Investing Archives | Page 154 of 221

Oct

2022

What Is Earnings Season?

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

Earnings season is the period of time when publicly-traded companies release their quarterly earnings reports, as required by the Securities and Exchange Commission (SEC). Earnings season is important for investors because it provides insight into a company’s financial health and performance.

The financial results reported during an earnings season can help investors and analysts understand a company’s prospects, how a specific industry is performing, or the state of the overall economy. Knowing when earnings season is can help investors stay up to date on this information and make better investment decisions.

When Is Earnings Season?

Earnings season occurs four times a year, generally starting within a few weeks after the close of each quarter and lasting for about six weeks. For example, the earnings season for the first quarter, which ends on March 31, would typically begin in the second week of April and wrap up at the end of May.

Earnings season normally follows this timeline:

• First quarter: Mid-April through the end of May

• Second quarter: Mid-July through the end of August

• Third quarter: Mid-October through the end of November

• Fourth quarter: Mid-January through the end of February

However, not all companies report earnings on this schedule. Companies with a fiscal year that doesn’t follow the traditional calendar year may release their earnings on a different schedule.

Many retail companies, for instance, have fiscal years that end on January 31 rather than December 31, so they can capture the results from the holiday shopping season into their annual reports. Thus, these firms may report their earnings toward the end of earnings season, or even after the typical earnings reporting period.

Investors interested in knowing when companies will report earnings can check Nasdaq , Yahoo! Finance , and other websites to see the earnings calendars.

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Why Is Earnings Season Important for Investors?

Earnings season is an important time for investors to track a company’s or industry’s performance and better understand its financial health.

During earnings season, companies release their quarterly earnings reports, which are financial statements that lay out the revenue, expenses, and profits. This information gives investors a better understanding of how a company is operating.

Moreover, earnings season is also when companies provide guidance for the upcoming quarters, sometimes during the company’s quarterly earnings call. This guidance can give investors an idea of what to expect from a company in the future and help them make more informed investment decisions, especially if investors use fundamental analysis to choose stocks.

💡 Recommended: The Ultimate List of Financial Ratios

The following are some additional effects of earnings season:

Volatility

You may notice fluctuations in your portfolio during earnings seasons because of stock volatility. The release of earnings reports can significantly impact a company’s stock price. If a company reports better or worse than expected earnings, for example, it may result in a spike or dip in share price. And even if a company surpasses expectations for a given quarter, its forward-looking outlook may disappoint investors, causing them to sell and drive down its price. For this reason, earnings season is often a period of high volatility for the stock market as a whole.

Investment Opportunities

Many investors closely watch earnings reports to make investment decisions, especially traders with a short-term focus who hope to take advantage of price fluctuations before or after a company’s earnings report.

And investors with a long-term focus may pay attention to earnings season because it can give clues about a company’s future prospects. For example, if a company’s earnings are consistently increasing, it may be a suitable medium- to long-term investment. On the other hand, if a company’s earnings are decreasing quarter after quarter, it may mean that it is a stock investors want to avoid.

💡 Recommended: Short-Term vs Long-Term Investments

State of the Economy

Earnings season can help investors and analysts get a better picture of the overall economy. If most earnings reports are coming in below expectations or companies are revising their financial outlooks because they see trouble in the economy, it could be a predictor of an economic downturn or a recession.

And even if the overall economy is not at risk of a downturn, earnings season can help investors see trouble in a specific sector or industry if companies in a given industry report weaker than expected earnings.

Earnings season may give investors a holistic view of the state of the stock market and economy and help them make better investment decisions than focusing on specific stocks alone.

The Takeaway

Earnings season provides investors with valuable insights into the performance and outlook of specific companies, the stock market, and the economy as a whole. However, for most investors with a long-term focus, each earnings season shouldn’t be something that causes you too much stress. Even if some of your holdings spike or plummet because of an earnings report during earnings season, it doesn’t mean you want to make a rash investment decision based on a single quarter’s results. You still want to keep long-term performance in mind.

If you want to build a long-term portfolio, the SoFi app can help. With a SoFi online brokerage account, you can trade stocks and exchange-traded funds (ETFs) with no commissions for as little as $5.

Take a step toward reaching your financial goals with SoFi Invest.

Photo credit: iStock/shapecharge

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.

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.

SOIN0522002

Oct

2022

How to Invest During a Recession

By Colin Dodds | Financial Independence, Growing Wealth, Investing | No Comments

The first half of 2022 caused many investors to be worried about how to invest during a recession. With inflation at levels not seen in 40 years, stocks falling into bear market territory, and the U.S. economy contracting for two straight quarters, investors were searching for strategies to invest during these volatile times.

