While college rankings matter, it can be a good idea to take them with a grain of salt, and to view them through a lens of what matters most to you about the college experience and what you’re hoping to get out of it.
Colleges and universities each have different strengths and weaknesses, and published rankings can help you learn which schools are the strongest in different areas, and whether or not a college has improved or lapsed behind other schools in recent years.
Rankings may also allow you to filter schools by selected academic and non-academic characteristics, and help you hone in on schools that may meet your specific needs.
That said, rankings aren’t everything. Even U.S. News & World Report says on its best-colleges website: “The rankings provide a good starting point for students trying to compare schools. … The best school for each student, experts say, is one that will most completely meet his or her needs, which go beyond academics.”
Here’s what you need to know about college rankings.
What Are the College Rankings?
There is no single, ultimate, college ranking. All over the world, there are entities using a wide array of criteria to appraise universities and determine which ones are “the best.”
The factors an organization or company will use to come up with their college rankings can vary, which is why you might see a school ranked #3 on one list and #9 on another. However, here are some factors list-makers will commonly consider when ranking schools:
Though college rankings typically consider a large amount of information, they won’t tell you everything you need to know about a college. As a result, you may want to use rankings as one of many factors to make your list of prospective colleges. Ideally, you want to find a school that matches your interests, needs, goals, and budget.
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What Really Matters
Although many groups rank colleges, the term “college rankings” commonly refers to the U.S. News & World Report list, which rewards graduation rates and reputation.
But there’s also The Princeton Review, which drills down on other factors like quality of life, extracurriculars, social scene, and town life. They even rank “party schools,” a list “based on student ratings concerning the use of alcohol and drugs at their school, the number of hours they study each day outside of class time, and the popularity of fraternities/sororities at their school.”
As you look at different college rankings, you’ll want to keep your own priorities in mind, whether that’s finding the best school for your chosen field, honing in on schools that have the smallest class sizes, or finding a school that is known for being a good value.
You may want to use college rankings in combination with a number of other resources, including college guide books and talking to friends and family that have gone (or currently go) to schools that interest you. College tours can also provide a wealth of information about a school.
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The Bottom-Line Question
No discussion of college would be complete without touching on what you can afford to spend. Is going to college worth it? The answer depends on how much your chosen college will cost, how much aid you will get, how much you will need to borrow, and what you plan to do with your degree.
To get a sense of what a college will cost you out-of-pocket, a good first step is to fill out the Free Application for Federal Student Aid (FAFSA), which considers eligibility for grants, federal student loans, and work-study programs. But even after scholarships, federal aid, and any college savings plans, many students come up short when all education expenses are tallied.
At that point, you may want to consider private student loans. These are available from private lenders, such as banks, credit unions, and online lenders. Rates and terms will vary depending on the lender, so it can be well worthwhile to shop around. Borrowers (or cosigners) with excellent credit tend to qualify for the lowest rates. Just keep in mind that private student loans don’t necessarily offer the same protections, like income-driven repayment plans, that come with federal student loans.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
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Investing in bonds is a method of lending money to a company or government. Governments, municipalities, and companies issue bonds to investors who are willing to lend them money for a set period of time. In exchange, the issuer pays interest over the life of the loan and returns the principal when the bond “matures” at the end of a predetermined period known as the bond term.
For diversification, many investors want to include a mix of equities (stocks) and fixed income (bonds), since the two securities have different attributes and often behave differently throughout the economic cycle.
Why Invest in Bonds
As investors choose between the different types of investments, there are several reasons they might opt for bonds. Bonds pay interest at regular intervals, such as twice a year, which provides investors with a predictable stream of income. Also, if investors hold the bond to maturity, they get back their entire principal. In this way, investors can preserve their savings while investing.
Bonds are also an important tool for building a diversified portfolio. Compared with stocks, bonds are less volatile, so they can offset some of the risk inherent to stock investing.
While investors typically consider bonds a less risky investment, it’s still possible to lose money when investing in bonds if the issuer is unable to fulfill its obligation. In addition, inflation can eat away at bond returns, since fixed returns are worth less during periods of high inflation.
