Life Stages Archives | Page 528 of 571

Nov

2021

Blockchain in Real Estate: How it Works and Biggest Benefits

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

While it may not seem intuitive, real estate is one of many industries with potential blockchain applications. In fact, blockchain may even provide a superior method of conducting business in the real estate industry to existing protocols, in some cases.

Before we get into that, though, we’ll quickly review blockchain technology, how it is or can be used in the real estate sector, and then discuss some of the benefits of marrying blockchain and real estate.

Recommended: 9 Blockchain Uses and Applications

What is Blockchain, Exactly?

Blockchain technology is a decentralized, distributed ledger. Think of a spreadsheet, for instance, with blocks of data. But instead of that spreadsheet being saved on a single hard drive, it’s instead saved on thousands, and perhaps millions of hard drives around the world. When changes are made to the data, it can be cross-checked by all other versions of the spreadsheet, ensuring that nobody is getting away with any suspicious edits.

Benefits of Using Blockchain in Real Estate

There are many potential use cases for blockchain in the real estate industry — and many of them overlap with other industries, too.

For instance, the transparency and decentralization of blockchains can allow users to potentially cut costs, secure their data, and reduce friction to ultimately close deals faster. Here is a short list of some of the broad benefits that blockchain could have in the real estate market.

1. Faster Deal Closing

Anyone who’s bought or sold a property can probably say one thing about the experience: It wasn’t quick. Blockchain could, potentially, speed things up in the real estate industry, as it may allow for an upgrade to the paper-driven and largely off-line due diligence process.

Closing a real estate deal requires a lot of paperwork and a lot of back and forth between parties. Funds need to be transferred, contracts need to be reviewed, and finances need to be evaluated — it’s a pretty involved process. And that’s why it tends to be so drawn-out.

But blockchain technology introduces smart contracts to the mix, which can make many of these processes into a single, streamlined chain of events. In effect, each phase of the deal-making process can be built into the “code” of a contract, or a block, building upon itself, creating a chain. Once one phase of the deal is done, relevant parties are notified that the next has begun.

In all, it creates a seamless, transparent, and (hopefully) quicker process through which real estate transactions can be executed.

2. Stronger Security

Security and transparency are another one of the hallmarks of blockchain technology and a potentially attractive element that it can bring to real estate.

Considering the sensitivity of the information being passed around (social security numbers, bank account information, etc.), and the large sums of money being transferred, most parties probably wouldn’t scoff at the prospect of tighter security.

Blockchain tech is actually designed to be secure. Since data and information are recorded in blocks and linked on a distributed ledger, any tampering is snuffed out with relative ease. Beefing up security may be especially attractive to those working to do due diligence and financial evaluation for potential buyers.

Of course, there are always vulnerabilities to be concerned about. But blockchain safety and security could provide an upgraded, secure ecosystem.

3. Eliminating Middlemen

Traditionally, the real estate industry has been all about middlemen, from brokerages to individual real estate agents. The process of connecting buyers and sellers — and collecting a commission to do so — has long been the industry’s bread and butter.

The average commission on a real estate transaction is between 5% and 6%, according to data from Redfin . And that’s just one part of the process in which middlemen can inflate transaction costs.

Real estate listings are often available to paying subscribers through private databases, or Multiple Listing Services (MLS). Agents and brokers pay for access to these databases. There are some obvious use cases for these databases and blockchain, and potentially, the technology could be used to make these services more accurate and freely accessible.

That could, in turn, lower costs (or remove them altogether), allowing buyers and sellers direct access to listings, rather than going through an intermediary.

This is just one example of ways that blockchain in real estate could remove intermediaries from the equation — ultimately allowing buyers and sellers to reap savings.

4. Fractional Real Estate Investing

Traditionally, real estate investors had huge piles of money that they could put down on properties, be they commercial or residential units that could be rented out to earn returns. Small-time or retail investors with less cash to spend have been relegated to investing in REITs to get in on the action.

With blockchain technology, investing in real estate could become a decentralized and tokenized process, in which property owners could offer up digital tokens (like how an investor would buy crypto) in lieu of shares for their property. Purchases could be tracked on the blockchain, allowing for more investors to pile in.

