What is Delta in Options Trading?

In options trading, Delta is an important assessment tool used to measure risk sensitivity. Delta is a risk metric that compares changes in a derivative’s underlying asset price to the change in the price of the derivative itself.

Essentially it measures the sensitivity of a derivative’s price to a change in the underlying asset. Using Delta as part of an options assessment can help investors make better trades.

Delta is one of “the Greeks,” a set of options trading tools denoted by Greek letters. Some traders might refer to the Greeks as risk sensitivities, risk measures,or hedge parameters. The Delta metric is the most commonly used Greek.

Recommended: A Beginner’s Guide to Options Trading

Option Delta Formula

Analysts calculate Delta using the following formula with theoretical pricing models:

Δ = ∂V / ∂S

Where:

•   ∂ = the first derivative

•   V = the option’s price (theoretical value)

•   S = the underlying asset’s price

Some analysts may calculate Delta with the much more complex Black-Sholes model that incorporates additional factors. But traders generally don’t calculate the formula themselves, as trading software and exchanges do it automatically. Traders analyze these calculations to look for investment opportunities.

Option Delta Example

For each $1 that an underlying stock moves, an the equity derivative’s price changes by the Delta amount. Investors express the Delta sensitivity metric in basis points. For example, let’s say there is a long call option with a delta of 0.40. Investors would refer to this as “40 delta.” If the option’s underlying asset increased in price by $1.00, the option price would increase by $0.40.

However, the Delta amount is always changing, so the option price won’t always move by the same amount in relation to the underlying asset price. Various factors impact Delta, including asset volatility, asset price, and time until expiration.

If the price of the underlying asset increases, the Delta gets closer to 1.0 and a call option increases in value. Conversely, a put option becomes more valuable if the asset price goes lower than the strike price, and in this case Delta is negative.

How to Interpret Delta

Delta is a ratio that compares changes in the price of derivatives and their underlying assets. It uses theoretical price movements to track what will happen with changes in asset and option price. The direction of price movements will determine whether the ratio is positive or negative.

Bullish options strategies have a positive Delta, and bearish strategies have a negative Delta. It’s important to remember that unlike stocks, options buying and selling options does not indicate a bullish or bearish strategy. Sometimes buying a put option is a bearish strategy, and vice versa.

Recommended: Differences Between Options and Stocks

Traders use the Delta to gain an understanding of whether an option will expire in the money or not. The more an option is in the money, the further the Delta value will deviate from 0, towards either 1 or -1.

The more an option goes out of the money, the closer the Delta value gets to 0. Higher Delta means higher sensitivity. An option with a 0.9 Delta, for example, will change more if the underlying asset price changes than an option with a 0.10 Delta. If an option is at the money, the underlying asset price is the same as the strike price, so there is a 50% chance that the option will expire in the money or out of the money.

Call Options

For call options, delta is positive if the derivative’s underlying asset increases in price. Delta’s value in points ranges from 0 to 1. When a call option is at the money the Delta is near 0.50, meaning it has an equal likelihood of increasing or decreasing before the expiration date.

Put Options

For put options, if the underlying asset increases in price then delta is negative. Delta’s value in points ranges from 0 to -1. When a put option is at the money the Delta is near -0.50.

How Traders Use Delta

In addition to assessing option sensitivity, traders look to Delta as a probability that an option will end up in or out of the money. The more likely an option is to generate a profit, the less risky it is as an investment.

Every investor has their own risk tolerance, so some might be more willing to take on a risky investment if it has a greater potential reward. When considering Delta, traders recognize that the closer it is to 1 or -1 to greater exposure they have to the underlying asset.

If a long call has a Delta of 0.40, it essentially has a 40% chance of expiring in the money. So if a long call option has a strike price of $30, the owner has the right to buy the stock for $30 before the expiration date. There is a 40% chance that the stock’s price will increase to at least $30 before the option contract expires.

Traders also use Delta to put together options spread strategies.

Delta Neutral

Traders also use Delta to hedge against risk. One common options trading strategy, known as neutral Delta, is to hold several options with a collective Delta near 0.

The strategy reduces the risk of the overall portfolio of options. If the underlying asset price moves, it will have a smaller impact on the total portfolio of options than if a trader only held one or two options.

One example of this is a calendar spread strategy, in which traders use options with various expiration dates in order to get to Delta neutral.

Delta Spread

With a Delta spread strategy, traders buy and sell various options to create a portfolio that offsets so the overall Delta is near zero. With this strategy the trader hopes to make a small profit off of some of the options in the portfolio.

Using Delta Along With the other Greeks

Delta measures an option’s directional exposure. It is just one of the Greek measurement tools that traders use to assess options. There are five Greeks that work together to give traders a comprehensive understanding of an option. The Greeks are:

•   Delta (Δ): Measures the sensitivity between an option price and the price of the underlying security.

•   Gamma (Γ): Measures the rate at which Delta is changing.

•   Theta (θ): Measures the time decay of an option. Options become less valuable as the expiration date gets closer.

•   Vega (υ): Measures how much implied volatility affects an option’s value. The more volatility there is the higher an option premium becomes.

•   Rho (ρ): Measures an option’s sensitivity to changing interest rates.

The Takeaway

Delta is a useful metric for traders evaluating options and can help investors determine their options strategy. Traders often combine it with other tools and ratios during technical analysis. However, you don’t need to trade options in order to get started investing.

A great way to begin investing is by opening an investment account on the SoFi Invest® app. While SoFi does not offer options trading, it does allow you to research, track, buy and sell stocks, ETFs, and crypto right from your phone.

Photo credit: iStock/PeopleImages


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN1021463

Source: sofi.com

What Is Fibonacci Retracement in Crypto Trading?

A retracement level is the price at which a stock or cryptocurrency tends to see a reversal in its trend. Fibonacci retracement is a popular tool in technical analysis that helps determine support and resistance levels on a price chart.

What Are Fibonacci Retracement Levels?

Fibonacci numbers are a series where each number equals the sum of the two previous numbers. The most basic series is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 etc.

When it comes to technical analysis, investors use Fibonacci Replacement Levels, expressed as percentages, to analyze how much of a previous move a price has retraced. The most important Fibonacci Retracement levels are: 23.6% 38.2%, 50% and 61.8%.

Some analysts refer to 61.8% as “the golden ratio,” since it equals the division of one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

The other Retracement levels reflect other calculations: Dividing one number by the number three places to its right equals 23.6%. For example: 8/34 = 0.2352. Bitcoin traders often use 78.6%, which is the square root of 0.618,

Some prefer the 0.618 and 0.382 levels because these are the retracement levels analysts believe are most likely to generate a trend reversal. These levels are considered inflection points where fear and greed can alter price action. When an asset is trending upward but loses momentum, it’s possible that a pullback to the 0.618 price level could result in a bounce upward, for example.

How Does Fibonacci Retracement Work and What Does it Do?

There are several theories as to why the fibonacci retracement works. Some of these include:

•   Fibonacci price levels reflect the effects of extreme fear and greed in the market. To use this to their advantage, traders might buy when people are panicking and sell when others are getting greedy.