Where Can You Buy Bonds?
The best way to purchase bonds will depend on the type of bond and the bond market exposure that you want.
The Government
If you’re 18 or older, you can buy government bonds directly from the federal government through the TreasuryDirect website. The site is available at all times and gives investors access to Treasury bills, notes, bonds, Floating Rate Notes, Treasury Inflation-Protected Securities and savings bonds.
A Brokerage
Investors can buy a variety of bonds, including corporate, municipal, and government bonds, through their brokerage account. Bond prices vary depending on transaction fees and markups.
An ETF or Mutual Fund
Investors who don’t want to buy bonds directly can gain access to the asset class by buying shares of exchange-traded funds (ETFs) or mutual funds that invest in bonds.
Diversification is the main reason for investing in funds. Because issuers typically sell individual bonds in large units (a single bond might cost $1,000) the average investor may only be able to purchase a few of them on their own, making it tricky to put together a diversified bond portfolio.
Meanwhile, funds typically hold a diversified basket of bonds that tracks a bond index or a certain sector of the bond market, making it much easier for individuals to diversify. It’s important to note that while the yield of individual bonds is fixed, the yield on bond mutual funds or ETFs can fluctuate over time.
What Type of Bonds Can You Buy?
There are a few basic types of bonds you may consider buying:
Corporate Bonds
Corporate bonds are a type of debt security issued by public and private corporations. Investment banks typically underwrite the debt and issue it on the entity’s behalf. Companies use the money they raise through bond sales for a variety of purposes, such as investing in new equipment, research and development, paying investor dividends, and stock buybacks.
Municipal Bonds
States, cities, and counties issue municipal bonds, sometimes called “munis”, to finance capital expenditures like the building of new roads or bridges. There are three general types of municipal bonds:
• General obligation bonds aren’t backed by assets, but rather the “full faith and credit” of the issuer. Governments have the power to tax residents to pay bondholders back.
• Revenue bonds are backed by revenue from a specific source, such as highway tolls. That said, some revenue bonds are “non-recourse” meaning that if the revenue source disappears, bondholders have no claim to it.
• Conduit bonds are issued on behalf of private entities like hospitals.
US Treasuries
The Department of the Treasury issues U.S. Treasury bonds for the federal government. Investors typically consider Treasuries one of the safest investments, since they have the full faith and credit of the U.S. government backing them.
• Treasury bills are short-term debt obligations that mature within one year or less.
• Treasury notes are longer-term debt securities that mature within 10 years.
• Treasury bonds mature in 30 years and pay bondholders interest every six months.
• Treasury Inflation-Protected Securities, or TIPS, are notes or bonds that adjust payments to match inflation. Investors can buy tips with maturities of five, 10 and 30 years, and they pay interest every six months.
A mutual fund is a pool of money that’s invested by an investment firm according to a set of stated objectives. A bond mutual fund focuses specifically on bonds. They may focus on one type, such as corporate bonds, or they may contain all types. Unlike traditional bonds, investors don’t get their principal returned with bond mutual funds, and there may be ongoing fees and expenses associated with owning shares of the mutual fund.
Bond ETFs
Like bond mutual funds, bond ETFs represent a way for investors to pool their money and spread it across many different investments. While investors can only trade mutual funds once a day, they can trade ETFs throughout the day. ETFs may have lower fees than mutual funds.
How to Invest in Bonds
As investors decide which bonds to buy, they may want to consider the following factors:
Credit Ratings
Credit ratings are a way to gauge the creditworthiness of companies or governments that issue bonds. The ratings give investors an idea of how likely the bond issuer is to default. Standard & Poor’s, Moody’s and Fitch are the three private companies that control most bond ratings. The rating system is slightly different at each company, but generally speaking, a mark of AAA represents the highest rated and least likely to default issuers, while C or D denotes the riskiest issuers.
