Trading Futures vs. Options: Key Differences to Know

Futures vs Options: What Is the Difference?

Futures and options are similar in that they are both derivative contracts between a buyer and seller to trade an asset at a certain price, on or before a certain date. Investors can use these instruments to hedge against risk and potentially earn profits — but options and futures function quite differently.

Options are derivatives contracts that give buyers the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) an asset at a specified price within a certain period of time.

Futures are another type of contract in which buyers and sellers are obligated to trade a specific asset on a certain future date, unless the asset holder closes their position prior to the contract’s expiration. A futures contract consists of a long side and a short side, where the short side is obligated to make delivery of the underlying asset, and the long side is obligated to take it.

Both options and futures typically employ some form of financial leverage or margin, amplifying gains and losses, creating a greater level of risk.

Futures

Options

Buyer is obliged to take possession of the underlying asset, or make a trade to close out the contract. Buyer has the right, but not the obligation, to buy or sell a certain asset at a specific price.
Futures typically involve taking much larger positions, which can involve more risk. Options may be less risky because the investor is not obliged to acquire the asset.
No upfront cost to the buyer, other than commissions. Buyers pay a premium for the options contract.
Price can fall below $0. Price can never fall below $0.

Options Explained

Options are contracts that establish an agreement for the trade of a certain underlying asset, such as a stock or currency. An options contract typically reflects 100 shares of the asset.

Buyers of options have the right to buy or sell the asset, but they are not required to. These contracts are known as derivatives because they are tied to the underlying assets they represent but are not the assets themselves.

To enter into an options contract, the buyer pays what is known as a premium in options terminology. The premium is non-refundable, so that is what the buyer risks when they enter the contract.

Types of Options

The two types of options are call options and put options.

•   Call options, or calls, allow the option holder to buy an underlying asset at the strike price any time until the expiration date.

•   Put options, or puts, allow the option holder to sell an asset at a certain price for the duration of the contract.

Example of a Call Option

An investor buys a call option for XYZ stock with a strike price of $40 per share, paying a $3 premium to enter into the contract. The contract expires in six months, and the stock is currently trading at $39 per share.

Within the next six months, if the stock price goes up to $50, the buyer can choose to exercise their call option and purchase the stock at the $40 strike price. They could then sell that stock on the market for $50 per share and make a $10 per share profit, minus the cost of the premium.

Or, the buyer could choose to sell the option itself rather than exercising it and buying the shares. The contract will have gone up in value as the price of the stock went up, so the buyer would likewise see a profit.

If the price of the stock is below the $40 strike price at the time of expiration, the contract would expire worthless, and the buyer’s loss would be limited to the $3 premium they paid upfront.

Example of a Put Option

Meanwhile, if an investor owns a put option to sell XYZ stock at $80, and XYZ’s price falls to $60 before the option expires, the investor will gain $20 per share, minus the cost of the premium.

If the price of XYZ is above $80 at expiration, the option is worthless, and the investor loses the premium paid upfront.

Who Trades Options

Experienced investors who are able to buy and sell on margin are typically those who trade options contracts.

Because options investing entails a certain amount of risk, as well as access to a margin account, retail investors may need approval from their brokerage in order to trade options.

Futures Explained

Futures contracts are similar to options in that they set a specific price and date for the trade of an underlying asset. One of the most common forms are futures on commodities, which speculators can use to make a profit on changes in the market without actually buying or selling the physical commodities themselves. Futures are also available for individual stock market indices and other assets. Rather than paying a premium to enter the contract, the buyer pays a percentage of the notional value called an initial margin.

Example of a Futures Contract

Let’s look at an example of a futures contract. A buyer and seller enter a contract that sets a price of $40 per bushel of wheat. During the life of the contract, the market price may move above $40, putting the contract in favor of the buyer, or below $40, putting it in favor of the seller. If, for example, the price of wheat goes to $45 at expiration, the buyer would make $5 per bushel, multiplied by the number of bushels the contract controls.

Who Trades Futures?

Some of the most commonly traded futures contracts are related commodities, including agricultural products (e.g. wheat, soybeans), energy (e.g. oil), and metals (e.g. gold. silver). There are also futures on major stock indices, such as the S&P 500, government bonds, and currencies.