•   Fibonacci patterns are often observed in nature as well as in mathematics. For example: fruits and vegetables. If one would look at the center of a sunflower, spiral patterns could appear to curve left and right. Counting these spirals, the total often is a Fibonacci number. If one could divide the spirals into those pointed left and right, then two consecutive Fibonacci numbers could be obtained. Therefore, it’s thought that these patterns may be important in financial markets as well.

•   The law of numbers: If a greater percentage of people practice Fibonacci crypto trading, then the likelihood of its accuracy increases.

At its core, a Fibonacci retracement is a mathematical measurement of a particular pattern. When it comes to Fibonacci in crypto, traders try to apply these patterns to price action to predict future price movements.

Who Created Fibonacci Retracements?

While traders commonly use Fibonacci in crypto today, the number sequences pre-date the invention of cryptocurrency by many centuries. Fibonacci numbers are based on the key numbers studied by mathematician Leonardo Fibonacci (or Leonardo of Pisa) in the 13th century, although Indian mathematicians had identified them previously. He was a medieval Italian mathematician famous for his “Book of the Abacus”, the first European work on Indian and Arabian mathematics, which introduced Hindu-Arabic numerals to Europe.

Formula

In an uptrend or bullish market, the formulas for calculating Fibonacci retracement and extension levels are:

UR = High price – ((High price – Low price) * percentage) in an uptrend market; where UR is uptrend retracement.

UE = High price + ((High price – Low price) * percentage) in an uptrend market; where UE is an uptrend extension.

For example: A stock price range of $10 – $20, could depict a swing low to swing high.

Uptrend Retracement (UR) = $20 – (($20 – $10) * 0.618)) = $13.82 (utilizing 0.618 retracement)

Uptrend Extension (UE) = $20 + (($20 – $10) * 0.618)) = $26.18 (utilizing 0.618 retracement)

If a stock pulls back $13.82 could be a level that the stock bounces back to reach higher levels than its swing high price, e.g. $20. In an uptrend, the general idea is to take profits on a long trade at a Fibonacci price extension Level ~ $26.18.

What Does a Fibonacci Retracement do?

Markets don’t go straight up or down. There are pauses and corrections along the way. To buy stocks in an uptrend, one would look to get the best price possible.

Some traders use Fibonacci Retracement to determine how much a stock could pull back before continuing higher. Traders can use these retracement levels to find optimal prices at which to enter a trade.

A swing high happens when a security’s price reaches a peak before a decline. A swing high forms when the highest price reached is greater than a given number of highs around it.

Swing low is the opposite of swing high. It refers to the lowest price within a timeframe, usually fewer than 20 trading periods. A swing low occurs when a lowest price is lower than any other surrounding prices in a given period of time.

Support and Resistance

Support is the price level that acts as a floor, preventing the price from being pushed lower, while resistance is the high level that the price reaches over time. Analysts often illustrate these as horizontal lines on a graph.

A support or resistance level can also represent a pivot point, or point from which prices have a tendency to reverse if they bounce (in the case of support) or retreat (in the case of resistance) from that level.

Learn more: Support and Resistance: What Is It? How To Use It for Trading

Limitations of Fibonacci Retracement

Fibonacci retracements in crypto or other markets may be slightly predictive. But over relying on them can be counterproductive for reasons such as:

•   Fibonacci retracements, like any other indicators, could be used effectively only if investors understand it completely. It could end up being risky if not used properly.

•   There are no guarantees that prices will end up at that point, and retrace as the theory indicates.

•   Fibonacci retracement sequences are often close to each other, therefore it may be tough to accurately predict future price movements.

•   Using technical analysis tools like Fibonacci retracements can give investors tunnel vision, where they only see price action through this one indicator. Assuming that any single indicator is always correct can be problematic.

A Fibonacci retracement in crypto trading could wind up being even less predictive than in other financial markets due to the extreme volatility that cryptocurrencies often experience.

Fibonacci Retracements and Bitcoin

Fibonacci retracements can also be used for trading cryptos such as Bitcoin (BTC), similarly to how they’re used in stocks. In this case, one would use the levels 23.6%, 38.2%, 50%, 61.8% and 78.6% to determine where the cryptocurrency price would reverse.

Crypto prices are very volatile, and leverage trading is common. Leverage is the use of borrowed funds to increase the trading position, beyond what would be available from the cash balance alone. Therefore, it can be important to have some reference as to when the price could reverse, to not incur major losses.

Using the Fibonacci Retracement Tool to Trade Cryptocurrencies

In order to get started with a Fibonacci Retracement Tool, a trader could find a completed trend for a crypto, say, Bitcoin, which could either be an uptrend or downtrend.

Below are some steps on how to use Fibonacci retracement tool:

1.    Determine the direction of the market. Is it an uptrend or downtrend?

2.    For an uptrend, determine the two most extreme points (bottom and top) on the Bitcoin price chart. Attach the Fibonacci retracement tool on the bottom and drag it to the right, all the way to the top.

3.    For a downtrend, the extreme points are top and bottom and the retracement tool could be dragged from the top to the bottom.

4.    For an uptrend or downtrend, one could monitor the potential support levels: 0.236, 0.382, 0.5 and 0.618.

Recommended: Crypto Technical Analysis: What It Is & How to Do One

Fibonacci Retracement Example for Bitcoin

In December 2017, Bitcoin fell from $13,112 to around $10,800, within a short timeframe. After that, it rallied up to $12k twice, but did not break above that level until 2021. That indicates a bearish pattern, as it couldn’t break above its previous high. In technical analysis it is called a double top.

On the Fibonacci tool, the $12k resistance point coincided with the 50% level of retracement. When the price could not reach this level, it started to fall again. In this scenario, traders using Fibonacci Retracement might consider this a good time to exit a long position or establish a short position. A short trade is based on the speculation that the price of Bitcoin is going to fall.

By February, 2018, the trade materialized as Bitcoin continued its downtrend falling all the way to $9,270. The short trade would have worked and traders could have realized a profit from using the crypto Fibonacci Retracement tool, although those who managed to HODL for years after that would have made even more.

FAQ

Does Fibonacci retracement work with crypto?

While the Fibonacci retracement tool is traditionally used for analyzing stocks or trading currencies in the forex market, some analysts believe it is also helpful in determining a crypto trading strategy.

How accurate is fibonacci retracement?

In crypto, Fibonacci retracement levels are often fairly accurate, although no indicator is perfect and they are best used in combination with other research. The accuracy levels increase with longer timeframes. For example, a 50% retracement on a weekly chart is a more important technical level than a 50% retracement on a five-minute chart.

What are the advantages of using fibonacci retracement?

Here are some benefits of using Fibonacci Retracement.

•   Trend prediction. With the correct setting and levels, it can often predict the price reversals of bitcoin at early levels, with a high probability.

•   Flexibility. Fibonacci Retracement works for assets of any market and any timeframe. One must note that longer time frames could result in a more accurate signal.