Looking at your brokerage or 401(k) account may cause a sense of dread when the economy or stock market looks to be on shaky footing. You may wonder how you can navigate the moment. Just because your investments may be trending downward, don’t let fear lead you to make impulsive decisions like pulling your money out of the market and locking in losses. Read on to learn why staying the course during a recession can have an upside, and sometimes entering the market even in the depths of a downturn might offer some long-term rewards.

What You Need to Know About Investing in a Recession

A recession describes a contraction in economic activity, often defined as a period of two consecutive quarters of decline in the nation’s real Gross Domestic Product (GDP) — the inflation-adjusted value of all goods and services produced in the United States. However, the National Bureau of Economic Research, which officially declares recessions, takes a broader view — including indicators like wholesale-retail sales, industrial production, employment, and real income.

The point is that the markets tend to price in those indicators, so much so that you may see the prices of stocks start to drop (and bond prices start to rise) even before a recession is officially called. For example, the S&P 500 Index declined about 57% from October 9, 2007, through March 9, 2009, a bear market that started two months before the Great Recession, which lasted from December 2007 through June 2009.

From those lows in March 2009, the S&P 500 delivered a return of 400% through February 2020, surpassing the previous peak in April 2013. Those that stayed in the market despite unprecedented economic declines were still able to experience a positive return.

But that stock volatility can give investors the jitters — and that emotional state that can be contagious.

Behavioral finance experts have dubbed this tendency “herd mentality,” which means you’re more likely to behave similarly to a larger group than you realize. Combine that behavioral bias with another common one — loss aversion — and you can see how emotions can lead some investors to make impulsive choices in a moment of panic or doubt.

However, there is some good news: history shows that most recessions don’t last as long as you might think — about 17 months, according to the National Bureau of Economic Research (NBER). So while an economic downturn can be scary while it lasts, it’s likely that time is on your side.

By staying the course and sticking with your investment strategy (and not yielding to emotion), the market recovery could help you recoup any losses and possibly see some gains — especially if you buy the dip (when prices are low).

As investors witnessed firsthand during the market swoon that accompanied the arrival of the pandemic in March of 2020, sometimes declines don’t last very long. The pandemic-related bear market lasted for about a month, while the recession lasted about two months.

💡 Need more recession help? Check out our recession survival guide.

Investing Strategies for a Recession

The following are a few investment strategies that may help investors weather a recession:

Dollar-Cost Averaging

While it’s critical for investors to stay true to their long-term strategy during a recession, what about investing new money? This is where the concept of dollar-cost averaging is important for investors to keep in mind.

Dollar-cost averaging, simply put, is a systematic way of investing a fixed amount of money regularly. It’s often used to describe the way most people invest, on a paycheck-by-paycheck basis, through workplace 401(k) and 403(b) plans.

This approach spreads the cost basis out over a long period of time and a wide range of prices. By doing so, it provides a degree of insulation against market fluctuations. During times of rapidly rising share prices, the investor will have a higher cost basis than they otherwise would have had. During times of collapsing stock prices, the investor will have a lower cost basis than they otherwise would have had.

Taken together, then, dollar-cost averaging can help you pay less for your investments on average over time and help to improve long-term returns.

Buy and Hold

Because most investors invest with a long-term time horizon, it’s best to employ a buy and hold investment strategy. This strategy can often be paired with a dollar-cost averaging strategy.

In short, a buy and hold strategy is a passive strategy in which investors buy stocks, exchange-traded funds, and other securities and hold on to them for a long time.

By buying and holding, investors believe that they are likely to earn long-term investment returns despite whatever short-term market volatility may come their way. They think an extended time horizon allows them to ride out short-term dips in the market.

This strategy can also help investors avoid emotional investing or trying to time the market.

Rebalancing

Investors try to gauge how close or far they are from their goals because your time horizon determines how you invest. For instance, a younger investor may have a portfolio that’s heavier in growth stocks and lighter when it comes to bonds and cash.

For an investor nearing an important goal, like retirement, the priority may be safety and security or investments like high-quality (but lower-yielding) bonds. Over time, investors need to rebalance their portfolios, shifting the allocation of different asset classes. A younger investor may start with an allocation of 70% stocks and 30% bonds and cash. As you near retirement, that equity allocation would likely shift toward 50% stocks or even lower.

Tax-Loss Harvesting

A recession can also be a chance to sell out of a mix of investments, owing to tax considerations. Investors can take advantage of tax-loss harvesting by selling stocks or mutual funds that have appreciated alongside those that have lost value. This strategy allows investors to use investments that have declined in value to offset investment gains and potentially reduce their annual tax bill.