This would create fractional ownership of properties, and allow investors to pool their cash to target bigger properties with potentially higher returns. While there are micro-investing services that currently do this in the real estate industry, blockchain could make the process easier, more secure, and more transparent — as it has for cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH).

Downsides of Blockchain in Real Estate

So why hasn’t blockchain already revolutionized the real estate industry?

One reason is a lack of professionals with the knowledge to bring about these industry-wide changes. That will hopefully come in time.

Another reason is that rules and regulations around blockchain technology aren’t yet fully worked out, and aren’t consistent from state to state. As more laws get put in place surrounding blockchain, it’s possible we’ll see more industries adopting this technology to improve their businesses.

In terms of real estate investing and blockchain, tokenizing property ownership could lead to greater volatility in values, because they’d be happening in real time. Real estate is often considered more stable than other assets, but blockchain has the potential to change that.

The Takeaway

Blockchain has applications and implications across a variety of industries, and real estate is one of them. Blockchain technology has the potential to improve the way people buy homes, commercial real estate, and real estate investments.

Photo credit: iStock/Altayb

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

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

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

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

SOIN0521233

Nov

2021

What Is Chainlink Crypto? How to Buy LINK Coin

Chainlink Crypto: What it is, Price, and How to Invest in LINK

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

Chainlink is a decentralized oracle network that provides information that certain smart contracts need to perform their designated functions.

Smart contracts are blockchain-based, decentralized virtual agreements that can execute automatically when certain conditions are met. They are computer protocols designed to enforce, verify, or apply an agreement. These digital contracts can automate contractual agreements while getting rid of the need for lawyers, notaries, and other related services.

Chainlink gathers information from a decentralized network of information providers referred to as oracles. To ensure that the data is accurate, each oracle stakes a certain amount of collateral. If the oracle provides inaccurate data, it will be forced to forfeit that collateral. In this way, oracles are monetarily incentivized to give information that accurately reflects what’s happening in the real world.

Oracles have become a useful tool in the decentralized finance (DeFi) space, as much of DeFi is powered by smart contracts that need to source their prices from a decentralized place. This might be one factor that has led to the continued rise of coins like LINK.

What is the Chainlink Network?

Chainlink provides real-time price data to smart contracts. The smart contracts in question then use the data to perform some other function — swapping one token for another, for example.

LINK was launched in 2017. The idea came from a previous project of its parent company, SmartContract.com. They had once tried to develop an oracle solution for blockchains, but failed to do so in a decentralized manner. Centralized oracles are thought to be unreliable because if they source false data, it will be recorded in the blockchain and there will be no way for anyone to fix it.

Blockchains are designed to get their data from on-chain information. This makes them more secure and tamper-resistant. But sometimes, smart contracts require off-chain data from the real world. Things like fiat currency exchange rates or any other external type of data can only be integrated on-chain through oracles like Chainlink.

What is LINK Coin?

Chainlink crypto (LINK) is used to keep the network running smoothly. LINK is intended to provide an incentive for those who participate in the Chainlink network to source reliable data. This helps ensure that the smart contracts being fed Chainlink information will receive accurate data.

Smart contracts can use LINK to pay for the information they need, and oracles can use LINK as collateral.

There are 1 billion LINK tokens total. They exist as ERC20 tokens on the Ethereum blockchain.

Chainlink Price

As of early November 2021, LINK was the 15th largest cryptocurrency by market cap, according to data from Coinmarketcap.com . The price was around $33, triple its $11 price at the start of 2021. The all-time record high LINK price was $52.19, reached on May 8th.

In September 2017, about the time the project launched, the LINK coin price was less than $0.17.

What Can You Use LINK Coin For?

LINK can be traded on exchanges, where traders try to buy low and then sell higher later to make a profit. It’s important to be mindful of crypto rules and regulations and cryptocurrency taxes when trading.

Programmers also use Chainlink crypto to fund the oracle-driven information that powers some smart contracts. If someone wants to create a decentralized way for people to swap one cryptocurrency with another, as with Kyber Network (KNC), for example, they need real-time data on what the appropriate exchange rate would be. This information comes from oracles like Chainlink.

Should You Invest in LINK Coin?

Altcoins are generally considered to be speculative investments that carry high risk. There are few other investments available to the average person that carry greater risk and volatility.

Recommended: What Are Altcoins?