•   Fair assessment of market psychology. Fibonacci levels are built on both a mathematical algorithm and the psychology of the majority, which is a fair assessment of market sentiment.

The Takeaway

The Fibonacci Retracement tool can help identify hidden levels of support and resistance so that analysts can better time their trades. Analysts believe this tool is more effective when utilized with types of cryptocurrency that have higher market-capitalization, like Bitcoin and Ethereum, because they have more established trends over extended time frames.They consider it less effective on cryptocurrencies with a smaller market capitalization.

Whether you use Fibonacci Retracement or other methods to create your cryptocurrency trading strategy, a great way to get started is by opening a brokerage account on the SoFi Invest investment app. You can use it to trade more than a dozen different coins, including Bitcoin, Ethereum, Litecoin, Cardano, and Dogecoin.

Photo credit: iStock/HAKINMHAN


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
SOIN1221533

Source: sofi.com

Tax Loss Carryforward

A tax loss carryforward is a special tax rule that allows capital losses to be carried over from one year to another. In other words, capital losses realized in the current tax year can also be used to offset gains or profits in a future tax year.

Investors can use a capital loss carryforward to minimize their tax liability when reporting capital gains from investments. Business owners can also take advantage of loss carryforward rules when deducting losses each year.

Knowing how this tax provision works, and when it can be applied, is important from an investment tax-savings perspective.

What Is Tax Loss Carryforward?

Tax loss carryforward is the process of carrying forward capital losses into future tax years. A capital loss occurs when you sell an asset for less than your adjusted basis. Capital losses are the opposite of capital gains, which are realized when you sell an asset for more than your adjusted basis.

Adjusted basis simply means the cost of an asset, adjusted for various events (i.e. increases or decreases in value) through the course of ownership. Whether a capital gain or capital loss is short-term or long-term depends on how long you owned it before selling. Short-term capital losses and gains apply when an asset is held for one year or less, while long-term capital gains and losses are associated with assets held for longer than one year.

The Internal Revenue Service allows certain capital losses, including losses associated with personal or business investments, to be deducted from taxable income. There are limits on the amount that can be deducted each year, however, which depend on the type of losses that are being reported.

In order to allow taxpayers to claim the full capital loss deduction they’re entitled to, the IRS makes it possible to carry tax losses forward into future years.

Recommended: What to Know about Paying Taxes on Stocks

How Tax Loss Carryforwards Work

In general terms, a tax loss carryforward works by allowing you to report losses realized on assets in one tax year on a future year’s tax return. IRS loss carryforward rules apply to both personal and business assets. The main types of carryforwards allowed by the Internal Revenue Code are capital loss carryforwards and net operating loss carryforwards.

Capital Loss Carryforward

IRS rules allow investors to “harvest” tax losses, meaning they use capital losses to offset capital gains. An investor could sell an investment at a capital loss, then deduct that loss against capital gains from other investments, assuming they don’t violate the wash sale rule.

The wash sale rule prohibits investors from buying substantially identical investments within the 30 days before or 30 days after the sale of a security for the purposes of tax-loss harvesting.

If capital losses are equal to capital gains, they would offset one another on your tax return, so there’d be nothing to carry over. For example, a $5,000 capital gain would cancel out a $5,000 capital loss and vice versa.

If capital losses exceed capital gains, you can claim the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 21 of Schedule D for Form 1040. Any capital losses in excess of $3,000 could be carried forward to future tax years. The IRS allows you to carry losses forward indefinitely.

Net Operating Loss Carryforward

A net operating loss (NOL) occurs when a business has more deductions than income. Rather than posting a profit for the year, the business operates at a loss. Business owners may be able to claim a NOL deduction on their personal income taxes. Net operating loss carryforward rules work similar to capital loss carryforward rules, in that businesses can carry forward losses from one year to the next.

For losses arising in tax years after December 31, 2020, the NOL deduction is limited to 80% of the excess of the business’s taxable income, according to the IRS. To calculate net operating loss deductions for your business, you first have to omit items that could limit your loss, including:

•   Capital losses that exceed capital gains

•   Nonbusiness deductions that exceed nonbusiness income

•   Qualified business income deductions

•   The net operating loss deduction itself

These losses can be carried forward indefinitely at the federal level.

Note, however, that the rules for NOL carryforwards at the state level vary widely. Some states follow the federal rules, but others do not.

How Long Can Losses Be Carried Forward?

According to the IRS, tax loss carryforward rules allowed losses to be carried forward indefinitely. That includes both capital losses associated with the sale of investments or other assets, as well as net operating losses for a business. Prior to the Tax Cuts and Jobs Act of 2017, business owners were limited to a 20-year window when carrying forward net operating losses.

It’s important to keep in mind that capital loss carryforward rules don’t allow you to simply roll over losses. IRS rules state that you must use capital losses to offset capital gains in the year that they occur. You can only carry capital losses forward if they exceed your capital gains for the year. The IRS also requires you to use an apples-to-apples approach when applying capital losses against capital gains.

For example, you’d need to use short-term capital losses to offset short-term capital gains. You couldn’t use a short-term capital loss to balance out a long-term capital gain or a long-term capital loss to offset a short-term capital gain. This rule applies because short- and long-term capital gains are subject to different tax rates.

Example of Tax Loss Carryforward

Assume that you purchase 100 shares of XYZ stock at $50 each. Thirteen months after purchasing the shares, their value has doubled to $100 each so you decide to sell, collecting a capital gain of $5,000. You also hold 100 shares of ABC stock, which have decreased in value from $70 per share to $10 per share over that same time period.

Your capital losses would total $6,000 (the difference between the $7,000 you paid for the shares and the $1,000 you sold them for). You could use $5,000 of that loss to offset the $5,000 gain associated with selling your shares in the first company. Per IRS rules, you could also apply the additional $1,000 loss to reduce your ordinary income for the year.

Now, say you also have another stock that you sold at a $5,000 loss. You could apply $2,000 of that loss to offset ordinary income, then carry the remaining $3,000 forward to a future tax year, per IRS rules. All of this, of course, assumes that you don’t violate the wash sale rule when timing the sale of losing stocks.

The Takeaway

If you’re investing in a taxable brokerage account, it’s important to include tax planning as part of your strategy. Selling stocks to realize capital gains could result in a larger tax bill if you’re not deducting capital losses at the same time. With tax-loss harvesting, assuming you don’t violate the wash sale rule, it’s possible to carry forward investment losses to help reduce the tax impact of gains over time. This applies to personal as well as business gains and losses. Thus, understanding the tax loss carryforward provision may help reduce your personal as well as investment taxes.

In order to understand the true impact of gains and losses, it may help to open an investment account with SoFi Invest®. Here you can trade stocks as well as ETFs and even cryptocurrency. Even better, as a SoFi Member you have access to financial professionals who can offer complimentary guidance and answer your most pressing investing questions.