Duration
A bond’s duration is not the same at its term, or maturity. Rather it is a measure of how sensitive a bond’s price will be to changing interest rates. The longer a bond’s duration, the more likely its value will fall as interest rates rise. However, you can avoid duration issues by holding the bond to its maturity date.
Fees
If you buy bonds through a broker, you should expect to pay transaction fees. Brokers typically markup the price of a bond when they sell it to you in lieu of charging a commission. Markups may be anywhere from 1% to 5% of the bond’s original value. Look for brokerages that have low fees and markups.
Risk Level
Before buying a bond, investors should understand the associated risks, including:
• Credit risk: The risk that issuers may fail to make interest payments and default on the bond.
• Interest rate risk: The possibility that changes in interest rate will raise or lower a bond’s value if sold before maturity.
• Inflation risk: The risk that inflation will decrease the value of bond returns.
• Liquidity risk: The risk an investor won’t be able to sell their bond when they want to due to low or no demand.
You might consider matching the maturity date to your investment timeline. For example, if you need your principal in five years to make a down payment on a house, you may not want to buy a 10-year bond. While you could sell the 10-year bond after five years, market conditions could make it less valuable than if you waited until maturity.
The Takeaway
Whether purchased individually or accessed through mutual funds and ETFs, bonds provide a way for investors to diversify their portfolios. They can also typically help investors develop a reliable stream of income, which can become increasingly important as they move toward retirement.
Before buying a bond, you should research issuers and credit ratings to be sure you aren’t taking on undue risk. And above all, you should be sure that whatever you buy fits into your long-term investment plan.
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Banking today has a lot of one-click convenience, and you may hear the terms EFT and ACH used interchangeably. There is, however, a key difference between these two acronyms: ACH is one kind of EFT.
To understand this better, first know your definitions. Automated Clearing House (ACH) is a national network linking U.S. financial institutions. This electronic system allows them to debit money from one account and then credit it to another. ACH payments are one variety of EFT, or electronic funds transfer. The term EFT includes additional methods of moving money electronically, such as wire transfers.
So all ACH transactions are considered EFT, but not all EFTs are ACH.
Keep reading to learn more including:
• Which payments are considered ACH?
• What are some other EFT payment methods?
• How do EFT vs. ACH vs. wire transfers compare?
ACH Transfers
ACH stands for Automated Clearing House, a network governed by Nacha (National Automated Clearing House Association). The first ACH association appeared in 1972 in California; by 1974, multiple regional networks joined together to form Nacha, which has since overseen the ACH network nationally.
But what is ACH? Put simply, ACH is a type of electronic fund transfer (EFT) that allows individuals, corporations, and even the government to electronically move money from one bank account to another. It can be thought of as a hub that keeps funds flowing.
ACH payments work domestically; that is, among banks and credit unions within the United States. You may be able to send money via international ACH transfers, but other countries will have their own networks and governing bodies. Some countries do not have an equivalent network at all.
Funds first go to the Automated Clearing House, which then reviews the payments and releases them in batches throughout the day. For this reason, ACH transfers are not immediate. How long ACH transfers take can vary: Traditional ACH transfers can take one to two business days, but in recent years, Nacha has enabled same-day transfers for eligible transactions.
How Do ACH Transfers Work?
ACH transfers work thanks to a data file that includes information about a prospective payment. The file goes to the payor’s bank to the clearing house and then on to the payee’s bank, with details on the transaction. The funds get moved into the intended location, and the process is completed, transferring money from one account to another.
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How Is ACH Used?
Consumers and businesses can use ACH for a variety of purposes. For example, employers often use the ACH network for direct deposit. This enables them to deposit paychecks directly into employees’ bank accounts. When an entity, like an employer or the government, initiates the ACH process to send funds, this is classified as an ACH credit.
Individuals can provide bank account information to businesses, such as mortgage lenders and utility companies, to enable ACH debit transactions as part of their electronic banking. This means those companies are able to directly debit funds from the individual account using ACH as a form of electronic bill payment. Businesses and individuals may utilize ACH debit for autopay (recurring payments) or for one-time payments.
