the net credit).

Let’s say the stock rallies to the call’s strike by expiration. In this case, the trader makes $10 on the long stock position, keeps the $5 call premium, and lets the put expire worthless. The gain is $11 (the stock price gain plus the options’ net credit received).

If the stock price drops to $80, the trader loses $20 on the stock position, keeps the $5 call premium, and makes $6 on the $90 strike long put. Thus, the net loss is just $9. The trader benefitted from the collar as opposed to just owning the stock which was down $20. The payoff diagram below shows how losses are limited in our trade scenario, but gains are also capped at the $110 mark.

Collar Payoff Diagram

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Reasons to Consider Using a Collar Option Strategy

A collar is an effective strategy when an investor expects a stock to trade sideways or down over a period. A trader might also use it when they expect a stock to go up over time and do not want to sell their shares, but they do want to protect unrealized gains – perhaps for tax reasons. A collar option trade is less bearish than buying puts outright, but it protects a trader from large losses. Also, selling the upside call helps finance the protective position.

Limiting Risk

A collar option strategy limits risk beyond the protective put’s strike. Even if a stock price goes to zero, the trader’s loss maxes out at the protective put’s strike.

Protecting an Asset

Another way to protect your stock position is to implement a protective put. With a protective put, a trader buys a put in addition to their long position in the underlying stock. This trade would be more expensive than a collar, since there is no sale of a call option to offset the cost of buying the put, but retains the unlimited upside of the underlying stock position.

The Takeaway

A collar is a strategy whereby a trader protects an unrealized gain on a stock at a reduced cost while still allowing some upside equity participation. Traders might use this strategy for tax purposes, or to limit the overall risk in their portfolio.

While SoFi does not currently offer options traders, it does help investors learn more about options. Investors can also get started by opening a brokerage account on the SoFi Invest investment platform where you can build a portfolio of stocks and exchange-traded funds.

FAQ

What is the maximum profit on a collar option?

The maximum profit on a collar is when the stock price rallies up to the call’s strike price. Above that level, gains are constant since the long stock position is offset by the short call.

Maximum profit = (call option strike price – net of option premiums) – stock purchase price

What is maximum loss on a collar option?

The maximum loss on a collar option trade is when the stock price declines to the put’s strike price. Below that level, losses are limited since the long stock position is offset by the long put.

Maximum Loss = stock purchase price – (put option strike price – net of option premiums)

What is breakeven on a collar option?

The breakeven on a collar strategy at expiration is the current stock price minus the net credit received or the current stock price plus the net debit paid.

Breakeven = stock price + put option premium paid – call option premium received

Photo credit: iStock/gorodenkoff

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.
SOIN1221506

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