When an investor wants to reduce capital gains taxes they owe on investments they’ve sold, tax-loss harvesting can allow an investor to deduct $3,000 in losses per year. As such, the strategy can be the silver lining on investments that didn’t work out.

Potential Investments During a Recession

It’s worth remembering some investments do better than others during recessions. Recessions are generally bad news for highly leveraged, cyclical, and speculative companies. These companies may not have the resources to withstand a rocky market.

By contrast, the companies that have traditionally survived and even outperformed during a downturn are companies with very little debt and strong cash flow. If those companies are in traditionally recession-resistant sectors, like essential consumer goods, utilities, defense contractors, and discount retailers, they may deserve closer consideration.

💡 Recommended: What Types of Stocks Do Well During Volatility?

Some investors might also seek out even more defensive positions during a recession by buying real estate, precious metals (e.g., gold), or investing in established, dividend-paying stocks.

Additionally, some investors may look to move some money out of riskier investments like stocks, bonds, or commodities and into cash and cash equivalents. For some investors, having adequate cash on hand or having money invested in certificates of deposit (CDs) and money market funds may be a good option for a portfolio during a recession.

Bear in mind that every recession impacts different sectors in different ways. During the Great Recession of 2008-09, financial companies suffered — because it was a financial crisis. In 2020, biotech companies tended to thrive, but investments in energy companies have been hit harder owing to fluctuating oil prices.

As an investor, you must do the math on where the risks and opportunities lie during a recession.

What to Avoid In a Recession

During a recession, it’s important to remember two key tenets that will help you stick to your investing strategy. The first is: While markets change, your financial goals don’t. The second is: Paper losses aren’t real until you cash out.

The first tenet refers to the fact that investors go into the market because they want to achieve certain financial goals. Those goals are often years or decades in the future. But as noted above, the typically shorter-term nature of a recession may not ultimately impact those longer-term financial plans. So, most investors want to avoid changing their financial goals and strategies on the fly just because the economy and financial markets are declining.

The second tenet is a caveat for the many investors who watch their investments — even their long-term ones — far too closely. While markets can decline and account balances can fall, those losses aren’t real until an investor sells their investments. If you wait, it’s possible you’ll see some of those paper losses regain their value.

So, investors should generally avoid panicking and making rash decisions to sell their investments in the face of down markets. Panicked and emotional selling may lead you into the trap of “buying high and selling low,” the opposite of what most investors are trying to do.

Should Investors Expect a US Recession in 2023?

There is a possibility that the U.S. will be in or enter a recession in 2023, but it is not guaranteed. Factors that could lead to a recession include decreased consumer spending, rising unemployment, and decreased business investment.

In the first two quarters of 2022, the Bureau of Economic Analysis reported that GDP in the U.S. declined. To some, this indicated that the U.S. economy was in a recession. The stock market seemed to agree, with the S&P 500 down 25% in the year’s first three quarters.

However, others argued that the economy was not in a recession and that the GDP figures didn’t tell the whole story. After all, unemployment was still low, hiring was still robust, and consumer spending was growing.

Nonetheless, there is a chance that a recession will occur. Around the world, inflation is running high, so the Federal Reserve and other central banks are raising interest rates to try to cool economies to bring prices under control. But this hawkish monetary policy, along with factors like a volatile energy market and the Russia-Ukrainian War, may lead to a global recession that ultimately affects the U.S.

The Takeaway

Investing during a recession is really what you make of it. While market volatility can spark investor worries, it’s possible to manage your emotions, stay in control of your investment strategy, and possibly come out ahead.

Certainly, you could start investing today by opening an account with SoFi Invest® so that you lay the groundwork for your financial plans sooner rather than later. With a SoFi online brokerage account, you can trade stocks and ETFs with no commissions for as little as $5. Then you could be better positioned to take advantage of new opportunities if and when another recession comes along.

Take a step toward reaching your financial goals with SoFi Invest.

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.

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.

SOIN1022008

Oct

2022

What Is Stablecoin Interest & How Does It Work?

What Is Stablecoin Interest and How Does It Work?

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

Stablecoin interest refers to the interest rate that investors can earn by lending out their stablecoins.

Stablecoin holders can put their tokens on a number of platforms that lend those stablecoins to other investors in exchange for a fee. Because the rate for borrowers is higher than what depositors receive, some companies are happy to provide this service, as they pocket the difference.

Some platforms that let investors earn interest are centralized, while others are decentralized. Because there are different types of stablecoins on the market, and this sector has come under the scrutiny of regulators in 2022, it’s important to understand how stablecoins work.