Traders of futures are generally divided into two camps: hedgers and speculators. Hedgers typically have a position in the underlying commodity and use a futures contract to mitigate the risk of future price movements. An example of this is a farmer, who might sell a futures contract against a crop they produce, to hedge against a fall in prices and lock in the price at which they can sell their crop.

Speculators, on the other hand, take some risk in order to profit from favorable price movements in the underlying asset. These include institutional investors, such as banks and hedge funds, as well individual investors. Futures enable speculators to take a position on the price movement of an asset without trading the actual physical product. In fact, much of trading volume in many futures contracts comes from speculators rather than hedgers, and so they provide the bulk of market liquidity.

Futures vs Options: Main Differences

So far, we’ve described some of the differences in how options and futures are structured and used. Here are some additional factors to consider when comparing the two instruments.

Risk

Trading options comes with certain risks. The buyer of an option risks losing the premium they paid to enter the contract. The seller of an option is at risk of being required to purchase or sell an asset if the buyer on the other side of their contract exercises the option.

Futures can be riskier than options because of the high degree of leverage they offer. A trader might be able to buy or sell a futures contract putting up only 10% of the actual value. This leverage magnifies price changes, meaning even small movements can result in substantial profit or loss.

With futures, the value of the contract is marked-to-market daily, meaning each trading day money may be transferred between the buyer and seller’s accounts depending on how the market moved. An option buyer, on the other hand, is not required to post any margin, since they paid the premium upfront.

Value

Futures pricing is relatively intuitive to understand. The price of a futures contract should approximately track with the current market price of the underlying asset, plus the cost of carrying or storing the physical asset until maturity.

Option pricing, on the other hand, is generally based on the Black-Scholes model. This is a complicated formula that requires a number of inputs. Changes in several factors other than the price of the underlying asset, including the level of volatility, time to expiration, and the prevailing market interest rate can impact the value of the option.

Holding constant the price of the underlying asset, futures maintain their value over time, whereas options lose value over time, also known as time decay. The closer the expiration date gets, the lower the value of the option gets. Some traders use this as an options trading strategy. They sell options contracts, knowing that time decay will eat away at their value over time, betting that they will expire worthless and pocketing the premium they collected upfront.

The Takeaway

Futures and options are popular types of investments for those interested in speculation and hedging. But these two types of derivatives contracts operate quite differently, and present different opportunities and risks for investors.

There are several differences between futures and options, most notably that futures contracts specify an obligation — for the long side to buy, and for short side to sell — the underlying asset at a specific price on a certain date in the future On the other hand, options contracts give the contract holder the right to buy or sell the underlying asset at a specific price, but not the obligation to do so (which removes some of the risk).

Another distinction, though, is that a futures contract is a simpler transaction in a way, as it only involves a buyer who wants to buy the contract/asset, and the seller who wants to sell it. Options, however, come in two flavors, puts and calls, which involve different rules and potential outcomes. Puts give investors the option to buy a certain asset, while calls give investors the right to sell a certain asset.

If you’re interested in getting started with trading options, SoFi now offers an options trading platform. This intuitive and approachable platform allows users to trade options from the web platform or mobile app. Plus, you’ll have a library of educational content at your fingertips to continue learning as you trade.

Pay low fees when you start options trading with SoFi.


Photo credit: iStock/DonnaDiavolo

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.
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A Guide to Special Margin Requirements

Guide to Special Margin Requirements

When it comes to trading stocks on margin, there are plenty of blanket rules and regulations in place. For instance, the Federal Reserve requires a 50% initial margin and a 25% maintenance margin. The Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange (NYSE) also require at least $2,000 of cash or securities to be deposited before someone can trade in a margin account.

According to the Securities and Exchange Commission (SEC), many brokers keep even higher maintenance margin requirements, typically between 30% and 40% — and sometimes higher depending on the type of securities purchased. These special margin requirements may vary.

Margin trading refers to using cash and securities in your account as collateral to purchase more assets. In doing so, you can use leverage to amplify returns — but you must also pay interest on borrowed funds. For anyone interested in trading on margin, it’s important to know the rules of margin accounts and also which stocks feature special margin requirements.

What Are Special Margin Requirements?