Photo credit: iStock/bymuratdeniz


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SOIN1221541

Source: sofi.com

Average Directional Index (ADX) Explained

The Average Directional Movement Index, or ADX, is an indicator used in technical analysis to help determine the strength of a pricing trend. The indicator was developed by Welles Wilder as part of his Directional Movement System for commodity trading. Since then it has been used for other tradeable investments such as stocks, exchange-traded funds (ETFs), and foreign currency.

The ADX can help investors understand when to buy and sell positions. Here’s a closer look at what ADX is, how to calculate it, and the role it plays in making investment decisions.

What is ADX?

ADX shows an average of price range values that indicate expansion or contraction of prices over time — typically a period of 14 days, but, in some cases it may be calculated for shorter or longer periods as well. Shorter periods may respond quicker to pricing movements but may also have more false signals. Longer periods tend to generate fewer false signals but may cause the indicator to lag the market.

The Average Directional Index is part of Wilder’s Directional Movement System, which attempts to measure the strength of pricing trends in both the positive and negative directions, by using DMI+ and DMI- indicators. The DMI+ indicates positive directional movement, and the DMI- indicates negative directional movement. ADX is calculated as the sum of the differences between DMI+ and DMI- over time. These three indicators are often charted together.

ADX Formula

Calculating the Average Directional Index on your own is a bit complex; it requires a series of calculations to be carried out in a specific order. Luckily, you probably won’t ever have to do it yourself — instead take a look at advanced chart settings for publicly available stock charts on websites like the Wall Street Journal . There is often an option to add an ADX or DMI overlay to the chart.

For those who are curious, here’s a look at the formulas required to calculate ADX:

+DI = (Smoothed +DM/ATR) X 100

-DI = (Smoothed -DM/ATR) X 100

DX= (|+DI – -DI|/|+DI + -DI|) X 100

ADX = ((Prior ADX X 13) + Current ADX))/14

Assumptions:

DM = Direction Movement

ATR = Average True Range

+DM = Current High – Previous High

-DM = Previous Low – Current Low

Smoothed +/- DM = ∑14 t=1DM – ((∑14 t=1DM)/14) + CDM

CDM = Current DM

How to Interpret ADX Results

It’s possible that prices within a given market could be moving up or down within a given range without ever developing into a trend. The ADX is used first and foremost to determine whether or not an up or down trend exists in a market at all.

According to Wilder’s calculations, when ADX is above 25, it indicates a strong trend; when ADX is below 20, that indicates there is no trend.

Generally, analysts conclude that between 20 and 25 represents a bit of a gray area in which some say that a developing trend is possible. It’s also possible that prices are simply ranging back and forth rather than trending.

For those who follow ADX, an ADX between 25 and 50 may represent a moderate strength trend. A result of 50 to 100 indicates trends that are increasingly strong.

How to Read an ADX Chart

Identifying the direction of trends is relatively easy when looking at an ADX chart. A line that’s moving in the upward direction indicates a strengthening trend, while a line moving in the downward direction indicates weakening. The steeper the slope of the line, the stronger the trend.

When ADX turns down, it may be an indicator that a trend is ending, which could be an opportunity for investors to consider whether they want to continue holding a position. If ADX has been low for a period of time and begins to rise by four or five points, it may be a bullish indicator that investors should consider buying to take advantage of a potentially burgeoning trend.

Using ADX, +DMI, and -DMI in tandem can generate crossover signals that can help signal opportunities to buy or sell. For example, the +DMI line crossing above the -DMI line is a potential signal to buy when ADX is above 20.

Investors tend to use ADX in conjunction with other technical analysis indicators such as moving averages to help them analyze price movements.

ADX can be used as a momentum indicator that can signal potential reversals in trends. For example, if ADX and market price are moving in an upward trajectory together, that can indicate that prices are strongly trending higher. However, if ADX declines but prices continue to rise, it may be an indicator that the market is losing momentum and prices will turn down soon.

ADX Comparisons

ADX is related to some other indicators. Here’s a breakdown of similarities and differences.

ADX vs DMI

Like ADX, DMI can be used as an indicator to help determine if the price of a security is trending and how strong that trend is. DMI does not take the direction of the trend into account.

DMI can be positive or negative. Positive DMI, or +DMI, is the difference between a stock’s high price today and its high yesterday. Values from the previous 14 days are then added up.

Negative DMI, of -DMI is the difference between a stock’s low from today and its low price from yesterday. A sum is then taken for these values for the previous 14 days.

ADX is calculated as the sum of the difference between positive and negative DMI over time.

ADX vs the Aroon Indicator

The Aroon Indicator is made up of two indicators, the Aroon-Up and the Aroon-Down. Aroon-up reflects the number of days since the last 25-day high, while Aroon-Down represents the number of days since the 25-day low.

The Aroon Indicator is similar in many ways to ADX. It’s used to identify the beginning of a trend or changes to trends, and determine whether a trend exists or if prices are just fluctuating within a range. It can also help investors determine the strength of a trend.

Higher Aroon values indicate a trend, while low values represent a weakening or nonexistent trend.

Pros and Cons of Using ADX

Like any indicator, the ADX has benefits and limitations. Here’s a look at some of the pros and cons:

Pros Cons
Helps identify whether a trend exists or if prices are simply fluctuating within a given range. False trading signals can occur, for example when crossovers are happening too frequently, which can result in confusion as trades quickly shift direction.
Can indicate shifts in trends to help investors make buy and sell decisions.
When used in conjunction with +DMI and -DMI, investors can examine crossover signals to make buy and sell decisions.

The Takeaway

When using technical analysis to decide when to buy and sell investments, individuals may make use of a wide range of research and analytic tools, such as ADX, DMI, the Aroon Indicator, and other trend indicators.

For investors who prefer this type of hand-on approach, a SoFi Invest® brokerage account offers active investing. For others, who may prefer a more hands-off approach, SoFi Invest offers automated investing accounts — an automatically managed portfolio based on their risk tolerance and goals.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Pekic


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SOIN1221542

Source: sofi.com

Understanding Economic Indicators

An economic indicator is a statistic or piece of data that offers insight into an economy. Analysts use economic indicators to gauge where an economic system is in the present moment, and where it might head next.

Governments use economic indicators as guideposts when assessing monetary or fiscal policies, and corporations use them to make business decisions. Individual investors can also look to these indicators as they shape their portfolios.

There are different types of economic indicators and understanding how they work can make it easier to interpret them.

What Is an Economic Indicator?

An economic indicator is typically a macroeconomic data point, statistic, or metric used to analyze the health of an individual economy or the global economy at large. Government agencies, universities, and independent organizations can collect and organize economic indicator data. In the United States, the Census Bureau, Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) are some of the entities that aggregate economic indicator data.

Some of the most recognizable economic indicators examples include:

•   Gross domestic product (GDP)

•   Personal income and real earnings

•   International trade in goods and services

•   U.S. import and expert prices

•   Consumer prices (as measured by the Consumer Price Index or CPI)

•   New residential home sales

•   New home construction

•   Rental vacancy rates

•   Home ownership rates

•   Business inventories

•   Unemployment rates

•   Consumer confidence

Private organizations also regularly collect and share economic data investors and economists may use as indicators. Examples of these indicators include the Fear and Greed Index, existing home sales, and the index of leading economic indicators.