If an investor has done all the research necessary to understand what the Chainlink cryptocurrency is, how it works, and what it was designed for, then those with the necessary capital and risk tolerance might choose to take a chance on LINK. But as always, it’s common investment wisdom to never risk more than you can afford to lose.

Benefits of Investing in LINK Coin

One potential advantage that could work in Chainlink’s favor is that the network tends not to compete with other types of cryptocurrency. Instead, it helps to add value to other projects, particularly those in the DeFi space.

While there are other oracle networks out there, and likely will be more in the future, Chainlink is currently among the most well-known and trusted brands in this area. Should they continue to be a leader in the ecosystem, the LINK token might potentially see increased growth and adoption.

Disadvantages of Investing in LINK Coin

The drawbacks of LINK are largely the same as those of other altcoins. Volatility can be extreme and liquidity might not always be there when traders need it most. Competing projects could arise and see faster adoption, at which point Chainlink crypto could become irrelevant.

It’s also worth noting that thousands of altcoins have failed in the past for various reasons, with their values dropping to zero.

How to Buy LINK cryptocurrency

Buying LINK is not unlike buying any other cryptocurrency. Here is a simplified rundown of the basic steps.

1. Create an exchange account. After learning how crypto exchanges work, an investor will want to create an account with an exchange that offers trading for the Chainlink cryptocurrency. Many prominent exchanges trade Chainlink, including Kraken, Coinbase, and CEX.io.

2. Deposit either Bitcoin or some fiat currency, depending on what trading pairs the exchange has available. Buying crypto directly with a credit card is also an option on many exchanges, although this tends to incur higher fees (not only from the exchange — credit cards often treat crypto purchases as a cash advance, which comes with additional fees).

3. Buy LINK. Simply select the trading pair that includes LINK and the currency held in your account. For example, if a user had Bitcoin and wanted to buy LINK, they would select the pair called “BTC/LINK.” If they had dollars, it might be “USD/LINK.” For a stablecoin like USDC, it might be “USDC/LINK.” Enter a buy order for the desired amount of coins at a desired price.

Alternatively, on exchanges that include order books in the user interface (like Binance), simply select the sell order (sometimes called an “ask” order) with the lowest price and buy from it.

After having acquired LINK tokens, advanced users may want to consider moving their crypto off of an exchange and into a hardware wallet that supports LINK. This method of crypto storage provides additional security for long-term holdings.

The Takeaway

Decentralized oracle networks like Chainlink are designed to provide a trusted decentralized source of information for smart contracts. For investors, LINK token is just one more potential cryptocurrency they might decide to trade.

Photo credit: iStock/Dmytro Duda

Nov

2021

What Are Nodes? 7 Types of Blockchain Nodes

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

Nodes are critical aspects of blockchain security. Broadly speaking, a cryptocurrency node is a participant in a blockchain network. Without blockchain nodes, there can be no blockchain.

The key feature that makes blockchain technology unique, and part of why cryptocurrency has been so revolutionary, is decentralization. Bitcoin and most other cryptocurrencies aren’t controlled by a central server or group of servers. Instead, the network functions in a peer-to-peer (P2P) manner. People interact with each other directly rather than through a third-party intermediary, thanks to network nodes.

Recommended: How Do Bitcoin Transactions Work?

How Do Blockchain Nodes Work?

For decentralization to work, there has to be a way for the network to maintain its integrity. Everyone has to be assured that all transactions are valid and that no one on the network is cheating by double spending or reversing transactions.

The process of everyone on the network agreeing that transactions are valid in the absence of a central authority is known as “achieving consensus.” It is the network nodes that achieve this consensus among users, helping to make the blockchain secure.

Consensus Algorithms

Consensus refers to the rules by which a blockchain network operates and confirms the validity of information written in blocks. Confirming this information can be complicated with large networks involving large numbers of people, hence the need for a consensus algorithm.

The original consensus algorithm is Bitcoin’s proof-of-work (PoW) algorithm. Proof-of-Stake (PoS) is another popular consensus algorithm that works somewhat differently but seeks to achieve the same goal. Many DeFi protocols utilize PoS. Both algorithms rely on full nodes for the validation of transactions and enforcement of network rules.

