Feb
22
2022
Guide to Jade Lizards

Guide to Jade Lizards

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

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

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

What Is a Jade Lizard Option Strategy?

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

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

How Does a Jade Lizard Work?

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

Setting Up a Jade Lizard

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

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

•   Sell ABC 62 Call for 1.25

•   Buy ABC 63 Call for 0.90

•   Sell ABC 58 Put for 0.75

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

Maximum Profit

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

Maximum Loss

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

Breakeven Point

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

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

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

Exit Strategy

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

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

Maintaining a Jade Lizard

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

Pros and Cons of the Jade Lizard Strategy

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

Pros of the Jade Lizard strategy

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

Alternatives to Jade Lizards

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

Investing With SoFi

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

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

Trade options with low fees through SoFi.

FAQ

How are Jade Lizards managed?

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

How do reverse Jade Lizards differ from Jade Lizards?

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

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

What is the maximum payoff of a Jade Lizard?

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

Photo credit: iStock/ipopba

SoFi Invest®
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

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

Margin Interest: Deductibility, Calculation, and Definition

By | Growing Wealth, invest, Investing | Comments Off on Margin Interest: Deductibility, Calculation, and Definition

When traders use a margin account — which allows them to borrow money from their brokerage to make trades — they’re charged margin interest on the funds they borrowed. It’s similar to using a line of credit.

Living life on the margins may not sound appealing to many people, but for some investors — especially those making a lot of trades — it’s simply a part of the game. Many traders buy and sell securities “on margin” in order to place bigger bets than they normally would. The amount of interest charged is typically a function of how much the trader borrows.

In order to get the most from margin trading, it pays to understand how margin interest is calculated, and how and when to deduct it on your taxes. We explain it all below.

Recommended: What Is a Brokerage Account?

What Is Margin Interest?

As mentioned, margin interest refers to the interest charged on a trader’s margin debt: i.e., the balance owed on their margin account.

Margin Accounts

Just as you can borrow against the equity in your home via a line of credit, you can also borrow against certain investments in your portfolio. This is called margin lending, and it happens within a margin account, a type of account available at most brokerages.

Margin Accounts vs Cash Accounts

With a cash account, you can only buy as many securities as you can cover with cash. If you have $20,000 in your account, you can buy $20,000 worth of investments. By contrast, a margin account allows you to borrow from the brokerage to purchase securities that are worth more than the cash you have on hand. The assets in your account effectively act as the margin or collateral for any funds you borrow.

As an example: If your brokerage offered you 10% margin, you can use $1,000 to buy $10,000 worth of investments.

Most brokerages provide the option of making a taxable account a margin account. FYI, tax-advantaged retirement accounts like traditional IRAs or Roth IRAs are typically not eligible for margin trading.

Margin Accounts and Risk

Margin accounts are generally considered to be more appropriate for experienced investors, since trading on margin means taking on additional costs and investment risks. Trading on margin can amplify your gains, because you can afford to invest more, but conversely there is also the possibility that any losses would likewise be steeper.

In the event of a loss, a margin call may require your broker to sell assets from your account to cover your balance, without notification. Thus, in addition to facing a loss if your trade isn’t profitable, you would still be on the hook for repaying any margin debt plus interest.

How Does Margin Interest Work?

Each brokerage will have its own guidelines and rules relating to margin loans, and they must be at least as strict as those prescribed by law. That is, the brokerage will dictate which types of stocks, bonds, ETFs, etc., that are “marginable,” or that traders can buy on margin. For instance, a brokerage may decide that traders can only buy stocks that are listed on U.S. stock exchanges on margin, and that have a value of at least $10 per share.

In addition, the Securities and Exchange Commission (SEC), FINRA and other regulatory bodies have rules you need to know, in addition to understanding the policies of your specific brokerage. For example, FINRA requires that you deposit the lesser of $2,000 or 100% of the purchase price of the stocks you plan to purchase on margin.

Again, terms may vary from brokerage to brokerage, but with these basics in mind it’s easier to understand how margin interest works.

Once you qualify for a margin account and purchase a stock on margin, for example, you’ve essentially bought that security with credit and now have to pay back the loan with interest.

Margin interest rates, similar to rates on a line of credit, vary depending on the brokerage. The interest you owe is typically higher when you’ve borrowed lower amounts. The lowest margin interest rate is generally applied to traders with higher balances.