Understanding How Stablecoins Work

Stablecoins are unique among the many types of crypto. A stablecoin is a cryptocurrency whose value is pegged to a particular asset at a 1-to-1 ratio. Most often, the asset is a fiat currency, like the U.S. dollar (USD), though it can also be a commodity like gold.

U.S. Dollar Coin (USDC), for example, is a U.S. dollar-backed stablecoin that allegedly holds 1 dollar in reserve for every 1 USDC in circulation. To understand what USDC is: One USDC generally has the same value as one dollar.

That said, despite the name, stablecoins have a less-than stable track record. The stablecoin sector has come under scrutiny, owing to questions about their actual fiat currency reserves and how stable these coins actually are.

Different Types of Stablecoins

When discussing stablecoins, it’s important to consider which category the coin falls into.

There are three main types of stablecoins:

• Fiat-collateralized stablecoins

• Crypto-collateralized stablecoins

• Algorithmic stablecoins

Fiat-collateralized stablecoins like USDC or Tether (USDT) are widely thought to have the least possibility of losing their peg.

Crypto-collateralized stablecoins (like DAI) might be considered somewhat safer, but still carry the risk that their collateral could lose value.

Algorithmic stablecoins, like Iron Finance (IRON), might be the riskiest, as most have seen their values drop to zero. One notable stablecoin failure occurred in May 2022, when the Terra stablecoin fell below its $1 peg and collapsed.

💡 Recommended: Understanding the Different Types of Cryptocurrency

What Are Stablecoin Interest Rates?

Stablecoin interest rates refer to the amount of money investors can earn by depositing their stablecoins into a centralized lending platform or a decentralized smart contract.

Interest rates are often referred to as yields — i.e. the amount an investment can yield over time. An interest rate of 5% annual percentage yield (or APY), for example, could earn an investor $50 on an investment of $1,000 over 12 months. One of the benefits of cryptocurrency is that anyone from anywhere in the world can earn interest on stablecoins. Many exchanges offer 8% to 12% interest or more on stablecoins.

Why Are Stablecoin Interest Rates So High?

Interest rates on Stablecoins are high for a few reasons:

• Stablecoins involve greater risks than a traditional savings account

• The market is still new and immature

• Traditional savings rates are at or near historic lows

We may view stablecoin interest rates being “high” as a relative comparison. In the 1970s, savings accounts and U.S. Treasury Notes yielded rates of around 17%, which is comparable to some of today’s stablecoin rates.

Tips for Earning Stablecoin Interest

If you are earning high interest on stablecoins, you are wise to consider two risks: 1) that the coin could lose its 1-1 peg, and 2) that the lending platform might become insolvent.

1. First, make sure the stablecoin you’re using is actually stable. The coins need to have audited reserves showing that their tokens are backed by a fiat currency at a 1-to-1 ratio. A coin with proven backing could carry less risk.

2. Second, it’s critical to conduct due diligence on whatever platform you’re using to earn stablecoin interest. While all of these platforms are younger and less proven than traditional banks or credit unions, some still could be more trustworthy than others. Before you invest, consider looking at user reviews, reading the terms of service, and finding out as much as you can about how the company works and who is behind it.

Investors have lost a lot of money because they assumed that their stablecoins would always maintain their pegs, and the platforms they used would always stay solvent. Neither is necessarily true.

Keep in mind that there is no Federal Deposit Insurance Corporation (FDIC) insurance for stablecoin lending platforms. So, if the company goes bankrupt, investors could possibly lose everything. There may be no legal means by which to recover funds or protect yourself until new regulations are put in place.

Stablecoin Interest on CeFi vs DeFi

There are two different types of platforms that can be used to earn stablecoin interest: centralized finance (CeFi) platforms and decentralized finance (DeFi) platforms.

• CeFi platforms require customers to comply with anti-money laundering (AML) and know-your-customer (KYC) rules. They usually manage users’ funds and hold the private keys to their customers’ crypto. Some CeFi lenders offer insurance to protect against losses, while others do not.

• DeFi platforms work a little differently. Instead of the borrowing and lending being handled by one central entity, financial activities in DeFi are managed by smart contracts. These programs provide automatic lending pools to participants. The system operates outside the control of any centralized authority and users’ assets are held in a non-custodial way, meaning they are controlled by the users, themselves, not a third party.

Types of Stablecoin Interest Platforms
CeFi	DeFi
Governed by a central entity	Governed by smart contracts
AML and KYC compliance enforced	No verification required
Custodial	Non-custodial

Pros and Cons of Stablecoin Interest

Here are some of the pros and cons of earning interest on stablecoins.

Advantages:

• High interest rate. The interest rates that you can earn on stablecoins typically exceeds that of traditional savings accounts and even long-term savings bonds.

