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Mar

2022

Guide to Risk Reversal

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

Risk reversal can have two different meanings, depending on the context. From a stock market perspective, it can be a way to hedge a stock position. You can use a risk reversal option strategy to protect either a long or short position and minimize your downside risk.

Risk reversal is also used in foreign exchange trading (forex or FX) with a slightly different definition. There, risk reversal refers to the difference in implied volatility between call and put options. This can give forex traders an idea of the overall market conditions.

What Is Risk Reversal Option Trade?

Risk reversal is an options strategy that allows you to protect either a long or short position in a stock by buying put or call options to hedge your position. If you are long a stock, you can buy a put and sell a call option to protect you against extreme movements in the stock. If you are short a stock, you can use a risk reversal trade by selling a put and buying a call option contract.

How Does Risk Reversal Work?

Here is how a options traders use risk reversal options, and how you might use them to hedge a position that you hold:

Setup

How you set up a risk reversal depends on whether you are long or short the underlying stock. You’ll want to use both a call and put option contract in each case, but which one you sell and which you buy depends on if you are long or short. If you are long a stock, you will hedge by writing a call option and purchasing a put option. If you are short a stock, you will do the opposite — selling a put option and buying a call option that expires at the same time.

Profit/Loss

Let’s examine a scenario where you are long a stock and want to use risk reversal to hedge some of the risk in your position. So you sell an out-of-the-money call option and buy an out-of-the-money put option, usually at a net credit to yourself.

If the stock’s price goes up past the strike price of your call, you will profit based on the increased value of your stock holding. Your maximum loss will come if the stock’s price goes down, but your total can not amount to more than the strike price of the put option that you bought.

Breakeven

Because you generally hold the underlying stock as well as the option when using risk reversal, there is not a specific breakeven price.

Exit Strategy

Often when using a risk reversal strategy, you will keep repeating the process each month as new options expire. That way you can continue to hold the underlying stock and collect the net premium from your options each month. Eventually either your put or call will expire in the money, and you will sell your shares to fulfill your option obligations.

Maintaining a Risk Reversal

Maintaining your risk reversal will depend on the movement of the underlying stock. In an ideal situation, the stock will not make any drastic movements. If the stock’s price closes between the strike price of your call and put option, both will expire worthless. That will allow you to continue to use the risk reversal strategy and collect an additional premium.

Risk Reversal Example

Let’s say you are slightly bullish on a stock ABC that is trading at $80 per share. You own 100 shares of ABC stock and want to protect against risk. You can use the risk reversal strategy by buying a $75 put and selling an $85 call through your brokerage. Prices will vary depending on the delta or theta of the options, but you will likely receive a slight credit.

If the options expire with the stock in between $75 and $85, both financial instruments will expire worthless. Then you can continue the strategy by buying another put and selling another call. If the stock price rises above $85, your call option will be exercised, and you will close your stock position with a slight profit. You are also protected against any downward move of the stock below $75, thus mitigating your downward risk.

Forex Risk Reversal

Risk reversal has a slightly different meaning in the world of foreign exchange trading (forex), having to do with the volatility of out-of-the-money call or put options. A positive risk reversal is when the volatility of call options is higher than that of the corresponding put options. A negative risk reversal is when the volatility of put options is higher than that of call options. This information can help traders decide on which strategies might be more effective.

The Takeaway

The risk reversal options strategy is one method of protecting your investment from unexpected moves. Understanding how different options strategies work can help you learn about the stock market.

Once you’re ready to dive in, consider trying a user-friendly options trading platform like SoFi’s. Its intuitive design gives investors the ability to trade options through either the mobile app or web platform. Plus, support is offered in the way of a library of educational resources about options.

Trade options with low fees through SoFi.

FAQ

Why is it called risk reversal?

The risk reversal strategy gets its name because it allows investors to mitigate or reverse the risk you have from a long or short stock position. If you’re slightly bullish on a stock, you can use risk reversal to protect you against downward movement on the stock.

How are long and short risk reversal different?

With a long risk reversal, you are hedging against a short position in the underlying stock. You can do this by purchasing a call option and funding that call purchase by selling a put option. In a short risk reversal, you are mitigating the risk of a long position by selling a call and buying a put option.

How can you calculate risk reversal?