Special margin requirements are higher than standard margin requirements — above a maintenance margin rate of 25%. Higher margin rate requirements mean you must maintain a higher equity amount in your account when trading on margin.

Special margin requirements are often found on highly volatile stocks, so just a small drop in the price of these stocks can trigger a margin call. Brokers might also issue special margin requirements on concentrated positions in your account. Leveraged positions and other factors might also trigger special margin requirements.

Leverage and margin are related — but not the same.

Brokers do not just haphazardly issue special margin requirements. An analysis of historical volatility is used along with the use of SPAN margin. SPAN margin is calculated by standardized portfolio analysis of risk — a system used by exchanges around the world to control risk. SPAN margin determines margin requirements based on an assessment of one-day risk for a trader’s account. It is used primarily in options and futures markets. The SPAN system allows an exchange to know what a “worst-case” one-day move could be for any open futures position.

Special vs Standard Margin Requirements

Special Margin Requirement

Standard Margin Requirements

Brokers can determine special margin rates Initial margin set at 50%
A special margin requirement might exist for a concentrated position Some securities cannot be purchased 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.

How Do Special Margin Requirements Work?

Special margin requirements work by enforcing stricter equity deposits in your account when trading volatile stocks. The broker wants to protect itself in the event the securities in your account rapidly drop in value. Another way a broker protects itself is by issuing margin calls when special margin requirement percentages are breached.

With a margin call, you must deposit more cash or securities into your account to meet the call. You can also liquidate your holdings to generate cash and increase your equity percentage. If you fail to meet the call on time, the broker might liquidate your positions for you.

For a broker, it’s important to have safeguards like special margin requirements in place in case financial markets turn volatile. If many investors face margin calls all at once, the broker could face credit risk if those investors are unable to repay loans used in margin trading.

Pros and Cons of Special Margin Requirements

In terms of benefits and drawbacks, the upside is that special margin requirements help to control risk when investors engage in day trading — and the downside is more restrictions on your margin trading account.

Here’s a deeper dive into positives and negatives for the broker and for the investor.

Pros and Cons for Brokers

Pros Cons
Reduces risk when markets turn volatile More restrictive trading could turn away customers
Allows for tighter margin calls on risky positions Individuals might seek looser requirements from other brokers
Historical data provides a guide as to which stocks are most volatile Uncertainty exists when trying to predict what the most volatile securities will be going forward

Pros and Cons for Investors

Pros Cons
Highly volatile stocks are easier to identify Higher equity is required to trade certain stocks
Provides a guardrail when trading stocks Margin calls can trigger more quickly
Can be a tool to identify highly volatile stocks for options trading Margin percentages can change without notice

The Takeaway

While many stocks and ETFs have initial margin amounts of 50% and maintenance margin levels at 25%, some volatile stocks have higher special margin requirements. These requirements help protect both brokers and investors in the event that the stock tanks.

Margin trading is typically riskier than trading with a cash account. Investing with borrowed funds amplifies returns — positive and negative. It is important to be aware of the risks involved with this strategy.

If you have the experience and risk tolerance and are ready to try out trading on margin for yourself, 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%*

FAQ

What is a special margin account?

A margin account is a type of brokerage account in which your broker lends you cash, using the account’s equity as collateral, to purchase securities. These securities are known as marginable securities. Margin increases your purchasing power but also exposes you to the potential for larger losses.

That is not to be confused with a Special Memorandum Account (SMA). Excess margin generated from a trader’s margin account is deposited into a separate account called an SMA.

What are margin requirements?

Margin requirements are percentages of equity you must maintain in your margin trading account. According to Regulation T of the Federal Reserve Board, the initial margin for equities is 50% and maintenance margin is 25%. There are higher special margin requirements for highly volatile stocks. In addition, if you have a concentrated position, you might face a special higher margin requirement.

How much money do you need to open a margin account?

The NYSE and FINRA require a deposit of $2,000 or cash or securities with your broker before trading on margin. Some firms may require larger deposits.


Photo credit: iStock/akinbostanci

*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®
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.

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

Third-Party Brand Mentions: No brands, 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.

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Tokenized Stocks and How They Work

Tokenized stocks are digital assets that mimic the price action of publicly traded stocks. These tokens allow cryptocurrency traders to gain exposure to the price action of stocks without leaving the crypto ecosystem.