Margin Interest Example

Here’s a hypothetical example: let’s say Brokerage A’s margin interest rates were between 4% and 8%. Traders using up to $24,999 in margin might be subject to the highest interest rate (8%), whereas traders with more than $1 million in margin debt would be charged the 4% rate.

Brokerage B, though, could have different terms, with margin debt up to $24,999 subject to an 8.5% margin interest rate, and those with debit balances between $250,000 and $499,999 subject to 6.5%.

While in many cases, the repayment of your margin loan is up to you, interest charges are automatically posted to your account on a regular cadence (e.g., monthly), similar to a credit card. To minimize the amount of interest you’re charged, it’s wise to have a plan for reducing the amount you owe. This can be done by selling securities or depositing cash into your account.

In theory, you could pay off a margin loan before much interest had time to accrue. But, as with other forms of credit, the interest on your margin loan may be charged daily.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10%* and start margin trading.

*For full margin details, see terms.

How Is Margin Interest Calculated?

Okay, so now you have a basic understanding of trading on margin, and margin interest. The next big question: How is margin interest calculated?

To calculate margin interest, there are two key variables at play: The loan balance, and the interest rate. The size of your balance (we’ll call it a loan, for simplicity’s sake) generally determines the effective margin interest rate, too.

In simple terms, here’s how margin interest would be calculated: The loan, multiplied by the effective interest rate, divided by 360 (the brokerage industry generally uses a 360-day annual calendar, rather than 365). This calculation gives you the daily interest charge.

As an example, say you borrowed $10,000 to buy Stock X. You think that Stock X will gain value over the next two weeks, so you plan to hold it for 14 days, and then sell. Your broker will charge you an effective interest rate of 8.5%.

It bears repeating that the stipulations and specifics will depend on your brokerage. So be sure to check the documents in your account to know what you’ll be charged.

Back to our example — with these variables in hand, we can calculate the margin interest we should expect to pay. Here’s what the calculation would look like, step by step:

•   Step 1: Multiply the margin debt and the effective interest rate.

   $10,000(.085) = $850

•   Step 2: Divide the annual interest charge by 360 to get a daily interest charge.

   $850 ÷ 360 = $2.36

•   Step 3: Multiply the daily interest charge and the number of days you’ll hold Stock X.

   $2.36(14) = $33.04

With that, we now know that it’ll cost about $33.04 in margin interest charges to buy $10,000 of Stock X on margin and hold it for 14 days. Remember, this is a pared-down, simplified version of this calculation. But this should give you an idea of how margin interest is applied and accrued.

💡 Recommended: Calculating Margin for Stock Trading

Margin Interest Tax Deductibility

Another important question that many investors ask: Are margin interest charges tax deductible?

The short answer is yes. Though there were some changes made to what types of itemized deductions can be made a few years ago relating to a tax reform bill and investments — changes that started in 2018 and will phase out in 2025 — the investment interest deduction wasn’t one of them.

Margin interest is, technically speaking, an investment expense. So if you borrow money to make investments, and itemize your deductions on the Schedule A portion of your 1040 tax form, it’s likely you can deduct margin interest up to the amount of your net taxable investment income. So, calculate your total net investment income, and that number is the limit of how much you’re able to deduct for margin interest. You’ll use Form 4952 for the deduction.

The devil is in the details when it comes to taxes and specific deductions, like this, however. For that reason, it may be best to consult with an accountant or other professional to make sure these deductions are the best way to shore up your tax efficient investing strategy.

The Takeaway

Like most forms of credit, margin loans — i.e., borrowing money from your brokerage to buy securities — must be repaid with interest. Understanding the terms of your brokerage’s margin account means learning what the margin interest rates are, and how they apply to you. Typically, higher margin balances are charged lower interest rates.

That doesn’t mean you can trade more on margin to get a lower interest rate. Industry regulations, in addition to the rules of your brokerage, restrict how much you can borrow — and how much you must keep in your account as collateral.

If you are an experienced trader and have the risk tolerance to try out trading on margin, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.

Get one of the most competitive margin loan rates with SoFi, 10%*

Photo credit: iStock/Eva-Katalin

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
SoFi Invest®
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

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Feb
22
2022
What Does At the Money Mean in Options Trading?