For the sake of simplicity, in this article we will assume that someone is interested in learning about Bitcoin nodes that run on PoW.

Anyone can download the entire Bitcoin blockchain and validate blocks. This increases both the security and the decentralization of the network, as more copies of the ledger come into existence and can be referenced by others. Bitcoin nodes can be run by anyone in the world with the proper hardware and an internet connection.

7 Types of Blockchain Nodes

To recap: A node is one computer in a network of many that follows rules and shares information.

The term “node” is sometimes used interchangeably with the term “full node,” but they are not the same. A “full node” is a computer in the Bitcoin network that stores and synchronizes a copy of the Bitcoin network’s entire blockchain history.

Full nodes are important for several reasons, not the least of which being that they vote on proposed changes to the network. When more than 51% of full nodes don’t agree on a proposal, it gets skipped. Sometimes this leads to a hard fork, as was the case in 2017 with the Bitcoin Cash fork.

Recommended: What Happens When Bitcoin Forks?

While there are several types of full nodes, there are also lightweight nodes. Below, we’ll highlight both lightweight and full nodes.

1. Light Nodes

Lightweight nodes or “light nodes” do not hold full copies of the blockchain. Light nodes only download blockheaders, saving users significant download time and storage space. Nodes of this nature depend on full nodes to function and are used for simplified payment verification (SPV).

2. Archival Full Nodes

Most often, when someone uses the term “full node,” they are referring to an archival full node. This is the primary node type that forms the backbone of a blockchain network. Archival full nodes are servers that host the entire blockchain, with every single transaction recorded in their databases. The main task of these nodes is to validate blocks and maintain consensus.

Archival nodes can be broken down further into two subcategories: nodes that can add blocks to the chain and those that cannot.

3. Pruned Full Nodes

A pruned full node is one that saves hard disk space for its users by “pruning” older blocks in the blockchain. This type of node will first have to download the entire blockchain from the beginning. After that, it will begin deleting blocks beginning with the oldest and continue until the node only holds the most recent transactions up to a set size limit. If a node operator were to set the size limit to 250 MB, then a pruned full node would hold the most recent 250 MB worth of transactions.

4. Mining Nodes

In crypto mining, miners are either full or light nodes that try to prove they’ve completed the work required to create a new block. This is where the term “proof-of-work” comes from. To accomplish this task, miners have to either be an archival full node themselves, or get data from other nodes to learn the current status of the blockchain and how to work on finding the next block. (Those who seek to run mining nodes might want to take into account crypto mining electricity costs.)

5. Authority Nodes

Authority nodes are used by consensus algorithms for networks that aren’t fully decentralized, including Delegated Proof of Stake and Proof of Authority. In these networks, either the development team will decide how many authority nodes are needed and who will run them, or the community could vote for the decision. The task of these nodes is the same as full nodes in other networks.

6. Masternodes

Masternodes cannot add blocks to a blockchain. They only serve to validate and record transactions. Running a masternode can earn users a share of the network’s rewards. Doing so requires first locking away a certain amount of money in the form of the network’s native token.

7. Lightning Nodes

Lightning nodes don’t quite fit the mold of any of the nodes discussed so far. The main idea of a lightning node is to establish a connection between users outside of the blockchain, enabling what are referred to as “off-chain transactions.”

This reduces the load on the network and allows for much faster and cheaper transactions. Bitcoin lightning transactions typically cost 10 or 20 satoshis, or the equivalent of a fraction of a penny.

How to Set Up and Run a Full Node

Running a full blockchain node comes down to the following:

• Choose a blockchain (Bitcoin, for example)

• Acquire the hardware and/or software needed

• Start running the node

The first thing required for running any kind of node is the necessary hardware. This often involves a small computer like a Raspberry Pi. There are three different ways to run a full node. They include:

• Hosting a node in the cloud via Amazon Web Services or Google Cloud

• Running a node on your local device (which requires a lot of hard disk space and RAM)

• Using a “node-in-a-box” solution or building one from scratch.

After that, it’s just a matter of maintaining and monitoring the node.

The Takeaway

People might choose to run full nodes for a variety of reasons, including increased privacy or a desire to support their network of choice. Lightweight nodes and full nodes alike come with wallets that can be used for making cryptocurrency transactions. Full nodes provide greater privacy, as outside observers have a hard time distinguishing between transactions being processed by the node and transactions sent by the person running the node.