What Is a Tokenized Stock?

There are key differences when it comes to cryptocurrency vs. stocks. Tokenized stocks occupy the middle ground.

A tokenized stock is basically the same thing as a share of equity in a publicly traded company, like stocks traded on the Nasdaq or S&P 500. The difference is tokenized stocks come in the form of digital tokens.

When an investor buys a traditional stock on an exchange or during an initial public offering (IPO), their shares typically arrive in an investor’s brokerage account. The process for tokenized stocks is the same but with one key difference: because these shares are based on a blockchain, they can be bought and traded on a cryptocurrency exchange.

There’s usually a custodian and an investment institution involved in the process of creating a tokenized stock. The institution buys the underlying stock and deposits it with the custodian. Based on the shares that the custodian holds in reserve, tokens are issued on a blockchain. The price of each token is pegged to the value of the shares.

The tokens can then be listed on a cryptocurrency exchange where they can be bought and traded like any other cryptocurrency. Those who hold a stock token gain exposure to the underlying stock pretty much as if they owned it, including dividend payouts where applicable. However, they don’t actually own shares. They own a derivative that is backed by actual shares.

How Does Tokenized Stock Trading Work?

Tokenized stock trading isn’t the same as trading actual stocks. The tokens are cryptocurrencies and can only be traded as such.

Trading tokenized stocks involves many of the same steps required for trading cryptocurrency in general.

1.    Find an exchange that trades the tokenized stock you’re interested in. This could be a centralized exchange or a decentralized exchange.

2.    Create an account on the selected exchange. This usually involves submitting some basic personal info and verifying your identity.

3.    Fund your account. This can usually be done with a variety of cryptocurrencies or fiat currencies. (note: be sure to use a currency paired with your token of choice. For example, if the token only trades against BTC, you will need to deposit Bitcoin).

4.    Buy the stock token of your choice. Make sure the stock fits your risk tolerance.

Why Are Companies Tokenizing Equity?

The chief reason that many companies are tokenizing equity is the same reason that they issue shares of stock: To raise capital. There can be some distinct advantages to raising additional capital by issuing digital tokens, rather than going through the traditional method of either going public (IPO) or issuing additional shares.

With the goal of tokenized equity being to raise capital, and digital equity tokens taking on the role of stocks in some cases, it opens some cans of worms. For instance, while the federal government has been somewhat slow to determine how or if it wants to handle Bitcoin regulation and other cryptocurrencies, tokenized equity is essentially forcing the Securities and Exchange Commission’s hand.

The tokens issued by companies in lieu of stocks have the same characteristics and functions, and thus, are securities. That means they’re subject to registration and filing requirements. That’s brought on security token offerings (STOs), which are more or less the same as initial coin offerings (ICOs), but with the added caveat that the company issuing the tokens acknowledges that the token represents equity and is therefore a security.

Examples of Tokenized Stocks

Many tokenized stocks will be familiar to most investors. They include stock tokens of companies like Twitter, Tesla, Apple, and Alibaba, as well as some exchange-traded funds (ETFs).

Here are the top ten tokenized stocks by market cap according to CoinMarketCap data as of December 2021 (the top tokens change frequently since they trade on very little volume). Nine of the top 10 are “Mirrored” tokens that were minted on the Mirror Protocol and can be traded on one or more decentralized exchanges.

1. Mirrored Apple (mAAPL)

A tokenized stock of the Apple computer company, mAAPL has traded as low as $142 and as high as $171 over the last three months.

2. Mirrored iShares Gold Trust (mIAU)

The Mirrored iShares Gold Trust is a tokenized stock of the iShares Gold Trust ETF. The price has held steady between $17 and $18 for much of the past three months. From 11/30 – 12/3, however, there was a flash crash that saw the price of mIAU trade as low as $15.38 for a time.

3. Mirrored Tesla (mTSLA)

Mirrored Tesla (mTSLA) is a tokenized stock of Tesla, the electric car company. The token has traded as low as $748 and as high as $1,210 over the last three months.

4. Mirrored iShares Silver Trust (mSLV)

The Mirrored iShares Silver Trust (mSLV) is a tokenized stock of the iShares Silver Trust ETF. The token has traded as low as $20.83 and as high as $24.40 over the past three months.