• Less verification required than traditional banks. In many cases, anyone can access the stablecoin interest market.

• Allows users to remain within the cryptocurrency ecosystem. Exchanging fiat currency and crypto often involves long wait times and additional fees. With stablecoins, users can switch between traditional cryptocurrencies like Bitcoin or dollar-denominated stable crypto like USDC without having to make bank transfers.

Disadvantages:

• Rates can vary without notice. Especially in DeFi, interest rates can fluctuate wildly.

• Risk of losing 100% of principal. While some CeFi platforms might offer insurance, many do not. In the past, platforms have gone bankrupt, leaving investors empty-handed because there was no insurance.

• Lack of transparency among many coins. Currently, stablecoin issuers are not required to disclose which assets back their coins, though this could change soon, based on proposed legislation. Borrowing and lending institutions also may not need to provide full disclosures regarding their operations at this time.

Pros and Cons of Stablecoin Interest
Pros	Cons
High interest rates	Rates can vary
Minimal verification needed	Risk of 100% loss of principal
Funds can remain in crypto	Lack of transparency around reserves

The Takeaway

Anyone who holds stablecoins can earn interest on them easily. While the potential returns are attractive, the risks are also high. Investors should be aware that it’s possible to lose 100% of their investments.

FAQ

How do stablecoins generate interest?

Stablecoins generate interest in much the same way as a bank. A business entity accepts stablecoin deposits from investors and loans those coins out to borrowers at a particular interest rate. Depositors then receive a portion of the interest paid by borrowers.

Can you really earn interest on stablecoins?

Yes, you can earn interest by lending your stablecoins. Be careful to select a borrowing/lending platform with a good reputation, as some have gone bankrupt in the past and some could be scams posing as legitimate companies.

Photo credit: iStock/filadendron

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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.

²Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

SOIN0322029

Oct

2022

Guide to Short Put Spreads

By Dan Miller | Growing Wealth, invest, Investing, Terminology | Comments Off

A short put spread, sometimes called a bull put spread or short put vertical spread, is an options trading strategy that investors may use when they expect a slight rise in an underlying asset. This strategy allows an investor to potentially profit from an increase in the underlying asset’s price while also limiting losses. An investor may utilize this strategy to protect against any downside risk; the investor will know their total potential loss before making the trade.

When trading options, you have various strategies, like short put spreads, from which you can choose. The short put spread strategy can be a valuable trade for investors with a neutral-to-bullish outlook on an asset. Which options trading strategy is right for you will depend on several factors, like your risk tolerance, cash reserves, and perspective on the underlying asset.

What Is a Short Put Spread?

A short put spread is an options trading strategy that involves buying one put option contract and selling another put option on the same underlying asset with the same expiration date but at different strike prices. This strategy is a neutral-to-bullish trading play, meaning that the investor believes the underlying asset’s price will stay flat or increase during the life of the trade.

A short put spread is a credit spread in which the investor receives a credit when they open a position. The trader buys a put option with a lower strike price and sells a put option with a higher strike price. The difference between the price of the two put options is the net credit the trader receives, which is the maximum potential profit in the trade.

The maximum loss in a short put spread is the difference between the strike prices of the two puts minus the net credit received. This gives the trading strategy a defined downside risk. A short put spread does not have upside risk, meaning the trade won’t lose money if the price of the underlying asset increases.

A short put spread is also known as a short put vertical spread because of how the strike prices are positioned — one lower and the other higher — even though they have the same expiration date.

How Short Put Spreads Work

With a short put spread, the investor uses put options, which give the investor the right — but not always the obligation — to sell a security at a given price during a set period of time.

An investor using a short put spread strategy will first sell a put option at a given strike price and expiration date, receiving a premium for the sale. This option is known as the short leg of the trade.

Simultaneously, the trader buys a put option at a lower strike price, paying a premium. This option is called the long leg. The premium for the long leg put option will always be less than the short leg since the lower strike put is further out of the money. Because of the difference in premiums, the trader receives a net credit for setting up the trade.

💡 Recommended: In the Money vs Out of the Money Options

Short Put Spread Example

Say stock ABC is trading around $72. You feel neutral to bullish toward the stock, so you open a short put spread by selling a put option with a $72 strike price and buying a put with a $70 strike. Both put options have the same expiration date. You sell the put with a $72 strike price for a $1.75 premium and buy the put with a $70 strike for a $0.86 premium.

You collect the difference between the two premiums, which is $0.89 ($1.75 – $0.86). Since each option contract is usually for 100 shares of stock, you’d collect an $89 credit when opening the trade.