What Does At the Money Mean in Options Trading?

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

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

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

What Is At the Money?

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

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

Understanding At the Money

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

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

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

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

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

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

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

Option

 Strike price

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

Recommended: Call vs. Put Options: The Differences

At the Money and Near the Money

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

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

Pricing At-the-Money Options

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

At the Money and Volatility Smile

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

Pros and Cons of Trading At-the-Money Options

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

Pros of trading at-the-money options

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

The Takeaway

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

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

Trade options with low fees through SoFi.

FAQ

What does buying at the money mean?

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

How do at the money and in the money differ?

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

Is it best to buy at the money?

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

Photo credit: iStock/DMEPhotography

SoFi Invest®
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

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

How Does a Margin Account Work?

By | Growing Wealth, invest, Investing | Comments Off on How Does a Margin Account Work?

Just as you can borrow money against the equity in your home, you can also borrow money against the value of certain investments in your portfolio. This is called margin lending, and it happens within a margin account, which is a type of account you can get at a brokerage.

Most brokerages offer the option of making a taxable account a margin account. Tax-advantaged retirement accounts, such as traditional IRAs or Roth IRAs, generally are not eligible for margin trading.

What Is a Margin Account?

When defining a margin account, it helps to understand its counterpart—the cash account. With a cash brokerage account, you can only buy as many investments as you can cover with cash. If you have $10,000 in your account, you can buy $10,000 of stock.

A margin account allows you to borrow from the brokerage to purchase securities that are worth more than the cash you have on hand. In this case, the cash or securities already in your account act as your collateral.

Margin accounts are generally considered to be more appropriate for experienced investors, since trading on margin means taking on additional costs and risks.

How Do Margin Accounts Work?

Once you open a margin account with a brokerage, you’ll be able to purchase securities with a line of credit. The securities and cash you already have in the account act as collateral on the loan, which has an interest rate, just like any other loan. There is no deadline to repay the loan, but most margin accounts require that you keep your account value above a certain threshold. Not all securities can be purchased on margin.

Margin Account Rules and Regulations

When it comes to margin accounts, the Securities and Exchange Commission (SEC), FINRA and other bodies have set some rules:

•  Minimum margin: There is a minimum margin requirement before you can start trading on margin. FINRA requires that you deposit the lesser of $2,000 or 100% of the purchase price of the stocks you plan to purchase on margin.

•  Initial margin: Your margin buying power has limits—generally you can borrow up to 50% of the cost of the securities you plan to buy. This means, for example, that if you have $10,000 in your margin account, you can effectively purchase up to $20,000 of securities on margin. You would spend $10,000 of your own money and borrow the other 50% from the brokerage. (You can also borrow much less than this.) Your buying power varies, depending on the value of your portfolio on any given day.

•  Maintenance margin: Once you’ve bought investments on margin, regulators require that you keep a specific balance in your margin account. Under FINRA rules, your equity in the account must not fall below 25% of the current market value of the securities in the account. If your equity drops below this level, either because you withdrew money or because your investments have fallen in value, you may get a margin call from your brokerage.

Avoiding Margin Calls

As mentioned above, if the equity in your margin account drops below a certain threshold, you may get an alert from your brokerage, called a margin call. This is meant to spur you to either deposit more money into your account or sell some securities to bolster the equity that’s acting as collateral for your margin loan.

Recommended: What is a Margin Call?

It’s worth noting that if your investment value drops quickly or significantly, you may find that your brokerage has sold some of your securities without notifying you. Commonly, investors are forced by a margin call to sell investments at an inopportune time—such as when the investment is priced at less than you paid for it. This is an inherent risk of trading on margin.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10%* and start margin trading.

*For full margin details, see terms.

What Are Margin Costs?

Trading on margin adds additional investment costs. When you borrow money from the brokerage to buy securities, you are essentially taking out a loan, and the brokerage will charge interest. Margin interest rates are different from company to company, and may be somewhat higher than rates on other kinds of loans.

Consider interest costs when you’re thinking about your margin trading plan. If you use margin for long-term investing, interest costs can affect your returns. And holding investments on margin means the value of your securities must hold steady.

What Are the Benefits of a Margin Account?