Photo credit: iStock/A stockphoto

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

SOIN0721306

Nov

2021

What Is a Protective Put? Definition, Graphs, & Example

What Is a Protective Put? Definition & Example

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

A protective put is an investment strategy that employs options contracts to mitigate the risk that comes with owning a particular security or commodity. In it, an investor buys a put option on the security or commodity.

Typically, put options are used by investors who hope to benefit from a price decline in a given investment. But in a protective put strategy, the investor owns the underlying asset, and is positioned to benefit if the price of the asset goes up.

Essentially, the investor is buying the right to also make money if the investment goes down. But while this protection is a nice thing to have, it isn’t free.

To buy the option, the investor pays a fee, called a premium. It is a way of managing uncertainty and risk (sort of like an insurance policy). An investor may take out a protective put on anything they own, including equities, currencies, commodities like oil, and index funds. But if the investment they own does go up, the investor will have to deduct the cost of the put-option premiums from their returns.

Understanding Protective Puts

Investors typically purchase protective puts on assets that they already own as a way of limiting or capping any future potential losses.

The instrument that makes a protective put strategy works is the put option. A put option is a contract between two investors. The buyer of the put acquires the right to sell an agreed-upon amount of a given asset security at a given price during a predetermined time period.

Important Options Terms to Know

There is some key options trading lingo to know, in order to fully understand a protective put.

• The price at which the purchaser of the put option can sell the underlying asset is known as the “strike price”.

• The amount of money the buyer pays to acquire this right is called the “premium”.

• And the end of the time period specified in the options contract is the expiration date, or “expiry date”.

• The strike price is also known as the “floor price”, after which the investor will not face losses on their investment. The options allow the investor to sell the underlying asset at the floor price, no matter where it is trading, which serves the purpose of wiping out the losses the investor would face below the strike price.

For complete coverage in a protective put strategy, an investor might buy put options contracts equal to their entire position. For large positions in a given stock, that can be expensive. And whether or not that protection comes in handy, the put options themselves regularly expire — which means the investor has to purchase new put options contracts on a regular basis.

How Strike Price and Premiums Affect Protective Puts

An investor can buy a protective put option contract when they buy the underlying security, or at any time while they’re holding it. But whenever they buy the put option, that option’s strike price will bear one of three relationships to the security they own.

These three relationships between a security’s price and the price of a given option are sometimes called the “moneyness.” The varieties of moneyness are:

1. At the money (ATM): This is when the option’s strike price and the asset’s market price are the same. An option purchased ATM will offer 100% protection against losses for the duration of the option contract.

2. Out of the money (OTM): In this situation, the option’s strike price is lower than the asset’s market price. With an OTM option, the further the strike price is below the market value, the lower the premium. An OTM put option won’t provide complete protection against loss, but it will limit the losses to just the difference between the price at which the investor bought the stock price and the option’s strike price.

3. In the money (ITM): This is when the asset’s market price is lower than the option’s strike price. In this scenario, the option might be worth exercising in order to cover the price of the premium.

Recommended: How to Sell Options for Premiums

Protective Put Scenarios

An investor who is pursuing a protective put strategy will own the underlying security, commodity, currency or asset. If the underlying asset goes up in value and the put options related to it expire, then the investor gets to keep all of the upside growth, minus the premiums connected with the put options. To keep the protection, the investor will have to buy new put options once the original options expire.

Investors may use protective puts differently. Some investors use the strategy to cover only a portion of a long position. Others may use protective puts for the entirety of their position. When protective put coverage is the same as the amount of stock the investor owns, it is often referred to as “married put.”

Most often, investors will enter into married puts at the time they buy a given stock, though they can enter into a married put at any time they want to protect their investment.

A married ATM put effectively limits the maximum loss an investor faces to the costs connected with buying the stock, including commissions, plus the premium and other costs related to purchasing the put option.

Pros & Cons of Protective Puts

As with most investing strategies, there are both upsides and downsides to using protective puts.

Pros of Protective Puts

Protective puts allow investors to set a limit on how much they stand to lose in a given investment. Here’s why investors are drawn to them:

• Protective puts offer protection from the possibility that an investment will lose money.