Recommended: Guide to How Options Are Priced

Maximum Profit

The credit you collect up front is the maximum profit in a short put spread. In a short put spread, you achieve your maximum profit at any price above the strike price of the option you sold. Both put options expire worthless in this scenario.

In our example, as long as stock ABC closes at or above $72 at expiration, both puts will expire worthless and you will keep the $89 credit you received when you opened the position.

Maximum Loss

The maximum loss in a short put spread is the difference between the strike prices of the two put options minus the credit you receive initially and any commissions and fees incurred. You will realize the maximum loss in a short put spread if the underlying asset’s price expires below the strike price of the put option you bought.

In our example, you will experience the maximum loss if stock ABC trades below $70, the strike price of the put option you bought, at expiration. The maximum loss will be $111 in this scenario, not including commissions and fees.

$72 – $70 – ($1.75 – $0.86) = $1.11 x 100 shares = $111

Breakeven

The breakeven on a short put spread trade is the price the underlying asset must close at for the investor to come away even; they neither make nor lose money on the trade, not including commissions and investment fees.

To calculate the breakeven on a short put spread trade, you subtract the net credit you receive upfront from the strike price of the short put contract you sold, which is the option with the higher strike price.

In our example, you subtract the $0.89 credit from $72 to get a breakeven of $71.11. If stock ABC closes at $71.11 at expiration, you will lose $89 from the short leg of the trade with a $72 strike price, which will be balanced out by the $89 cash credit you received when you opened the position.

Set-Up

To set up a short put spread, you first need to find a security that you are neutral to bullish on. Once you have found a reasonable candidate, you’ll want to set it up by entering your put transactions.

You first sell to open a put option contract with a strike price near where the asset is currently trading. You then buy to open a put option with a strike price that’s out-of-the-money; the strike price of this contract will be below the strike price of the put you are selling. Both of these contracts will have the same expiration date.

Maintenance

The short put spread does not require much ongoing maintenance since your risk is defined to both upside and downside.

However, you may want to pay attention to the possibility of early assignment, especially with the short leg position of your trade — the put with the higher strike price. You might want to close your position before expiration so you don’t have to pay any potential assignment fees or trigger a margin call.

Exit Strategy

If the stock’s price is above the higher strike price at expiration, there is nothing you have to do; the puts will expire worthless, and you will walk away with the maximum profit of the credit you received.

If the stock’s price is below the lower strike price of the long leg of the trade at expiration, the two contracts will cancel each other, and you will walk away with a maximum loss.

Before expiration, however, you can exit the trade to avoid having to buy shares that you may be obligated to purchase because you sold a put option. To exit the trade, you can buy the short put contract to close and sell the long put contract to close.

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Impacts of Time, Volatility, and Price Change

Changes in the price and volatility of the underlying stock and the passage of time can affect a short put spread strategy in various ways.

Time

Time decay will generally work in favor of the short put spread. As both of the legs of the short put spread get closer to the expiration, any time value that the option contracts have will erode.

Volatility

The short put spread is more or less volatility neutral. Because you are both long and short one put option contract each, volatility in the underlying stock similarly affects each leg of the contract.

Price

A short put spread is a bullish option strategy. You have no risk to the upside and will achieve your maximum profit if the underlying stock closes above the strike price of the higher put option. You are sensitive to price decreases of the underlying stock and will suffer the maximum loss if the stock closes below the strike price of the lower put option.

Pros and Cons of Short Put Spreads

Here are some of the advantages and disadvantages of using short put spreads:

Short Put Spread Pros	Short Put Spread Cons
No risk to the upside	Lower profit potential compared to buying the underlying security outright
Limited risk to the downside; maximum loss is known upfront	Maximum loss is generally larger than the maximum potential profit
Can earn a positive return even if the underlying does not move significantly	Difficult trading strategy for beginning investors

Short Put Calendar Spreads

A short put calendar spread is another type of spread that uses two different put options. With a short put calendar spread, the two options have the same strike price but different expiration dates. You sell a put with a further out expiration and buy a put with a closer expiration date.

Alternatives to Short Put Spreads

Short put vertical spreads are just one of the several options spread strategies investors can use to bolster a portfolio.

Bull Put Spreads

A bull put spread is another name for the short put spread. The short put spread is considered a bullish investment since you’ll get your maximum profit if the stock’s price increases.

Bear Put Spread

As the name suggests, a bear put spread is the opposite of a bull put spread; investors will implement the trade when they have a bearish outlook on a particular underlying asset. With a bear put spread, you buy a put option near the money and then sell a put option on the same underlying asset at a lower strike price.

Call Spreads

Investors can also use call spreads to achieve the same profit profile as either a bull put spread or a bear put spread. With a bull call spread, you buy a call at one strike price (usually near or at the money) and simultaneously sell a call option on the same underlying with the same expiration date further out of the money.