5. Mirrored Netflix (mNFLX)

Mirrored Netflix is a tokenized stock of Netflix, the online streaming entertainment company. The token has traded as low as $590 and as high as $700 over the last three months.

6. Mirrored United States Oil Fund (mUSD)

Mirrored United States Oil Fund (mUSD) is a tokenized stock of the United States Oil Fund ETF. It has traded between $50 and $60 over the last three months.

7. Mirrored Alibaba (mBABA)

Mirrored Alibaba is a tokenized stock of Alibaba, the Chinese wholesale company. It has traded as low as $117 and as high as $183 over the last three months.

8. Mirrored Google (mGOOGL)

Mirrored Google is a tokenized stock of Google, the tech giant. The token has traded as low as $2,713 and as high as $3,073 over the last three months.

9. Mirrored Twitter (mTWTR)

Mirrored Twitter (mTWTR) is a tokenized stock of Twitter, the social media company. The token has traded down to $41.23 and up to $67.77 over the last three months.

Not all tokenized stocks are backed by real shares at a 1:1 ratio. Some of these tokens, particularly those based on DeFi platforms like Synthetix or Mirror, only track the prices of the stocks themselves. They accomplish this by using Chainlink or Band Protocol, which feed real-time price data into the blockchain from elsewhere.

Pros of Trading Tokenized Stocks

Tokenized stocks provide some advantages over trading regular shares of equity with a licensed brokerage, including:

•   Greater liquidity. Because a broader segment of the population can access tokenized stocks compared to traditional shares, these tokens can have greater liquidity than their counterparts that are traded thinly on major brokerages.

•   Faster transaction and clearance time. Depending on the network and exchange, token transactions might settle in a matter of minutes. Compare this to traditional stock transactions, which may take a number of business days to clear.

•   Fractional shares are easy to obtain. While fractional stocks are only available from specialized firms (like SoFi, for example), fractions of any tokenized stock are readily available wherever it is traded.

•   Low fees. Some crypto exchanges don’t charge fees for the trading of tokenized stocks.

•   24/7 trading. Tokenized stocks can be traded any time of day, any day of the week. The cryptocurrency markets never close. However, in an attempt to make sure that stock tokens trade in tandem with their equity counterparts, trading of some of these tokens is restricted to the regular hours that traditional stock exchanges are open (which typically 9:30 AM to 4 PM Eastern time Monday-Friday in the U.S.).

Cons of Trading Tokenized Stocks

Tokenized stocks also come with some drawbacks. These include:

•   Token holders are not technically shareholders. They don’t own any equity in the underlying company, and therefore they don’t have the right to participate in the Annual General Meeting (AGM) of the company behind their tokenized stock, nor are they granted voting rights in the decision-making process of the company.

•   Tokenized stocks come with additional risks. There are several additional intermediaries involved, including the custodial firm that holds shares and the crypto exchange that holds the tokens.

•   Additional know-your-customer (KYC) requirements. Extra KYC requirements from the custodian or exchange can create a hassle for investors.

Holding a tokenized stock is a way to gain exposure to the price of a stock. Other than possibly receiving dividend payouts, token holders are not considered to be shareholders within a company in the same way as those who hold traditional equities are.

Tokenized Equity: Advantages and Drawbacks

Advantages Drawbacks
Accessibility for investors Availability still not widespread
More efficient markets Lack of clarity around regulation
More market liquidity Investors may lack voting rights

Who Can Trade Tokenized Stocks?

In theory, anyone can trade tokenized stocks. That’s the beauty of cryptocurrency in general — there are no barriers to entry in the market besides an internet-connected device and some funds to get started with.

Tokenized stocks might be ideal for investors who want but don’t have access to traditional financial markets. For example, someone without a bank account can’t register with a stock brokerage, but they could potentially trade tokenized stocks.

To do so, a potential stock token investor might buy Bitcoin with cash at a Bitcoin ATM, send it to their own wallet, and deposit it at an exchange that trades tokenized stocks. As long as they are able to verify their identity to pass KYC requirements, they’d be unlikely to encounter any problems with this process.