In forex trading, you can calculate the risk reversal by looking at the implied volatility of out-of-the-money call and put options. If the volatility of calls is greater than the volatility of the corresponding put option contracts, there is positive risk reversal, and vice versa.

Photo credit: iStock/Likoper

Mar

2022

What Does Bullish and Bearish Mean in Investing and Crypto?

By Paulina Likos | Growing Wealth, invest, Investing, Terminology | Comments Off

Markets are often described as being either bullish vs. bearish. These are common terms used to refer to how a market is performing over a short or longer period of time. Investors can also be bullish or bearish on a specific stock, a sector, an asset class such as cryptocurrency, or on the economy in general.

Read on to learn more about the definitions of bearish vs. bullish, where the terms bullish and bearish come from, and the bullish and bearish meaning for investors in stocks, cryptocurrency, or other markets.

What Does Bullish Mean?

Bullish refers to stock market sentiment that the direction of the overall market will go up. A market that is increasing in value over a long period of time is said to be in a bull market. A bullish trend means that there may be an upward trend in prices for an asset.

For investors, being bullish means they feel positive about a stock, index, or the overall stock market. For example, if an investor says she is bullish on Apple (AAPL) stock, the investor expects the market value of AAPL stock to increase in the long-term. That bullishness may even compel the investor to buy more shares of the company.

A bullish market is one where prices go up by 20% after a sustained 20% decline.

What Does Bearish Mean?

Bearish refers to a sentiment that the direction of securities or the overall market will move down in price. An investor characterized as a bear believes the stock market will decrease in value, even if current prices are going up. An investor investing in a bearish market may even sell shares of their portfolio if they believe the market will turn negative.

A bear market is one that has fallen 20% from recent highs and remains below that threshold for at least two months. Since investors are bearish during this period, there may be lower trading activity.

Where Do the Terms Bullish and Bearish Come From?

While there are several theories as to the origins of bullish vs. bearish. The consensus believes the difference between bullish and bearish reflects the way each animal responds when they attack. When a bull goes into attack mode, it races at its target with confidence. In a bull market, investors are confident that stock prices will rise and correspondingly, the value of the market will trend upward.

When bears attack, they swipe their paws in a downward motion and often in fear. That is why in a bear market, prices drop. When investors are bearish, they do not have confidence in stocks and usually end up selling off some of their investments.

Bullish vs Bearish in Cryptocurrency

The terms bullish and bearish have historically been used in the context of the stock market. But these terms can apply to any market, including the cryptocurrency market. The definitions of bullish and bearish are largely similar in the context of trading crypto.

When cryptocurrencies are rallying, this means crypto is in a bull market. During this period, there is strong demand and, in some cases, limited supply. Bullish crypto traders may talk about prices going “to the moon,” which refers to periods when prices might surge or suddenly spike (these price moves can also happen in times of extreme volatility).

A bearish trend in the crypto market reflects falling prices accompanied by selling. But sometimes, crypto traders may consider a bear market a great time to add to their crypto portfolio. These traders may be hoping to “HODL,” which stands for “hold on for dear life,” and refers to the goal of investors riding out volatility.

Pump-and-Dump in Crypto

Sometimes bullish or bearish movements in cryptocurrency reflect more than market sentiment. A “pump and dump” scheme in the crypto market refers to a group of market participants buying up large amounts of a cheap cryptocurrency to artificially increase its price.

They then relay positive messages about the asset to get other investors to buy in. Once prices soar, they sell off their assets and pocket the profits while others lose value.

How Bullish Markets Can Impact Investors

In a bull market, demand is greater than supply. There are many investors who want to buy stocks while only a few are willing to sell. Bullish traders tend to have long positions in stocks or other assets.

How Bearish Markets Can Impact Investors

In a bear market, supply is greater than demand — and investors look to offload their shares when there is not a lot of demand for market participants to buy. As a result, share prices decrease. A bear market is challenging for investors because stock prices keep falling, and that means more losses in an investment portfolio.

Your first instinct may be to sell in a bear market, but to increase chances of securing a profit in the long-term, it may make more sense to remain invested. Bear markets do not last forever.

Still, some investors prefer to adjust their investments in a bear market, turning to defensive stocks like consumer staples, healthcare, or utilities. They also may consider going into safer investments like bonds that offer stable fixed-income.