Even peer-to-peer (P2P) payment methods like PayPal and Venmo can utilize the Automated Clearing House network for electronic transfers. (When such services offer instant payments, they may charge a fee and use your credit card instead, so proceed carefully in these situations.)
Typically, the employer or merchant enabling ACH payments is the one to pay ACH fees.
Electronic fund transfers (EFTs) refer to a much broader range of electronic payments. ACH is a type of EFT, but EFT can also include payments like wire transfers, debit card payments, credit card payments, local bank transfers, instant P2P payments, and even ATM transfers. Electronic fund transfers can be domestic or international in scope.
The Consumer Finance Protection Bureau refers to electronic fund transfers as “any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape.”
Note: Another common term in finance is ETF (exchange-traded fund). The acronyms are similar, so it’s important to recognize that an ETF is an investment security, not a payment method.
How Do EFT Payments Work?
EFT payments may use the ACH network, or they may not. An example of a transaction that doesn’t use ACH is tapping or swiping your debit card to make a payment. It’s an instantaneous transfer of funds, without banking information being exchanged. The money is moved from your account to the store’s without any verification other than your PIN.
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Types of EFT Payments
EFT payment is a broad category, including common transfers like ACH and wire transfers. Here is just a short list of payment methods that can be classified as EFT:
• ACH transfers
• Wire transfers
• Peer-to-peer payments (often done through ACH)
• Debit card transactions (in person or online)
• Credit card transactions (in person or online)
• ATM transfers
• E-checks
• Telephone orders
Do EFT Payments Have Fees?
Typically, a merchant will pay a small percentage of a transaction’s amount for the privilege of using an EFT method. In some situations, you, the consumer, may be assessed a fee for using these methods. For instance, some merchants may add a surcharge for credit card vs. cash or debit card payments. Or if you pay by phone, there may be a surcharge. You should be alerted to these add-on costs, however, in advance, so you can decide if you want to proceed or not.
What Is the Difference Between ACH and EFT?
We’ve established that the key difference between ACH and EFT is that an ACH is a type of EFT. This table further breaks down the distinction:
ACH
EFT
Availability
Traditional ACH is available domestically (in the U.S.).
Various types of EFTs can be used internationally.
Security
Transfers pass through the ACH, which provides an added level of security over paper checks and debit card transactions.
While ACH and wire transfers are less prone to fraud, other forms of EFTs (like debit and credit cards) can be susceptible.
Speed
Can be same-day but never instant; may take multiple days.
Can be instant.
ACH vs EFT vs Wire Transfers
When banking, you’re likely to hear about different ways to move money, including ACH, EFT, and wire transfers. Here’s a closer look: ACH is a type of EFT, but another common type of EFT is a wire transfer, which can be used to send money to someone’s bank account.
Wires can be both domestic and international and often have a fee for both the sender and the receiver, depending on the banks or transfer service agencies (like Western Union) involved. Wire transfers allow you to make an electronic payment “by wire,” such as through SWIFT, the Clearing House Interbank Payments System, or the Federal Reserve Wire Network. Wire transfers can take up to two days to fully process; international ones might take longer.
Should You Use Electronic Transfers?
Electronic transfers are common in modern banking. It is likely that you already utilize some form of electronic transfer, whether you receive a direct deposit from your employer like 96% of American workers, have your utility bills on autopay, pay for groceries with a debit card, or use peer-to-peer transfer apps to split the dinner bill or pay a friend for concert tickets. When you buy a house, the mortgage company may even ask you to wire funds in time for the closing.
The Takeaway
Automated clearing house (ACH) transfers are a type of electronic funds transfer (EFT), which allows for the direct debiting and crediting of funds from one bank account to another. Common examples of ACH include direct deposit from an employer into your bank account or an automatic bill payment debited from your account.
ACH is only one type of EFT, however; other types include wire transfers and debit and credit card payments, among others. These kinds of payments are commonly used today to keep funds flowing quickly and securely and play an important role in your banking life.