For an experienced investor who enjoys day trading, having a margin account and trading on margin can have some advantages:

•  More purchase power. A margin account allows an investor to buy more investments than they could with cash. That might lead to higher returns, since they’re buying more securities and may be able to diversify their investments in different ways.

•  A safety net. Just as an emergency fund offers access to cash when you need it, so does a margin account. If you need funds but you don’t want to sell investments at their current price point, you can take a margin loan for short-term cash needs.

•  You can leave your losers alone. In another scenario, if you need cash but your investments aren’t doing so well, taking a margin loan allows you to keep your securities where they are instead of selling them right now at a loss.

•  No loan repayment schedule. There is no repayment schedule for a margin loan, so you can repay it at any rate you please, as long as your equity in the account maintains the proper threshold. Monthly interest will accrue, however, and be added to your account.

•  Potentially deductible interest. There may be tax situations in which the interest in a margin loan can be used to offset taxable income. A tax professional will tell you whether this is a move you can consider.

How Can a Margin Account Make Me Money?

Here is an example of the way in which having a margin account may boost your returns. Imagine that you have $10,000 in a cash account and you buy 50 shares of a stock at $200. Two years later, the stock is worth $250, and you sell your shares for $12,500, realizing $2,500 in gains. (For simplicity, this scenario leaves out trading fees.)

Now imagine if you had $10,000 in a margin account, and you were able to buy 100 shares of the same stock for $20,000, since you could borrow 50% of the purchase price. Two years later, the stock is worth $250, and you sell your shares for $25,000. After paying back the $800 in interest charges (assuming a hypothetical 8% interest rate), you’d realize $4,200 in gains.

What Are the Drawbacks of a Margin Account?

Despite the advantages, using a margin account is risky business. Here are some things to consider before trading on margin:

•  You could lose substantially. While it’s possible that trading on margin can help realize greater returns if an investment does well, you will also see greater losses if an investment takes a dive. And even if an investment you’ve purchased on margin loses all of its value, you’ll still owe the margin loan back to the brokerage—plus interest.

•  There may be a margin call. If your investments tank, it’s possible that you’ll have to sell securities or deposit additional funds to bring your account back up to the required margin threshold. It’s also possible for a brokerage to sell securities from your account without alerting you.

How Can I Lose Money With a Margin Account?

Here is an example of the way in which a margin account can amplify losses. Using the same example from above, imagine if you used $10,000 to buy 50 shares of a stock worth $200, and over two years the stock price dropped to $100. You would have lost $5,000.

Now imagine if you’d used margin to purchase 100 shares of the stock for $20,000. If the stock price dropped to $100 over two years, you’d have lost $10,000—but you’d still owe the original $10,000 margin loan, leaving you with nothing. Really, less than nothing, since you’d have to pay back the interest as well. It’s ultimately possible for the stock to fall even further, forcing you to come out of pocket for the money you owe the brokerage.

How to Manage Margin Account Risk

If you decide to open a margin account, there are steps you can take to try to minimize the amount of risk you’re taking by leveraging your trading:

•  Skip the dodgy investments. Trading on margin works if you’re earning more than you’re paying in margin interest. Speculative investments can be a risky portfolio move, since a swift loss in value can result in a margin call.

•  Watch your interest costs. Although there is no formal repayment schedule for a margin loan, you’re still accruing interest and you are responsible for paying it back over time. Regular payments on interest can help you stay on track.

•  Maintain some emergency cash. Having a cushion of cash in your margin account gives you a little wiggle room to keep from facing a margin call.

Should You Use a Cash Account or Margin Account?

If you’re a beginner investor, a cash account gives you an opportunity to learn how to trade and invest, and there’s a low level of risk. If you’re a more experienced investor and fully understand the risks of trading on margin, a margin account may offer the opportunity to expand and diversify your investments.

Some financial advisors suggest that clients open margin accounts in case they need cash in a hurry. For instance, if you need money quickly, it takes time to sell investments and for the money to be deposited in your account. If you have a margin account, you can take a margin loan while your securities are being sold. Typically, margin accounts don’t carry any additional fees as long as you aren’t borrowing on margin.

You also need a margin account for short selling. With short selling, you borrow a stock in your brokerage account and sell it for its current price. If the price of the stock falls—which you’re betting will happen—you repurchase shares of the stock and return it to the original owner, pocketing the difference in price.