The Takeaway

A short put spread is an options strategy that allows you to collect a credit by selling an at-the-money put option and buying an out-of-the-money put with the same expiration on the same underlying security. A short put spread is a bullish strategy where you achieve your maximum profit if the stock closes at or above the strike price of the put option you sold. While this trading strategy has a limited downside risk, it provides a lower profit potential than buying the underlying security outright.

Short put spreads and other options trading strategies can be complicated for many investors. An options trading platform like SoFi’s can make it easier, thanks to its user-friendly design and offering of educational resources about options. Investors have the ability to trade options from the mobile app or web platform.

Trade options with low fees through SoFi.

FAQ

Is a short put spread bullish or bearish?

A short put spread is a neutral to bullish options strategy, meaning you believe the price of an underlying asset will increase during the life of the trade. You will make your maximum profit if the stock closes at or above the strike price of the higher-priced option at expiration.

How would you close a short put spread?

To close a short put spread, you enter a trade order opposite to the one you entered to open your position. This would mean buying to close the put you initially sold and selling to close the put you bought to open.

What does shorting a put mean?

Shorting a put means selling a put contract. When you sell a put option contract, you collect a premium from the put option buyer. You’ll get your maximum profit if the underlying stock closes at or above the put’s strike price, meaning it will expire worthless, allowing you to keep the initial premium you received when you opened the position.

Photo credit: iStock/akinbostanci

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
SOIN0322021

Oct

2022

Guide to Investment Risk Pyramids

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

An investment risk pyramid is an illustration used to help investors understand the risk/reward profile of various assets. The investing risk pyramid uses a base, middle, and top to rank investments by the likelihood of losing money or seeing big gains. The tool is useful when getting started with investing.

Building a portfolio is no easy task. It requires due diligence and an assessment of your risk tolerance and return goals. The investment risk pyramid helps you determine what approaches work best for you.

What Are Investment Pyramids?

Investment pyramids are practical tools for gauging how risky certain asset types are. The pyramid model has been used in many areas for a long time, and it’s useful when learning what your risk tolerance is.

The investing risk pyramid has three levels grouped by risk/return profile. The safest securities are found in the large base; growth and moderately risky assets are in the middle; then the most speculative strategies are at the top.

How Investing Pyramids Work

There are many investing risk need-to-knows, and the pyramid of investment risk works by helping investors understand the connection between their asset allocation and their risk tolerance.

The visual should ultimately lead individuals to better grasp what percentage of their investable assets should go to which types of investments based on risk level and return potential.

Using a risk pyramid investment strategy provides a basic framework for analyzing portfolio construction. The investment risk pyramid is structured so that it suggests people hold a higher percentage of safer assets, and relatively little in the way of ultra-high-risk speculative assets.

Base of the Pyramid

Managing investment risk is among the most fundamental aspects of investing, and risk is controlled by ensuring an allocation to some safe securities. The base of the investment risk pyramid, which is the bulk of total assets, contains low-risk assets and accounts. Investments such as government bonds, money markets, savings and checking accounts, certificates of deposit (CDs), and cash are included in the base.

While these securities feature relatively minor risk, you might lose out to inflation over time if you hold too much cash, for example.

Middle of the Pyramid

Let’s step up our risk game a bit by venturing into the middle of the investing risk pyramid. Here we will find medium-risk assets. In general, investments with some growth potential and a lower risk profile are in this tier. Growth and income stocks and capital appreciation funds are examples.

Other holdings might include real estate, dividend stock mutual funds, and even some higher-risk bond funds.

Top of the Pyramid

At the top of the investment risk pyramid is where you’ll find the most speculative asset types and even margin investing strategies. Options, futures, and collectibles are examples of high-risk investments.

You will notice that the top of the pyramid of investment risk is the smallest – which suggests only a small portion of your portfolio should go to this high-risk, high-reward niche.

Sample Investment Pyramid

Here’s what a sample investment risk pyramid might contain:

Top of the pyramid, high risk: Speculative growth stocks, put and call options, commodities, collectibles, cryptocurrency, and non-fungible tokens (NFTs). Just a small amount should be allocated to the top of the pyramid.

Middle of the pyramid, moderate risk: Dividend mutual funds, corporate bond funds, blue-chip stocks, and variable annuities. Small-cap stocks and foreign funds can be included, too. A 30-40% allocation could make sense.

Base of the pyramid, low risk: U.S. government Treasuries, checking and savings accounts, CDs, AAA-rated corporate bonds. This might be 40-50% of the portfolio.