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FAQ
Is EFT the same as direct deposit?
EFT stands for electronic funds transfer. Direct deposit is one example of EFT.
Is ACH a wire transfer?
While ACH and wire transfers are similar transactions, they operate on different timelines and according to different rules. Wire transfers (especially domestic ones) can occur almost immediately, while ACH transactions can take a couple or a few business days.
What is the difference between ACH and autopay?
ACH is a method for electronically transferring funds between accounts. Autopay involves your setting up recurring payments of bills with a vendor. It typically uses the ACH network to complete those transactions.
Is ACH the same as direct deposit?
Direct deposit is one kind of ACH payment, but other kinds of ACH transactions are possible as well.
What is the best EFT payment method?
The best EFT method will depend upon various factors, such as timing and the technology you can most easily access or are most comfortable using.
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet. 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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An option is a financial instrument that gives the buyer the right to purchase or sell an underlying security, such as a stock, during a set time period for an agreed-upon price. They are popular with investors because they allow the investor to bet on the price increase or decrease of a stock, without owning the stock itself.
Exotic options are a class of options that allow investors to take advantage of some features of options contracts to pursue other strategies. Exotic options pricing tends to be higher than that of traditional options.
What Is an Exotic Option?
Exotic options are hybrid securities that offer unique and often customizable payment structures, expiration dates, and strike prices. For those features, they typically charge a higher price than traditional options. University of California Berkeley professor Mark Rubenstein coined the term “Exotic Options” in a 1990 paper about contracts.
The asset that underlies these options also includes non-traditional assets and securities. Exotic options can be either covered or naked call, meaning that the seller has not set aside shares or cash to meet the obligation when it expires.
To understand what makes an exotic option exotic, let’s review a traditional, plain-vanilla options contract and how it works. With a traditional option, the owner can buy or sell the underlying security for an agreed-upon price either before or at the option’s predetermined expiration date. The holder is not, however, obligated to exercise the option, hence the name.
An exotic option typically has all of those features, but with complex variations in the times when the option can be exercised, as well as in the ways investors calculate the payoff.
Investors typically buy and sell options in the over-the-counter (OTC) market, a smaller dealer-broker network. An exotic option may have underlying assets that differ from those offered by traditional options. Those underlying assets can include commodities like oil, corn and natural gas, in addition to stocks, bonds, and foreign currencies.
There are even exotic derivatives that allow traders to bet on things like the weather. Both institutional and sophisticated retail investors use customized exotic options to match their own unique risk-management needs.
💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.
11 Types of Exotic Options
There are many types of exotic options that investors can purchase for exotic options trading. Here’s a look at some of them:
1. Asian Options
One of the most common forms of exotic options contract, the Asian option is a contract whose payoff to the holder reflects on the security’s average price over one or several agreed-upon periods of time. This makes it different from a U.S. option, whose return reflects the price of the underlying asset when the holder chooses to exercise it, and different from a European option, whose payoff reflects the price of the security at the time of the option’s expiration.
2. Barrier Options
These options remain effectively dormant until activated, usually by the price of the underlying asset reaching a certain level.
3. Basket Options
Unlike traditional options, which typically have a single underlying asset, basket options contracts depend on the price movements of more than one underlying asset. For holders, the payout on a basket option reflects the weighted average of the assets underlying the contract.
4. Bermuda Options
The main differentiator of Bermuda options is when the holder can exercise them. An investor can exercise a Bermuda option at its expiration date, and at a handful of set dates before then. This makes them different from U.S. options, which holders can exercise at any point during the contract, and European options, which can only be exercised at expiration.
5. Binary Options
Sometimes called digital options, binary options are unique because they only guarantee a payout to the holder if a predetermined event occurs. This all-or-nothing investment typically delivers a predetermined payout or asset if the agreed-upon event occurs.
6. Chooser Options
With ordinary options contracts, the investor must decide upfront if they’re buying a call (right to buy the underlying security) or put (right to sell the underlying security) option. But with a chooser option, the holder can decide whether they want the option to be a put or call option at a predetermined date between when they buy the chooser option and when the contract expires.