Together, these indicators can provide a comprehensive picture of the state of the economy and shine light on potential opportunities for investors.

How Economic Indicators Work

Economic indicators work by measuring a specific component of the economy over a set time period. An indicator may tell you what patterns are emerging in the economy — or confirm the presence of patterns already believed to be established. In that sense, these indicators can serve as a thermometer of sorts for gauging the temperature of the economic environment or where an economy is in a given economic cycle.

Economic indicators can not predict future economic or market movements with 100% accuracy. But they can be useful when attempting to identify signals about which way the economy (and the markets) might head next.

For example, an investor may study an economic indicator like consumer prices when gauging whether inflation is increasing or decreasing. If the signs point to a steady rise in prices, the investor might then adjust their portfolio to account for higher inflation. As prices rise, purchasing power declines but investors who are conscious of this economic indicator could take action to minimize negative side effects.

Recommended: How to Invest and Profit During Inflation

Types of Economic Indicators

Economic indicators are not all alike in terms of what they measure and how they do it. Different types of economic indicators can provide valuable information about the state of an economy. Broadly speaking, they can be grouped into one of three categories: Leading, lagging, or coincident.

Leading Indicators

Leading indicators are the closest thing you might get to a crystal ball when studying the markets. These indicators pinpoint changes in economic factors that may precede specific trends.

Examples of leading indicators include:

•   Consumer confidence and sentiment

•   Jobless claims

•   Movements in the yield curve

•   Stock market volatility

A leading indicator doesn’t guarantee that a particular trend will take shape, but it does suggest that conditions are ripe for it to do so.

Lagging Indicators

Lagging indicators are the opposite of leading indicators. These economic indicators are backward-looking and highlight economic movements after the fact.

Examples of lagging indicators include:

•   Gross national product (GNP)

•   Unemployment rates

•   Consumer prices

•   Corporate profits

Analysts look at lagging indicators to determine whether an economic pattern has been established, though not whether that pattern is likely to continue.

Coincident Indicators

Coincident indicators measure economic activity for a particular area or region. Examples of coincident indicators include:

•   Retail sales

•   Employment rates

•   Real earnings

•   Gross domestic product

These indicators reflect economic changes at the same time that they occur. So they can be useful for studying real-time trends or patterns.

Popular Economic Indicators

There are numerous economic indicators the economists, analysts, institutional and retail investors use to better understand the market and the direction in which the economy may move. The Census Bureau, for example, aggregates data for more than a dozen indicators. But investors tend to study some indicators more closely than others. Here are some of the most popular economic indicators and what they can tell you as an investor.

Gross Domestic Product

Gross domestic product represents the inflation-adjusted value of goods and services produced in the United States. This economic indicator offers a comprehensive view of the country’s economic activity and output. Specifically, gross domestic product can tell you:

•   How fast an economy is growing

•   Which industries are growing (or declining)

•   How the economic activity of individual states compares

The Bureau of Economic Analysis estimates GDP for the country, individual states and for U.S. territories. The government uses GDP numbers to establish spending and tax policy, as well as monetary policy, at the federal levels. States also use gross domestic product numbers in financial decision-making.

Consumer Price Index

The Consumer Price Index or CPI measures the change in price of goods and services consumed by urban households. The types of goods and services the CPI tracks include:

•   Food and beverages

•   Housing

•   Apparel

•   Transportation

•   Medical care

•   Recreation

•   Education

•   Communications

CPI data comes from 75 urban areas throughout the country and approximately 23,000 retailers and service providers. This economic indicator is the most widely used tool for measuring inflation. According to the Bureau of Labor Statistics, which compiles the consumer price index, it’s a way to measure a government’s effectiveness in managing economic policy.

Producer Price Index

The Producer Price Index or PPI measures the average change over time in the selling prices received by domestic producers of goods and services. In simpler terms, this metric measures wholesale prices for the sectors of the economy that produce goods, including:

•   Mining

•   Manufacturing

•   Agriculture

•   Fishing

•   Forestry

•   Construction

•   Natural gas and electricity

The Producer Price Index can help analysts estimate inflation, as higher prices will show up on the wholesale level first before they get passed on to consumers at the retail level.

Unemployment Rate

The unemployment rate is an economic indicator that tells you the number of people currently unemployed and looking for work. The BLS provides monthly updates on the unemployment rate and nonfarm payroll jobs. Together, the unemployment rate and the number of jobs added or lost each month can indicate the state of the economy.

Higher unemployment, for example, generally means that the economy isn’t creating enough jobs to meet the demand by job seekers. When the number of nonfarm payroll jobs added for the month exceeds expectations, on the other hand, that can send a positive signal that the economy is growing.

Consumer Confidence

The Consumer Confidence Index can provide insight into future economic developments, based on how households are spending and saving money today. This indicator measures how households perceive the economy as a whole and how they view their own personal financial situations, based on the answers they provide to specific questions.

When the indicator is above 100, this suggests consumers have a confident economic outlook, which may make them more inclined to spend and less inclined to save. When the indicator is below 100, the mood is more pessimistic and consumers may begin to curb spending in favor of saving.

The Consumer Confidence Index is separate from the Consumer Sentiment Index, which is also used to gauge how Americans feel about the economy. This index also uses a survey format and can tell you how optimistic or pessimistic households are and what they perceive to be the biggest economic challenges at the moment.

Retail Sales

Retail sales are one of the most popular economic indicators for judging consumer activity. This indicator measures retail trade from month to month. When retail sales are higher, consumers are spending more money. If more spending improves company profits, that could translate to greater investor confidence in those companies, which may drive higher stock prices.

On the other hand, when retail sales lag behind expectations the opposite can happen. When a holiday shopping season proves underwhelming, for example, that can shrink company profits and potentially cause stock prices to drop.

Housing Starts

Census Bureau compiles data on housing starts. This economic indicator can tell you at a glance how many new home construction projects in a given month. This data is collected for single-family homes and multi-family units.

Housing starts can be useful as an economic indicator because they give you a sense of whether the economy is growing or shrinking. In an economic boom, it’s not uncommon to see high figures for new construction. If the boom goes bust, however, new home start activity may dry up.

It’s important to remember that housing starts strongly correlate to mortgage interest rates. If mortgage rates rise in reaction to a change in monetary policy, housing starts may falter, which makes this economic indicator more volatile than others.

Interest Rates

Federal interest rates are an important economic indicator because of the way they’re used to shape monetary policy. The Federal Reserve makes adjustments to the federal funds rate — which is the rate at which commercial banks borrow from one another overnight–based on what’s happening with the economy overall. These adjustments then trickle down to the interest rates banks charge for loans or pay to savers.

For example, when inflation is rising or the economy is growing too quickly, the Fed may choose to raise interest rates. This can have a cooling effect, since borrowing automatically becomes more expensive. Savers can benefit, however, from earning higher rates on deposits.