Pros and Cons of Investment Pyramids

The investment risk pyramid has advantages and disadvantages. Let’s outline those to help determine the right investing strategy for you.

Pros

The investing risk pyramid is useful as a quick introduction to asset allocation and bucketing. Another upside is that it is a direct way to differentiate asset types by risk.

Cons

While the investing risk pyramid is helpful for beginners, as you build wealth, you might need more elaborate strategies beyond the pyramid’s simplicity. Moreover, in the end, you determine what securities to own – the pyramid is just a suggestion.

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*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Examples of Low-Risk Investments

Let’s describe some low-risk investments in more detail since these are including the investment risk pyramid’s biggest tier.

Bonds

Bonds are essentially a loan you make to the government or other entity for a set amount of time. In return for lending your money, the debtor promises to pay you back at maturity along with periodic coupon payments, like interest.

Safer bonds include short-term Treasury bills while riskier bonds are issued by speculative companies at a higher yield.

Cash

Cash feels like a safe asset, but ideally you would store it in an interest-bearing savings account in order to keep up with inflation.

Also consider that holding too much cash can expose you to inflation risk, which is when cash loses value relative to the cost of living.

Bank Accounts

You can earn a rate of return through a SoFi bank account with FDIC insurance. Keeping an emergency fund in a checking account can be a prudent move so you can pay expenses without having to sell assets like stocks and bonds or take on debt.

Examples of High-Risk Investments

Let’s jump up top to the high-risk part of the investment risk pyramid. Here you will find assets and strategies that can earn big profits, but also expose you to serious losses. Margin trading is a method employed with some of these securities.

Margin Trading

Margin trading is using borrowed funds in an attempt to amplify returns. A cash account vs. margin account has key differences to consider before you go about trading. Trading with leverage offers investors the possibility of large short-term gains as well as the potential for outsize losses, so it perhaps best suited for sophisticated investors.

Options

Options on stocks and exchange-traded funds (ETFs) are popular these days. Options, through calls and puts, are derivative instruments that offer holders the right but not the obligation to buy shares at a specific price at a pre-determined time. These are risky since you can lose your entire premium if the option contract strategy does not work out for the holder. Compound options are an ultra-risky option type. The reward potential is massive since options can go up thousands of percent if certain market conditions happen.

Collectibles

Collectibles and artwork are alternative investment types that may provide some of the benefits of diversification, but it’s hard to know what various items are worth since they are not valued frequently. Consider that stocks and many bonds are priced at least daily.

Collectibles might also go through fad periods and booms and bust cycles, which can add to the risk factors in this category.

Discovering Your Risk Tolerance

The investment risk pyramid is all about helping you figure out your ability and willingness to accept risk. It is a fundamental piece of being an investor. You should consider doing more research and even speaking with a financial advisor for a more detailed risk assessment along with an analysis of what your long-term financial goals are.

Start Margin Trading Today

Using an investment risk pyramid can make sense for many investors. It’s an easy, visual way to decide which asset classes you might want to hold in your portfolio, so that the percentage of each (i.e. your asset allocation) is aligned with your risk tolerance.

The other helpful aspect of the investment risk pyramid is that it presumes a bigger foundation in lower-risk investments (the bottom tier), with gradually smaller allocations to moderate risk and higher-risk assets, as you move up the pyramid. This can be helpful for a long-term strategy. In a nutshell, the investment risk pyramid helps you figure out how to allocate investments based on your risk tolerance and return objectives.

If you’re all set in terms of low- and moderate-risk investments, it could be time to explore how higher-risk, higher-return investments fit into your plan. Margin investing is a strategy that uses leverage to enable you to buy more of the investments you think have big growth potential. You can open a margin account with SoFi Invest and use it to buy stocks, for example. You can also invest without using margin, and buy exchange-traded funds (ETFs), IPO shares, fractional shares, and more. Round out your portfolio today!

FAQ

What are the levels of an investment pyramid?

The levels of an investment risk pyramid are low-risk at the base, moderate-risk in the middle, and high-risk at the top. The risk/return investment pyramid helps investors understand how to think about various assets they may want to own.

What does investment risk refer to?

Investment risk can be thought of as the variance in return, or how great the chance is that an investment will experience sharp losses. While the risk investment pyramid helps you build a portfolio, you should also recognize that a diversified stock portfolio performs well over time, while cash generally loses out due to the risk of inflation.

What are some examples of high-risk investments?

High-risk investments include speculative assets like options, trading securities on margin, and even some collectibles that might be hard to accurately value since they are based on what someone might be willing to pay for them. The low-risk to high-risk investments pyramid can include virtually any asset.

Photo credit: iStock/MicroStockHub

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.

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

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.

SOIN0622020