Like trading on margin, short selling is a strategy for experienced investors and comes with a large amount of risk.

The Takeaway

A margin account is an account that lets you borrow against the cash or securities you own, to invest in more securities. As with other lending vehicles, margin accounts do charge interest.

While margin accounts do come with risk—including the risk of losing more money than you originally had, plus interest on what you borrowed—they also offer benefits including more purchasing power and a safety net for short-term cash needs.

If you have the experience and risk tolerance and are ready to try out trading on margin, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.

Get one of the most competitive margin loan rates with SoFi, 10%*

SoFi Invest®
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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.

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.

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

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Feb
22
2022
What Are Marginable Securities & Non Marginable Securities?

What Are Marginable Securities & Non-Marginable Securities?

By | Growing Wealth, invest, Investing | Comments Off on What Are Marginable Securities & Non-Marginable Securities?

Marginable securities are those assets that investors can purchase on margin, meaning they do not have the cash in their account to cover the cost, so they borrow it from their brokerage or another financial institution.

If you’re planning to trade on margin, or just want to know more about how it works, you’ll need to understand the difference between marginable and non-marginable securities.

Recommended: What Are Securities in Finance?

What Is a Marginable Security?

The term “marginable securities” refers to any stocks, bonds, options, or anything else, that your brokerage will allow you to trade on margin, or purchase with borrowed money.

There are a lot of rules at play when it comes to margin, set by a variety of different organizations. For example, groups like the Federal Reserve and the Financial Industry Regulatory Authority (FINRA), stock exchanges like the New York Stock Exchange (NYSE), and the individual brokerages themselves all have their own margin rules, including which securities traders can buy or sell on credit.

If you have a margin account, you can get a marginable securities list from your brokerage by asking your representative or looking online.

Marginable Securities Example

Most brokerages that allow margin trading would allow investors to trade large, blue-chip stocks on margin. That means that investors can borrow from their brokerage to buy that stock.

Traders might also use margin to short a stock, or bet that its price is about to go down. In that instance, they’d borrow shares from their brokerage and sell them on the open market to another investor, with the hopes of buying them back later at a lower price.

What Is a Non-Marginable Security?

Non-marginable securities are securities that investors cannot purchased on margin, or by borrowing money from a brokerage to facilitate their purchase.

If an investor or trader wants to purchase a non-marginable security, then, they must do so with a cash account, rather than a margin account.

Non-marginable Securities Example

Non-marginable securities typically include of exotic stock, or those considered high risk, perhaps because of low liquidity and higher levels of volatility. That can include stocks that trade over-the-counter (OTC), or penny stocks ( valued at less than $5 per share). It may also include IPO stocks.

In general, securities held in an IRA account or a 401(k) retirement account are non marginable because those accounts do not allow for margin trading.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10%* and start margin trading.

*For full margin details, see terms.

Differences Between Marginable and Non-Marginable Securities

Here’s a quick rundown of the main differences, and pros and cons between marginable and non-marginable securities:

Marginable & Non-Marginable Securities: Key Differences
Marginable Securities Non-Marginable Securities
Can be purchased on margin Cannot be purchased on margin
Usually common, popular securities Tend to be riskier or volatile
Require a margin account or margin access Determined by brokerage, and or regulators

Why Are Some Marginable and Non-Marginable Securities?

We’ve covered the difference between marginable and non-marginable securities. You should also know that there is a reason that the distinction exists at all: To protect both traders and brokerages. Financial institutions aren’t generally in the business of losing money, so there’s not much incentive to let traders run around with the institution’s money, buying up risky assets.

Marginable securities have a degree of risk built into them that non-marginable securities lack. Specifically, there is risk associated with using leverage, or margin, that could result in some traders finding themselves in debt or subject to a margin call by their brokerage.

The Takeaway

Marginable securities are those that you can purchase by borrowing money from your broker, while you must purchase non-marginable securities with cash on hand. Trading on margin is riskier than trading without it, since you can lose more money than you’ve invested, but there’s also potential for higher returns.

If you have the experience and risk tolerance and are ready to try out trading on margin, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.

Get one of the most competitive margin loan rates with SoFi, 10%*

Photo credit: iStock/Delmaine Donson

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
SoFi Invest®
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

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