7. Compound Options
These options, often called split-fee options, allow investors to buy an option on an option. Whether or not a compound option pays off depends on whether or not another option pays off. Investors in compound options have to make their decisions based on the expiration dates and strike prices of both the underlying option, as well as the compound option itself.
8. Extendible Options
The main advantage that extendible options offer is that they give an investor the ability to postpone the expiration date of the contract for an agreed-upon period of time. This can mean adding the extra time for an out-of-the-money option to get into the money, a feature that’s priced into the original option contract.
Extendible options can be holder-extendible, meaning the purchaser can choose to extend their options. They can also be writer-extendible, meaning that the issuer has the right to extend the expiration date of the options contracts, if they so choose.
9. Lookback Options
Lookback options differ from most options because they do not come with a specified exercise price. Instead, an owner of a lookback option can choose the most favorable strike price from the prices at which the underlying asset has traded at throughout the duration of the option contract.
10. Spread Options
Unlike a traditional option, where the payoff depends on the difference between the contract’s strike price and the spot price of the underlying asset when the investor exercises the contract, a spread option pays an investor based on the price difference between multiple assets. The butterfly spread, which involves four separate options, is one example of a spread option.
11. Range Options
For highly volatile assets, some investors choose to use range options, because their payout is based on the size of the difference between the highest and lowest prices at which the underlying asset trades during the life of the range options contract.
Pros and Cons of Exotic Options
There are benefits and drawbacks to using exotic options.
Pros
• Some exotic options have lower premiums than more flexible American options contracts.
• Investors can select and customize exotic options to fit very complex and precise strategies.
• With exotic options, investors can fine-tune the risk exposure of their portfolio.
• Investors can use exotic options to find opportunities in unique market conditions.
Cons
• Many exotic options come with higher costs, and less flexibility than traditional contracts.
• There are no exotic options that guarantee a profit.
• Because of their unique structures, exotic options sometimes react to market moves in unexpected ways.
• The complex rules mean that exotic options have a higher risk of ultimately becoming worthless.
💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
The Takeaway
Exotic options are complex financial instruments that allow investors to make bets on the price of an asset without owning that asset itself. Unlike traditional options, exotic options include customizable features that investors can use to pursue a specific options trading strategy.
As many investors know, trading options — of all types — is relatively advanced, and requires a good amount of background knowledge and understanding of intricate financial assets. For that reason, it may be a good idea to speak with a financial professional before diving into options trading.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
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For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes. Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Contango and backwardation are two ways to characterize and understand the state of the commodities or cryptocurrency futures markets, based on the relationship between spot and future prices.
In short, contango is a market in which futures trade at spot prices that are higher than the expected future spot price. But a contango market is not the same thing as a normal futures curve, though it is often mistaken for one. Normal backwardation, on the other hand, is a market where futures trade at a price that’s lower than the expected future spot price.
Futures and Derivatives
It’s important to have an understanding of both futures and derivatives to fully understand the difference between contango and backwardation.
Futures, Explained
Futures contracts, or futures, consist of legal agreements to buy or sell a security, commodity or asset at a set time in the future, for a predetermined price. One feature for both buyers and sellers of futures is that they can execute the contract no matter what current market price of the underlying asset when the contract expires.
Companies use futures contracts to hedge their risk of massive shifts in commodities prices, and investors who believe that the underlying security will go up or go down by a certain amount of time over a fixed period of time. The buyer of a futures contract enters a legal agreement to buy the underlying asset at the contract’s expiration date. The seller, on the other hand, agrees to deliver the underlying security at the agreed-upon price, when the contract expires.
💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.
Derivatives, Explained
A derivative refers to any financial security whose value rises and falls based on the value of another underlying asset, such as a security or commodity. That includes securities such as futures, options, and swaps. The most common assets upon which derivatives are based include securities like stocks and bonds, commodities like oil or other raw materials, but they may also reflect currencies and interest rates.