Bear markets can also present a good buying opportunity for investors who use dollar-cost averaging. This involves investing a fixed amount of money consistently. This way, investors can purchase stocks at a more affordable price. Learn more about

Tips on Withstanding Bullish vs Bearish Markets

One of the best investing strategies during a bull or bear market is diversification. Diversifying your investment portfolio with different securities in a variety of different industries — along with various asset classes — will protect a portfolio by minimizing losses and maximizing gains over the long-term. Diversification means buying shares of companies in different sectors and companies of different sizes, rather than just investing in a select few of stocks.

Stock Market

Investors who are not sure how to pick individual stocks can purchase an exchange-traded fund (ETF) or index fund, which are pre-selected baskets of securities all in one investment vehicle. For example, investors who own a fund that follows the S&P 500 will see their investments perform in line with that index.

In an ETF, investors own hundreds of companies, which means they don’t need to painstakingly choose one or two companies, rather, they own the entire index. This is a great strategy to ensure portfolio growth in the long-term.

Cryptocurrency

Because cryptocurrency is a relatively new asset class that has only been around for about 12 years, it can be difficult to know when a bull or bear period is approaching and how long it may last. One of the main characteristics of cryptocurrencies is their volatility. Assets with more volatility are riskier for investors. A crypto bear market or bull market can last for a period of hours, days, weeks, or months.

Crypto investors can also diversify by purchasing different types of cryptocurrencies, and keeping their overall crypto assets to a certain percentage of their wider portfolio.

The Takeaway

A market doesn’t necessarily have to be either bearish or bullish. It can actually be neither. The stock market can be in a state that is flat. This may mean there are normal market fluctuations leading to either small gains or small losses. Even if markets experience a sharp decline or rise in the short-term, this still cannot be defined as bearish or bullish because bull and bear markets are maintained over a period of time.

Whether you believe we’re in a bullish or a bearish market, a good way to get started investing is by opening an online brokerage account on the SoFi Invest® investment platform. With SoFi Invest, users can easily buy and sell stocks and exchange-traded funds directly from their phone.

FAQ

Does being bearish mean that you want to sell your crypto or other assets?

A bearish market period means investors think an asset’s price is headed downward. In some cases, people are not even aware of a bear market until it’s over because it’s difficult to predict the direction of the markets. Investors who are invested for the long run do not pay attention to the peaks and troughs of the market and take a dollar-cost averaging approach by investing consistently over time in both bear and bull markets.

What do bullish and bearish mean in crypto?

A bullish market in crypto means the value of the cryptocurrency will increase, while a bearish market means the asset will go in the opposite direction. Bearish investors are pessimistic that the market will decline — but there is so much momentum in the crypto market that when there is a bearish period, it is often seen as a buying opportunity to get more crypto.

How can you tell if a market is bearish or bullish?

Predicting and timing the markets is a challenging task. However, if stock prices have fallen by more than 20% from their recent peaks, and remained there for more than two months, that’s typically considered a bear market. A sustained increase in prices is a bull market.

Photo credit: iStock/NoSystem images

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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.

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

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

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Mar

2022

Short Position vs Long Position, Explained

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

Though having a long or short position on a stock, option, or exchange-traded fund (ETF) may sound like it has to do with how long an investor has held the shares, in fact it has nothing to do with time and everything to do with whether they own or owe.

Going long is often considered a bullish strategy, while selling short is a bearish strategy. But there are always exceptions to those rules of thumb, and ultimately it can depend on the securities being traded.

Here’s a look at short positions, long positions, and the benefits and drawbacks of each.

What Is a Short Position?

An investor in a short position benefits from a decline in the price of an asset. When you go short, your goal is to sell high then buy back low. Executing a short stock strategy is more complicated than putting on a long trade.

Short Selling a Stock

Short selling a stock is done by borrowing shares from your stock broker, then selling them in the open market. In doing this, you owe interest on the amount borrowed and face potentially unlimited losses since the stock price could hypothetically rise to infinity. You also must continue to meet margin requirements when keeping short trades active.

You must close your short position in the future by repurchasing them in the market (hopefully at a lower price than that at which you sold them) and then return the shares to the broker. A short squeeze is a danger short sellers face since intense short-covering leads to a rapidly appreciating share price.

Short Selling Options

Short and long positions also exist in the world of options trading. You can sell short options by writing contracts. An options seller simply enters a sell-to-open order to initiate a short sale.