On the other hand, the Fed may lower rates when the economy is sluggish to encourage borrowing and spending. Low rates make loans less expensive, potentially encouraging consumers to borrow for big-ticket items like homes, vehicles, or home improvements. Consumer spending and borrowing can help to stimulate the economy.

Stock Market

The stock market and the economy are not the same. But some analysts view stock price and trading volume as a leading indicator of economic activity. For example, investors look forward to earnings reports as an indicator of a company’s financial strength and health. They use this information about both individual companies and the markets as a whole to make strategic investment decisions.

If a single company’s earnings report is above or below expectations, that alone doesn’t necessarily suggest where the economy might be headed. But if numerous companies produce earnings reports that are similar, in terms of meeting or beating expectations, that could indicate an economic trend.

If multiple companies come in below earnings expectations, for example, that could hint at not only lower market returns but also a coming recession. On the other hand, if the majority of companies are beating earnings expectations by a mile, that could signal a thriving economy.

The Takeaway

Economic indicators can provide a significant amount of insight into the economy and the trends that shape the markets. Having a basic understanding of the different types of economic indicators could give you an edge if you’re better able to anticipate market movements when you start investing.

You can use these indicators to help shape your investing strategy. One way to get started building a portfolio is by opening an online brokerage account on the SoFi Invest trading platform, which you can use to trade stocks, exchange-traded funds (ETFs), cryptocurrency and even IPOs.

Photo credit: iStock/FG Trade


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN1221540

Source: sofi.com

What Is a Naked Put Options Strategy?

A naked put option, also known as an “uncovered put,” is a risky options strategy in which a trader writes (i.e. sells) a put option with no corresponding short position in the underlying asset. While this strategy allows the trader to collect the option premium up front, in hopes that the underlying asset will rise in value, it carries significant downside loss potential should the price of the underlying asset decline.

Here’s what you need to know about naked put options:

Understanding Naked Put Options

As a refresher, the buyer of a put option has the right, but not the obligation, to sell an underlying security at a specific price. On the flip side, the seller of a put option is obliged to purchase the underlying asset at the strike price if and when the option buyer chooses to exercise.

Writing a naked put means that the trader is betting that the underlying security will rise in value or hold steady. If, at the option’s expiration date, the price of the underlying security is above the strike price, the options contract will expire worthless, allowing the seller to keep the premium. The potential profit of the trade is capped at the initial premium collected.

The risk of a naked put option trade is that the potential losses can be much greater than the premium initially gained. If the price of the underlying security declines below the strike price, the option seller can be forced to take assignment of shares in the underlying security. The options seller would then have to either hold those shares, or sell them in the open market at a loss (since they were obligated to purchase them at the strike price).

Recommended: Buying Options vs. Stocks: Trading Differences to Know

Requirements for Trading Naked Put Options

Investors have to clear some hurdles before being able to engage in a naked put transaction.

Typically, that begins with getting cleared for margin trading by their broker or investment trading firm. A margin account allows an investor to be extended credit from their trading firm in order to actually sell a naked put.

There are two main requirements to be approved for a margin account in order to trade naked put options.

•   The investor must demonstrate the financial assets to cover any portfolio trading losses.

•   The investor must declare they understand the risks inherent when investing in derivative trading, including naked put options.

Selling Naked Puts

A trader initiates a naked put by selling (writing) a put option without an accompanying short position in the underlying asset.

From the start of the trade until the option expires, the investor keeps a close eye on the underlying security, hoping it rises in value, which would create a profit for them. If the underlying security loses value, the investor may have to buy the underlying security to cover the position, in the event that the buyer of the put option chooses to exercise.

With a naked put option, the maximum profit is limited to the premium collected up front, and is obtained if the underlying security’s price closes either at or above the option contract’s strike price at the expiration date. If the underlying security loses value, or worse, the value of the underlying security plummets to $0, the financial loss can be substantial.

In real world terms, however, the naked put options seller would see the underlying security falling in value and would likely step in and buy back the options contract in advance of any further decline in the security’s share price.

Naked Versus Covered Puts

We’ve mentioned a few times so far that in a naked put, the trader has no corresponding short position in the underlying asset. To understand why that is important, we need to talk about the difference between covered puts and naked puts.

A covered put means the put option writer has a short position in the underlying stock. As a reminder, a short position means that the investor has borrowed shares of a security and sold them on the open market, with the plan of buying them back at a lower price.

This changes the dynamics of the trade, compared with a naked (uncovered) put. If the price of the underlying security declines, losses incurred on the put option will be offset by gains on the short position. However, the risk instead is that the price of the underlying security could move significantly upward, incurring losses on the underlying short position.

Recommended: The Risks and Rewards of Naked Options

Example of a Naked Put Option

Here’s an example of how trading a naked put can work:

XYZ stock is trading at $50 per share. Alice, a qualified investor, opts to sell a put option expiring in 30 days with a strike price of $50 for a premium of $4. Typically, when trading equity options, a single contract controls 100 shares – so the total premium, her initial gain, is $400. If the price of XYZ is above $50 after 30 days, the option would expire worthless, and Alice would keep the entire $400 premium.

To look at the downside scenario, suppose the price of XYZ falls to $40. In this case, Alice would be required to buy shares in XYZ at $50 (the strike price), but the market value of those shares is only $40. She can sell them on the open market, but will incur a loss of $10 per share. Her loss on the sale is $1,000 (100 x $10), but is offset by the premium gained on the sale of the option, bringing her net loss to $600. Alternatively, Alice could choose not to sell the shares, but hold them instead, in the hope that they will appreciate in value.

There’s also a break-even point in this trade that investors should understand. Imagine that XYZ stock slides from $50 to $46 per share over the next 30 days. In this case, Alice loses $400 ($4 per share) after buying the shares at $50 and selling them at $46, which is offset by the $400 gained on the premium.

The maximum potential loss in any naked put option sale occurs if XYZ’s stock price goes to $0. In this instance, the loss would be $5,000 ($50 per share x 100 shares), offset by the $400 premium for a net loss of $4,600. Practically speaking, a trader would likely repurchase the option and close the trade before the stock falls too significantly. This can depend on a trader’s risk tolerance, and the stop-loss setting on the trade.

The Takeaway

The big risk of a naked put option trade is that the potential losses can be much greater than the premium initially gained, while the maximum profit is limited to the premium collected up front. The seller of an uncovered put thinks the underlying asset will rise in value or hold steady.

Like most options trading strategies, the complexity of naked options trading and the associated risks make it a strategy that’s typically best for experienced traders. There are plenty of less risky ways for beginner investors to start building a portfolio. One way to do just that is by opening a brokerage account on the SoFi Invest trading platform. Using the SoFi app, you can select company stocks, exchange-traded funds and fractional shares to build your portfolio, or you can opt for the automated features which build a portfolio on your behalf.

Photo credit: iStock/damircudic


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN1021450

Source: sofi.com

What Is a Ledger Wallet? An Overview

Ledger is a brand of crypto hardware wallets. They are among the most trusted in the industry and were responsible for bringing the first hardware wallets to market.