Tokenized Stock Regulations

The Securities and Exchange Commission (SEC) makes it clear that a tokenized stock is subject to the same regulations as regular stocks.

The SEC asserts that all tokenized securities need to be registered. Tokenized stocks that do not register their issuances will be regarded as illegal. In the past, the agency has taken legal action against both the Paragon and AirFox tokens for failing to comply.

In addition, all exchanges that trade tokenized securities are required to register with the SEC as national securities exchanges or request an exemption. The Commission has previously taken action against EtherDelta for failing to comply with this requirement.

What it comes down to is this: while crypto regulation in general may still have some legal gray areas surrounding it, this is not the case for tokenized stocks. According to the SEC, these tokens are to be regulated just as if they were regular stocks. And the exchanges providing trading services for these tokens can be subject to the same regulations as traditional broker dealers.

The Takeaway

The tokenization of stocks is a fairly new phenomenon in crypto and comes on the back of a wave of DeFi innovation over the last few years.

Keep in mind that some decentralized exchanges don’t actually trade tokenized stocks. Instead, they trade something called “synthetic assets” or “synths.” These are tokens designed to mirror the performance of other assets. But they’re not directly pegged to actual shares in the way that tokenized stocks are.

Another important fact is that these tokens can be highly concentrated into a few wallets. Mirrored Alibaba (mBABA), for example, has 100% of its supply held by the top 10 holders, according to CoinMarketCap data. Many other tokenized stocks have 90% of their supply controlled by the top 10 or top 50 wallets.

Photo credit: iStock/Prostock-Studio


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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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What Is Max Pain in Options Trading?

What Is Max Pain in Options Trading?

What Is Max Pain?

Max pain, or the maximum pain price, is the strike price with the most open options contracts combining puts and calls. It is the strike price that causes the highest dollar value of losses among option buyers on a given stock at a specific expiration.

According to the Chicago Board Options Exchange (CBOE), about 30% of options expire worthless, 10% are exercised, and 60% close out before expiration. The concept of max pain focuses on the 30% of options that expire with no intrinsic value.

Some large institutional options sellers see an investment opportunity in writing options that eventually expire worthless, according to max pain theory. If options expire worthless, the seller of those options keeps the entire premium as profit.

Max pain options trading stems from the Maximum Pain Theory. The theory contends that option sellers seek to hedge portfolios with options expiration. The Maximum Pain Theory also suggests an option’s price will arrive at a max pain price where the most options contracts held through expiration will experience losses. Bear in mind that an options contract that is not “in the money” at expiration is worthless.

Recommended: Popular Options Trading Terminology to Know

How Max Pain Works

The Maximum Pain Theory asserts that the price of the underlying asset is likely to converge at the maximum pain strike price. The max pain price is the strike with the greatest dollar value of calls and puts. As the expiration date approaches, the underlying stock price might “pin” to that option strike price.

Some day traders closely monitor the max pain price on the afternoon of expiration – usually the third Friday of the month for monthly options or each Friday for weekly options contracts.

Max Pain trading can be controversial, as some believe it borders on “market manipulation” when traders seek to pin a stock price to a certain price at a certain time. Market participants disagree about whether or not Max Pain Theory works in practice. If a trader can predict which strike price will feature the greatest combination of dollar value between calls and puts, the theory states that they could profit from using that information.

Some market makers may consider Max Pain Price Theory when hedging their portfolios. Delta hedging is a strategy used by options traders – often market makers — to reduce the directional risk of price movements in the security underlying the options contracts. A market maker is often the seller of options contracts, and they seek to hedge the risk of options price movements by buying or selling underlying shares of stock.

This activity can cause the stock price to converge at the max pain price. Delta hedging plays a significant role in max pain trading.

How to Calculate the Max Point

Calculating the max pain options price is relatively straightforward if you have the data. Follow these steps to determine the max pain strike:

•   Step 1: Calculate the difference between each strike price and the underlying stock price.

•   Step 2: Multiply the results from Step One by the open interest at each strike.

•   Step 3: Add the dollar value for both the put and the call at each strike.

•   Step 4: Repeat Steps One through Three for each strike price on the option chain.

•   Step 5: The strike price with the highest dollar value of puts and calls is the max pain price.