• The protective put strategy allows an investor to participate in nearly all of an investment’s upside potential.

• Investors can use at-the-money (ATM), or out-of-the-money (OTM) options, or a mix of the two to tailor their risks and costs.

Cons of Protective Puts

Like any form of insurance, buying protective put options comes at a cost.

• An investor using protective puts will see lower returns if the underlying stock price rises, because of the premiums paid to buy the put options.

• If a stock doesn’t experience much movement up or down, the investor will see a steady loss of assets as they pay the option premiums.

• Options with strike prices close to the asset’s current market price can be prohibitively expensive.

• More affordable options that are further away from the stock’s current price offer only partial protection and can put the investor in the position of losing money.

The Takeaway

Protective put options are risk-management strategies that use options contracts to guard against losses. This options-based strategy allows investors to set a limit on how much they stand to lose in a given investment.

Looking to start options trading? With SoFi’s options trading platform, you can trade options on the web platform or through the mobile app, thanks to an intuitive and approachable design.

Trade options with low fees through SoFi.

Photo credit: iStock/igoriss

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.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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.

SOIN0821354

Nov

2021

What Is a Bond Option? Definition & Examples

By Brian O'Connell | Growing Wealth, invest, Investing, Terminology | Comments Off

A bond option allows the contract holder to buy or sell an underlying investment (in this case, a bond) at a specific price and at a specific time. While considered less risky than stock options, bond options still typically carry higher risk than more traditional investments.

Like all options, bond options are derivative securities, used by investors to bet on the direction of an underlying security. Understanding what bond options are and how they work can help you understand these risks and determine whether bond options make sense for your portfolio.

Here’s a closer look at bond options, and the risks and rewards they bring to investors.

What are Bond Options?

A bond option is a legal contract to buy and sell underlying bond assets, usually via a call bond (i.e., the option to buy an underlying bond) or a put bond (the option to sell a bond) at a specific price (known as the “strike price)” at or before a specific time deadline (known as the “expiration date”).

For example, an investor might purchase a bond call option with a strike price of $900. The level value (also known as “par value”) of the underlying U.S. government bond is $1,000. Let’s say market conditions push the value of that bond up to $1,100. In that scenario, the option holder has the right to buy the government bond at $900 – even as the value of that underlying bond now stands at $1,100.

Investors typically trade options, including bond options, through over-the-counter exchanges. Bond options are also typically available wherever U.S. Treasury bonds are sold in fund form through investment companies.

Recommended: A Beginner’s Guide to Options Trading

Pros and Cons of Bond Options

There are benefits and drawbacks to incorporating bond options in your portfolio.

Pros of Bond Options

Higher return potential. As discussed in the example above, when executed well a bond options strategy can increase a trader’s gains on a particular investment. Bond options can also protect against downside risk. Investors often use bond options as hedges against more risk-laden investment strategies.

Risk hedging. Bond options investors can leverage derivative contracts to take advantage of interest rates and other short-term drives of investment performance. Investors can also lean on bond options to take advantage of pricing variations in options pricing or to position their portfolios ahead of major geopolitical events, like presidential elections, potentially big Federal Reserve policy decisions, or major recessions and other powerful economic forces.

Cons of Bond Options

The risk of non-exercise. Bond options investors may do well to let an options contract expire rather than execute a trade that goes awry and loses money. While a bond options investor isn’t obligated to exercise their bond options contracts, letting a contract expire means the original money used to buy or sell a bond option is gone forever. So, too, are the fees investment companies charge to handle options trades.

The risk of unlimited investment loss. While call options provide an investor with the possibility of unlimited gain if the underlying security rises in value, that same investor faces unlimited loss potential if that investor is selling a call or put option. If the underlying assets plummet to a value of zero, the options investor could face massive financial losses.

The risk of losing money quickly. As options, by nature, are short-term investing instruments, investors need to have extensive knowledge of near-term investment price movements to minimize the downside risk of investing in bond options. Often, traders make decisions about their options strategy based on a short time horizon. That means all options investors must master two key trading objectives – knowing the right time to purchase an options contract and knowing when to sell that contract, or cut losses by allowing the contract to expire without exercising the option to buy or sell by the expiration date.