When writing futures contracts for a given asset, the futures seller will place different prices on that commodity at different points in the future. While the base price of a futures contract is determined by adding the cost of carrying the underlying asset to its spot price, it also includes an element of prediction. People buy more oil in the winter to buy their homes, for example, so oil investors may predict that oil will be in higher demand — and thus cost more — in January than it will in May.
By comparing the prices within futures contracts for the same underlying asset at different points in the future, the dollar amounts form a curve.
Normal Futures Curve vs Inverted Futures Curve
In a normal futures curve, the prices assigned to the underlying asset of futures contracts goes up over time. In the example of oil, a normal futures curve will be one in which a barrel of oil is priced at $50 for a contract expiring in 30 days; $55 for a contract expiring in 60 days; $60 for a contract expiring in 90 days, and $65 for a contract expiring in 120 days.
A normal futures curve embodies an expectation that the price of the asset underlying the futures contracts — such as oil, soybeans, a stock, or a bond — will rise over time. An inverted futures curve assumes just the opposite.
To go back to the example of oil, in an inverted futures curve, a barrel of oil is priced at $50 for a contract expiring in 30 days; $45 for a contract expiring in 60 days; $40 for a contract expiring in 90 days, and $35 for a contract expiring in 120 days.
The futures curve is used by investors, policymakers and corporate treasurers as an indicator of popular sentiment toward the underlying asset. And the prices of those futures contracts can represent the market’s combined best guess about the prices of those assets.
The spot price of the asset, on the other hand, the price at which it’s currently trading. It’s the relationship between the spot price and the prices on the futures curve that determine if the futures market is in a state of backwardation or contango.
What Is Backwardation?
When an asset is trading at spot prices that are higher than the prices of that asset as reflected in the futures contracts maturing in the coming months, it’s called backwardation.
It can happen for a number of reasons, but most commonly occurs because of an unexpectedly higher demand for the underlying asset, especially in cases of a shortage in the spot market. Sometimes backwardation is caused by a manipulation of a commodity’s supply by a country or organization. Decisions by the Organization of Petroleum Exporting Countries (OPEC), for example, could create oil backwardation.
When backwardation occurs in futures markets, traders may try to make a profit by short-selling the underlying asset, while buying futures contracts that promise delivery at the lower prices. That trading drives the spot price down, until it matches the futures price.
What Is Contango?
Contango, on the other hand, is a situation where the spot price of an asset is lower than those offered in the futures contracts. In an oil contango market, for example, the spot price of the oil would rise to match that of the futures contracts at expiration. In contango, often associated with a normal futures curve, investors agree to pay more for a commodity in the future.
Backwardation vs Contango for Investors
Contango and backwardation can occur in any commodities market, including oil, precious metals, or agricultural products. Investors can find different opportunities and investment risks when investing in commodities in both backwardation and contango.
In backwardation, short-term traders who practice arbitrage can make money by short-selling the underlying assets, while buying futures contracts until the difference between the spot and futures prices disappears.
But investors can also lose money from backwardation in situations where the futures prices keep falling while the expected spot price remains the same. And investors hoping to benefit from backwardation caused by commodity shortage may wind up on the wrong side of their trades if new suppliers appear.
For investors, contango mostly poses a risk for investors who own commodity exchange-traded funds (ETFs) that invest in futures contracts. During periods of contango, investors can, however, avoid those losses by purchasing ETFs that hold the actual commodities themselves, rather than futures contracts.
💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.
The Takeaway
Contango and backwardation are two terms that describe the direction futures markets are headed. Knowing the difference between these two terms can help institutional and retail investors make the strategic choices when investing in a wide range of derivatives markets.
These are fairly high-level terms, and may be used as a part of an advanced trading strategy. If investors don’t feel comfortable investing in derivatives or futures contracts – or similar securities — it may be best to consult with a financial professional to get a better sense of if they fit into your strategy.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
Photo credit: iStock/LumiNola
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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. Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