Since the stock price constantly changes and open interest in the options market rises and falls, the max pain price can change daily. An options trader might be interested to see if there is a high amount of open interest at a specific price as that price could be where the underlying share price gravitates toward at expiration, at least according to Max Pain Theory.

Max Pain Point Example

Let’s assume that XYZ stock trades at $96 a week before options expiration. A trader researches the option chain on XYZ stock and notices a high amount of open interest at the $100 strike. The trader performs the steps mentioned earlier to calculate the max pain price.

Indeed, $100 is the max pain price. Since the trader believes in Max Pain Theory, they go long shares of XYZ on the assumption that it will rise to $100 by the next week’s options expiration. Another options trading strategy could be to put on a bullish options position instead of buying shares of the underlying stock.

This hypothetical example looks simple on paper but many factors influence the price of a stock. There could be company-specific news issued during the final days before expiration that sends a stock price significantly higher or lower.

Macro factors and overall market momentum might overwhelm market makers’ attempt to pin a stock to a max pain strike. Finally, stock price volatility could cause the max pain price to shift in the hours and even minutes leading up to expiration.

Pros and Cons of Using Max Pain Theory When Trading

Max Pain Options Theory can be an effective strategy for options traders looking for a systematic approach for their options strategy. That said, not everyone agrees that Max Pain Theory works in practice. Here are some of the pros and cons of Max Pain Theory.

Pros

Cons

A systematic approach to trading options Lack of agreement supporting the theory
Trades the most liquid areas of the options market Stock prices don’t always gravitate to a max pain price
Benefits from supposed market manipulation Other factors, such as market momentum or company news, could move the stock price

Max pain trading in the options market is easier today amid a brokerage world with low or even no commissions. Previously, it was simply not economical for many retail traders with small account sizes to buy and sell options using max pain theory.

Critics contend that there should be more regulatory oversight on max pain price trading — particularly on large institutions that could be manipulating prices. It’s unclear whether there will be more oversight of such practices in the future.

The Takeaway

Max Pain Theory is one approach to options trading based on the strike price that would cause the most losses. Options traders who calculate the max pain price, can use that information to inform their investing strategy. But it’s not necessary to invest in options at all to build your nest egg.

But if you’re ready to tackle options trading, check out the SoFi options trading platform. Investors can trade options either from the mobile app or web platform, with an intuitive and approachable design. Whether you’re a seasoned trader or an options trading beginner, you might also perusing the educational content about options offered, too.

Trade options with low fees through SoFi.


Photo credit: iStock/valentinrussanov

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.
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What Are CryptoPunks & Where Can You Get Them?

What Are CryptoPunks & Where Can You Get Them?

In June of 2021, a cryptopunk NFT (non-fungible token) called “Covid Alien” sold for an astounding $11.7 million. This NFT was part of a rare collection of only nine cryptopunks dubbed “alien punks,” and is the only one depicted as wearing a mask.

In May of the same year, three cryptopunks were sold as a single NFT for nearly $17 million.

What Exactly Are CryptoPunks?

A CryptoPunk is a piece of digital art from the CryptoPunks collection. CryptoPunks — known as Punks — look like pixelated portraits of random characters that are inspired by the London punk rock scene.

As a collection, there are 10,000 Punks in total. Each cryptopunk has its own personality and unique combination of features. Some features are rarer than others. In general, the more rare the combination of features, the higher price a CryptoPunk is likely to fetch. There are 3,840 female punks and 6,039 male punks.

Recommended: If you’re interested in CryptoPunks, check out the Gundam-style robot inspired MekaVerse NFTs.

How CryptoPunks Are Generated

Each Punk is the result of a software program that creates a random strange-looking character. The program results in 24×24 pixel images that are mostly punky-looking guys and girls. There are also a few odd images mixed in, like apes, zombies, and aliens.

How Did CryptoPunks Start?

The CryptoPunks project was launched on June 23, 2017 by Larva Labs . Earlier that year, two developers named John Watkinson and Matt Hall were experimenting with a program they had created to generate pixelated characters. While Matt and John deliberately inserted some of the visual characteristics that their Punks possess, much of the creativity came from the programmatic generator.