In the years since Ledger’s debut, many other wallet makers have hit the scene. But the Ledger name is still synonymous with secure crypto hardware wallets. The company derives its name from blockchain technology. Understanding the question “what is a crypto ledger” sheds light on why the company chose this name.

What Is a Crypto Ledger?

The term “crypto ledger,” or simply ledger, refers to the public ledger of transactions recorded on the blockchain. These transactions are recorded in the form of Bitcoin addresses. Whenever someone makes a transaction on the Bitcoin blockchain or any other blockchain, the transaction is recorded in the blockchain ledger along with the relevant information. This includes the time the transaction occurred, the amount sent, the sender and recipient’s addresses, and the current number of network confirmations.

A new blockchain begins with something called a “genesis block.” This is a manufactured block to start things off because no transactions have occurred yet. From that point on, transactions are grouped into additional “blocks,” with each block being added to the one that came before it. Subsequent blocks form a “chain,” giving rise to the term blockchain. A blockchain is, therefore, a public ledger of transactions.

Ledger, the company, is a leader in the cryptocurrency hardware wallet space. In 2014, they released the first such wallet to the general public.

Recommended: Cryptocurrency 101: A Beginner’s Guide

How Does a Ledger Wallet Work?

First, a brief answer to the question “what is a cryptocurrency wallet”: Wallets are where people send and receive crypto. Hot wallets hold private keys online while cold wallets (such as hardware wallets) hold keys offline. Hot storage vs. cold storage in crypto is an important distinction to make.

Ledger wallets are designed for newer users. Getting started is rather easy. The wallets require a separate application, also made by Ledger, to work. This app, called Ledger Live, lets users interact with their hardware wallet on a desktop or laptop computer.

The display of a Ledger crypto wallet has two parts: the small screen on the device itself and the Ledger Live app on a computer or mobile device. Most users’ actions take place in the app, although pushing one or both small buttons on the device itself is required to confirm some actions, like sending transactions.

The buttons are also used to navigate between the different cryptocurrency wallets. Each wallet is referred to as its own app within Ledger Live. For each crypto they want to manage, users have to install the appropriate app first.

What Are the Different Types of Ledger Wallets in Crypto?

Ledger makes two different wallet types:

1.    Ledger Nano S

2.    Ledger Nano X

Ledger Nano S

The Nano S has become known as one of the most popular and best-selling crypto hardware wallets to date. That said, it only has enough memory for about three apps at a time. That means users who want to work with more than three cryptocurrencies will have to repeatedly uninstall and reinstall new apps.

For example, say someone holds Bitcoin, Litecoin, and Ethereum. If they also want to use Dogecoin, they will have to uninstall the Litecoin app and install the Dogecoin app. Any Litecoin balance will still be held on the wallet, but to access it and send transactions, the Litecoin app will need to be reinstalled, which would require uninstalling an existing app.

Apps for different cryptocurrencies take different amounts of memory, so the potential number of installed apps may be higher than three. While limited currencies can be managed at one time, the list of Ledger-supported crypto is 1,800 coins long.

Ledger Nano X

The Nano X is the newer, upgraded version of the Nano S. Both wallets work with the Ledger Live app, and function in generally the same manner. However, the Nano X has a few extra features and allows for the storage of many more crypto apps at once.

While the Nano S supports only 3-7 apps at a time, the Nano X supports up to 100. Ledger Nano X users can connect to the app via mobile devices as well, thanks to the Nano X’s Bluetooth compatibility.

The Nano X can also run off of battery power and connect to a mobile device via Bluetooth. All of these extra features and upgraded functionality help explain why someone might choose the more expensive Ledger Nano X over the Nano S.

Why Consider Getting a Ledger Wallet?

The biggest reason to consider getting a Ledger wallet is for the additional security. Holding crypto in a hardware wallet results in greater security for two main reasons:

1.    Coins can be held offline in cold storage.

2.    Private keys are held by the individual.

Holding coins in cold storage means the private keys aren’t connected to the internet, so there’s no way for hackers to access them. While a hardware wallet generally has to be connected to an internet-connected device to send transactions, when not doing so the wallet will be completely offline.

Holding the private keys yourself means there’s no need to trust a third-party like an exchange. If an exchange gets hacked, and there’s no insurance policy, then users could be left empty-handed. This might be why those who hold large sums of crypto choose to make the investment in a hardware wallet like those made by Ledger.

Let’s take a closer look at how hardware wallets, and wallets made by Ledger specifically, come with increased security for long-term storage of cryptocurrency.

Ledger Hardware Wallet Security

Ledger wallets come with the following security features:

1.    24-word backup recovery seed phrase

2.    PIN

3.    Certified Secure Element (CC EAL 5+) hardware

When setting up a new wallet, users have to create a PIN that will be used to access the wallet. A seed phrase is also provided.

This 24-word string can be used to restore the balances held on a wallet. It’s best to keep that phrase somewhere safe and never store it digitally. Anyone with access to the seed phrase can steal the private keys, and therefore the coins, from your wallet. The seed phrase and PIN come standard with most hardware wallets.

Ledger uses something called Secure Element chips. Chips like these are also used to protect credit cards, SIM cards and passports. Ledger wallets are certified as being secure by an independent third-party.

There are different degrees of Evaluation Assurance Level (EAL), and Ledger has achieved the level EAL 5+. There are only two levels higher than EAL 5. According to Ledger , they are the only company that makes hardware wallets that have earned this level of security certification.

The Takeaway

A Ledger wallet for digital currencies can be used to hold crypto in a more secure manner. Cold storage is considered to be the ultimate in blockchain security measures.

While hardware wallets like those made by Ledger come with increased security for crypto, they also require greater user responsibility. Using a hardware wallet means you hold the private keys to your crypto, rather than them being held on an exchange. If you make a mistake like losing your PIN and backup seed phrase, the crypto held on that wallet will be gone forever. There’s nothing that Ledger or anyone else will be able to do to help.

That’s why investors holding a small amount of crypto might not need a crypto wallet like Ledger. For some people, a trusted third-party custodian like an exchange might be the best option.

Interested in investing in crypto? With SoFi Invest®, you can trade cryptocurrency online from a collection of more than two dozen coins including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Free Life Design


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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 or products 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.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SOIN1021411

Source: sofi.com

The ‘Bividend’: What’s Up With BTCS’s Bitcoin Dividend?

Apparently “bividends” are going to be a thing now. 

BTCS (BTCS, $4.36), a self-proclaimed blockchain technology-focused company, on Wednesday announced the first-ever dividend payable in bitcoin by a Nasdaq-listed company. 

And while it might be contradictory in nature to the purpose of traditional cash dividends, you can probably still expect more bividends to pop up from other companies down the road.

The BTCS “Bividend”

BTCS intends to pay shareholders of record a one-time dividend of 5 cents per share in bitcoin, based on the bitcoin price on the ex-dividend date. Investors who do not elect to receive the bividend in bitcoin will receive a cash dividend of 5 cents per share. 