Recommended: 10 Options Trading Strategies

Types of Bond Options

Bond options offer investors the right to buy or sell (via calls and puts) an underlying investment security at a specific time and at a set price.

Call Option Bonds

With a bond call option, if the price of the underlying bond option rises in value, the contract holder can earn a profit on the call by exercising the option to purchase the asset (with a call option) at a lower price and then selling it when the underlying asset goes up. A call option is in the money if the strike price is lower than the current market price of the underlying bond.

Bond Put Options

A bond options investor who buys believes a bond will go up in price may purchase a put option or put bond. With that option, buy the asset at the current low price and sell it at the rising strike price, assuming the price moves in the direction the trader had hoped. What a bond investor strives to avoid is being on the wrong side of an options trade, i.e., selling at a below market rate or buying at an above-market rate.

If an investor anticipates that bond prices will decline, given future expected market conditions, they’d purchase a put option. If the level value of the underlying bond option were$1,000, a bond put option gives the contract holder the right to sell the option contract at the strike price of $900 – on or before the expiration date. If bond prices fall, the underlying bond is now valued at $870. Now, that bond option investor can exercise the sale of the options contract at the strike price of $900, even as the bond’s value has fallen to $870. That guarantees a big profit for the investor, given the outsized nature of options contracts.

Embedded Bond Options

Embedded bond options are bonds in which the holder or the issuer has a right to take a specific action with a certain period going forward. Examples of embedded bond options include call provision, convertible provisions, and floored floating-rate provisions.

Callable Bond Options

Callable bonds are one type of embedded bond option. With callable bonds, the issuer has the option to repay investors the face value of the bond before the maturity date.

Bond Options Pricing

Given all the variables, including the current price and future price of a bond, volatility levels, interest rates, and time to expiration, it can be very complicated to properly price a bond option. Investors rely on several different mathematical formulas for this, including the Black-Derman-Toy Model and the Black Model.

The Takeaway

Options traders may use a bond option as a hedge against economic volatility in key areas like interest rates, currency rates, and bond yield rates, a bond option can be a useful portfolio management tool. However, there are plenty of other types of investments that an investor can use when building a portfolio, without trading bond options.

But for investors who are curious to start options trading, SoFi offers a user-friendly platform to do so. With an intuitive and approachable design, you can trade options on the web platform or through the mobile app.

Trade options with low fees through SoFi.

Photo credit: iStock/PeopleImages

Blockchain in Real Estate: How it Works and Biggest Benefits

What is Blockchain, Exactly?

Benefits of Using Blockchain in Real Estate

1. Faster Deal Closing

2. Stronger Security

3. Eliminating Middlemen

4. Fractional Real Estate Investing

Downsides of Blockchain in Real Estate

The Takeaway

Chainlink Crypto: What it is, Price, and How to Invest in LINK

What is the Chainlink Network?

What is LINK Coin?

Chainlink Price

What Can You Use LINK Coin For?

Should You Invest in LINK Coin?

Benefits of Investing in LINK Coin

Disadvantages of Investing in LINK Coin

How to Buy LINK cryptocurrency

The Takeaway

What Are Nodes? 7 Types of Blockchain Nodes

How Do Blockchain Nodes Work?

Consensus Algorithms

7 Types of Blockchain Nodes

1. Light Nodes

2. Archival Full Nodes

3. Pruned Full Nodes

4. Mining Nodes

5. Authority Nodes

6. Masternodes

7. Lightning Nodes

How to Set Up and Run a Full Node

The Takeaway

What Is a Protective Put? Definition & Example

Understanding Protective Puts

Important Options Terms to Know

How Strike Price and Premiums Affect Protective Puts

Protective Put Scenarios

Pros & Cons of Protective Puts

Pros of Protective Puts

Cons of Protective Puts

The Takeaway

What Is a Bond Option? Definition & Examples

What are Bond Options?

Pros and Cons of Bond Options

Pros of Bond Options

Cons of Bond Options

Types of Bond Options

Call Option Bonds

Bond Put Options

Embedded Bond Options

Callable Bond Options

Bond Options Pricing

The Takeaway

CATEGORIES

JOIN THE COMMUNITY

Student Loan Refinancing

Personal Loans

Online Investments

Other

Student Loan
Refinancing

Personal
Loans

Online
Investments