When they first launched the project, it was received by a small community of crypto enthusiasts who paid just a few pennies for their Punks. This was a brand-new idea at the time, launched even earlier than the famous CryptoKitties game.

CryptoKitties was responsible for creating the ERC-721 token standard that made NFTs possible. However, CryptoPunks are unique in that they are not technically ERC-721 tokens, which they pre-date. Instead, Punks exist as custom smart contracts.

An Art Experiment

NFTs are a new experiment in digital art. For the first time, it’s possible for creators to issue unique tokens representing their work.

The only thing ensuring this ownership is the fact that each token has a unique identifier and its owner can be tracked and proven on the blockchain. There’s nothing stopping someone from taking a screenshot of an NFT and issuing it as a new token, and as of now, it’s not illegal to do so.

Punk Inspiration

The concept for the CryptoPunks look came from the punk rock scene in London. The creators of the project thought this to be an appropriate visual touch, as the early days of Bitcoin and blockchain shared some of that anti-establishment spirit. The idea was to create virtual characters that would be “a collection of misfits and non-conformists,” according to the creators.

The look and feel of the movie Blade Runner and the novel Neuromancer also served as inspiration for the creation of CryptoPunks.

Digital Ownership and NFTs

NFTs are unique (not fungible) and cannot be replicated. Therefore, the wallet address that each token belongs to can be identified on the public blockchain. The person who owns the crypto wallet that an NFT resides in can claim that they have exclusive ownership of the token.

This provides for many possibilities in terms of digital ownership. Art, music, virtual property, and more can all be tokenized and given a unique identifier.

Recommended: What Is Blockchain and How Does It Work?

NFTs and Risk

This development has not been without controversy, however. Because NFTs are not copyrighted, in theory anyone can take a screenshot of a piece of digital art that exists as an NFT and re-sell it as something original. The copy would have a different name and number on the blockchain but would otherwise be the same.

Additionally, because NFTs are relatively new, there’s no precedent set for the long-term value of these digital tokens. There is a high risk of loss when it comes to using NFTs as an investment.

Value of CryptoPunks

Like any work of art, the value of CryptoPunks NFTs is totally subjective. It’s simply a matter of what someone is willing to pay for it. While some claim this has led to an irrational speculative frenzy, others assert that the market is more honest than some traditional financial markets.

Most Expensive

The most expensive CyptoPunks sale to date is the group of three Punks that sold as a single NFT for just under $17 million.

In general, Punks with rarer features sell for more. Beanie hats are the rarest attribute — if you don’t count the one and only Punk that wears a mask. Earrings are the most common attribute, making the Punks that wear earrings among the cheapest.

There’s not an exact 1:1 relationship between rarity and price, though. Prices can fluctuate randomly depending on what’s popular in the market at any given time.

Most Rare

The most rare of the CryptoPunks is the one referred to as “Covid Alien” that wears a mask. No other Punk is depicted as wearing a mask.

The Takeaway

CryptoPunks NFTs were created to represent the ethos of the early days of Bitcoin and crypto. These unique pixelated characters have captured the attention of investors who hold a lot of ETH tokens and are willing to pay ridiculously high prices for them. While Punks were technically some of the first NFTs created back in early 2017, they’re not the only ones, nor will they be the last.

FAQs

How much are CryptoPunks worth?

The total value of all sales of CryptoPunks as of mid-January 2022 is $1.9 billion. Dozens of Punks have sold for more than a million dollars each.

How can you get a CryptoPunks NFT?

If you already know how to buy and sell NFTs, you might assume the process is the same for CryptoPunks. But because these images pre-date the invention of modern NFTs, they can’t be bought on regular NFT marketplaces.

To buy a CryptoPunks NFT, you will first need the MetaMask wallet and some ETH. MetaMask works as a browser extension. ETH can be bought on many crypto exchanges like Coinbase or Kraken. After funding your wallet, you can buy punks on the Larva Labs website.

However, the lowest priced CryptoPunks NFT is currently going for just under $200,000, so be prepared to spend a small fortune.

What is making CryptoPunks so expensive?

NFT markets, like art markets, are subjective. The more people are willing to pay for something, the higher prices will get bid up. As CryptoPunks have grown in popularity, they have attracted the interest of buyers with deeper pockets.

Photo credit: iStock/Marcos Homem


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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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