“We want to reward our long-time shareholders for their continued support and encourage financial freedom by providing the means to enable direct ownership of bitcoin and other digital assets,” CEO Charles Allen said in a press release.

Before you can say “make it stop,” know that plenty of crypto-commenters have already begun poking holes in the premise of paying dividends in bitcoin. 

Sign up for Kiplinger’s FREE Closing Bell e-letter: Our daily look at the stock market’s most important headlines, and what moves investors should make.

For one thing, above all else, bitcoin and cryptocurrencies in general are attractive primarily as speculative assets. Traders love them for their volatility and return potential.

No one buys bitcoin for its future cash flow because bitcoin has no future cash flow. Buying bitcoin for income – that is, for the dividends, which are paid out of cash flow – makes even less sense.

And this is a one-time dividend to boot.

A Stunt? Possibly. But Bividends Might Be Here to Stay

All you really need to know, in the words of Bloomberg’s Matt Levine, is that BTCS “is a somewhat unloved micro-cap company,” but it did pull off an effective marketing trick. After all, BTCS shares popped more than 40% the day of the news drop.

“A bividend is a terrible name but an obviously good meme-y crypto stunt to increase attention,” Levine writes. “BTCS will pay about $500,000 in bividends, which bought it about $15 million of market cap. Just a good trade!”

But also be aware that BTCS stock is still off nearly 50% since its September Nasdaq debut. Its market cap, at less than $45 million, remains pitiable. And its daily average volume of 1.2 million shares reveals a distinct lack of interest among market participants on most trading days. 

Where this gets interesting – or maddening, depending upon your point of view – is that BTCS is unlikely to be the last issuer of a crypto dividend. That’s because, if nothing else, BTCS’ move worked remarkably well as an attention-getting device. Somewhat regrettably, we’re talking about BTCS in this post right now

But the firm’s one-time bitcoin (or cash) payout doesn’t change the investment thesis on BTCS stock (whatever that might be).

As for the concept of bividends more broadly, it stands to reason we’ll see copycats – and probably plenty of them – soon enough. Suffice to say that for the time being – and then some – quaint, old-fashioned common stock dividend investors would do well to tune out this noise.

Source: kiplinger.com

American Option vs European Option: What is the Difference?

Two of the most popular types of options are American and European. American and European options have a lot in common, but there are some key differences that are important for investors to understand.

Options Basics

One of the reasons investors like options trading is that it provides the right, but not the obligation to the buyer, to buy (call) or sell (put) an asset. Making the choice to buy (call) or sell (put) is known as exercising the option.

Recommended: Call vs Put Option: The Differences

Like all derivatives, the value of options reflects the value of an underlying asset. The value of an option changes as its expiration approaches and according to the price of the underlying asset. Investors using a naked option trading strategy may not have the cash or assets set aside in their portfolio to meet the obligations of the contract.

If the value of the contract or the underlying asset doesn’t increase, the investor would choose to let it expire and they lose only the premium they paid to enter into the contract. Both put and call options contracts include a predetermined price to which the buyer and seller agree, and the contract is valid for a specified period of time.

After the contract ends on the expiration date, so does the option holder’s ability to buy or sell. There are many different options trading strategies that investors can use.

Recommended: What Is a Straddle in Options Trading?

What Are American Options?

America options are the most popular, with both retail investors and institutional investors using them. One of the reasons for their popularity is their flexibility. Traders can exercise their right to buy or sell the asset on any trading day during the term of the agreement.

Most often, American stock options contracts have an expiration period between three and twelve months.

American Option Example

Say an investor purchases an American call in March with a one-year expiry date. The contract states that the investor has the option to purchase stock in Company X for $25 per share. In options terminology, $25 would be known as the option’s strike price. As the price of the underlying stock asset changes, the value of the option also changes.

After the investor purchases the American call options, the value of the stock increases. Within a few months the price was $50. The investor decides to exercise their option to buy, purchasing 100 shares of the stock at the agreed upon strike price of $25/share, paying a total of $2,500. The investor then sells the shares at the current market price of $50/share, making a profit of $2,500 because their value had doubled, not including the premium paid.

Investors can also buy put options, which give them the right to sell instead of the right to buy. With put options the scenario is reversed in that the investor would exercise their right to sell if the asset decreased in value.

What Are European Options?

European options are similar to American options, but holders can only exercise them on the expiration date (not before), making them less flexible.

European Options Example

Let’s say an investor purchases a European call option for 100 shares of Company X with a strike price of $25 and an expiration date six months from the time of purchase. Three months after the contract starts, the price of the stock increases to $50/share. The investor can’t exercise the right to buy because the contract hasn’t reached the expiration date.

When the option holder is able to exercise three months later, the stock is down to $30/share. So the investor can still exercise the option and make a profit by purchasing 100 shares at $25 and selling them for $30. The investor would also need to subtract the upfront premium they made, so this scenario wouldn’t be nearly as profitable as the American option scenario.

This is why European options are not as valuable or popular as American options. Options pricing reflects this difference. The premium, or price to enter into a European option contract is lower. However, traders can sell their European options at any point during the contract period, so in the example above the trader could have sold the option for a profit when the stock price went up to $50/share.

American Style Options vs European Style

American and European options are similar in that they have a set strike price and expiration date. But there are several key differences between American and European options. These include:

Trading

One main difference between American and European options is traders typically buy and sell European options over-the-counter (OTC) and American options on exchanges.

Premiums

American options typically have higher premiums than European options since they offer more flexibility. If the investor doesn’t exercise their right to buy or sell before the contract expires, they lose the premium.

Settlement

European options tend to relate to indices, so they settle in cash. American options, on the other hand, typically relate to individual stocks or exchange-traded funds and can settle in stock or cash.

Settlement Prices

With American options, the settlement price is the last closing trade price, while with European options the settlement price is the opening price of index components.

Volume

American options typically have a much higher trading volume than European options.

Exercising Options

Traders can only exercise European options at the expiration date, while they can exercise American options at any point during the contract period. Traders can sell either type of option before its expiration date.

Pricing Models

A popular pricing model for options is called the Black-Scholes Model. The model is less accurate for American options because it can’t consider all possible trading dates prior to the expiration date.

Recommended: Black-Scholes Model Explained

Underlying Assets

The underlying assets of most American options are related to equities, European options are typically pegged to indices.

Risks of Americans and European Options

American options are riskier to an options seller because the holder can choose to exercise them at any time.

For buyers, it’s easier to create a hedging strategy with European options since the holder knows when they can exercise their right to buy or sell. Day traders and others who invest in options realize that there are risks involved with all investing strategies, along with potential reward.

The Takeaway

Options are one commonly traded type of investment, and many traders use them to execute a trading strategy. However, it’s possible to build a portfolio without trading options as well.

If you’re interested in a more straightforward approach to investing, one great way to get started is by opening a brokerage account on the SoFi Invest platform. The trading platform lets you research, track, buy and sell stocks, ETFs, and more right from your phone.

Photo credit: iStock/AleksandarNakic


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN0721317

Source: sofi.com