The goal is the same as when selling shares short — you want to see the option price drop. That could be a bearish or bullish strategy depending on the options used. Whether you short call vs. put options makes a difference: If you short call options, you are bearish on the underlying security. Shorting puts is considered a bullish strategy.

With options, you can short implied volatility and benefit from the passage of time. These are plays on the options Greeks: vega and theta. Entering a short position on calls and puts is done in the hope of seeing the option premium decline in value — that can come from changes in the underlying asset’s price, but it can also come from a decline in implied volatility and as expiration approaches.

Short Selling ETFs

You can also sell shares of an exchange-traded fund (ETF) short. This play works much like shorting shares of stock in that you are borrowing from your broker, selling shares in the market, then buying them back. But the process of selling an ETF short can also be like selling options in that it may be either a bullish or bearish strategy. If you short an inverse ETF, for example, that would be a bullish strategy.

What Is a Long Position?

A long position vs. short position is simple to grasp. When you go long an asset, you are bullish on its price. Your potential downside is limited to the purchase price and your upside is unlimited. That is a key difference in a long vs. short position, since short positions can feature an unlimited risk of loss with a capped upside potential.

Long Positions and Stocks

To take a long position on shares, you must execute a buy order on a stock in hopes of profiting as the stock price rises. This is basically the way a typical stock purchase works.

Long Position and Options

In options trading, going long means entering a buy-to-open order on either calls or puts. A long options position can be bullish or bearish depending on the type of option traded. For example, in a long call position, you hope that the underlying asset price will appreciate so that your call value increases. In a long put position, you want to see the underlying asset price drop since a put offers the holder the right but not the obligation to sell a security at a prespecified price within a specified time frame.

With options, you can also take a long position on volatility, meaning you hope a stock price becomes more erratic, thus making the options more valuable. A long straddle strategy is one of several strategies for options trading that bets on higher volatility.

Long Position and ETFs

With ETFs, you can go long with a leveraged fund that offers multiples of market exposure. You can also enter a long position on an inverse ETF, which is a bearish play since the fund price rises when the market falls. Be careful, though, market mechanics can make taking a long position with these specialty ETFs for an extended period risky.

Comparing Long Positions vs Short Positions

There are both similarities and differences in a long position vs. short.

Similarities

Both exposures require a market outlook or a prediction of where a single asset price will go. If you are bullish, you would go long a stock or buy call options. If you are bearish, you look to short shares or sell call options. Buying put options in which you take a long position is a bearish strategy, as is taking a short position on call options.

Differences

A short vs. long position has several differences, and the ease at which you execute the trade is among them. For example, typically when taking a long position you’ll be required to pay interest to a broker. Additionally, long positions have unlimited gains and capped losses, whereas short positions have unlimited losses and capped gains.

Similarities in a Long Position vs. Short Position	Differences in a Long Position vs. Short Position
You can go long or short an underlying stock via calls and puts	Taking a long position on shares is bullish while going short is bearish
Both long and short positions offer exposure to the market or individual assets	Short positions can have potential losses that are unlimited with capped upside — that is the opposite of some long positions
You can take a long or short position with shares of an ETF	A long position does not require paying interest to a broker but a short position often does

Pros and Cons of Short Positions

When considering a short position, it can be helpful to look at both the pros and cons.

Pros of Short Positions	Cons of Short Positions
You benefit when the share price drops	You owe interest on the amount borrowed
You can short shares and options	There’s unlimited risk in selling shares short
Shorting can be a bearish or bullish play	There are limited gains since the stock can only drop to zero

Pros and Cons of Long Positions

Likewise, when considering a short position, assessing the benefits and drawbacks can be helpful.

Pros of Long Positions	Cons of Long Positions
You own shares and benefit when the stock rises and can profit from puts when the underlying asset drops in value	You face losses on a long stock position and on call options when the share price drops
You can take a long position on calls or puts	Taking a long position on inverse ETFs for a long period is risky
There’s unlimited potential upside with calls and shares of stock	A long options position is hurt from time decay

The Takeaway

Stock traders either go long or short when it comes to securities. Buying shares and selling short are two ways to profit from changes in an asset’s price. By going long, you purchase a security with the goal of seeing it rise in value. Selling short is a bearish strategy in which you borrow an asset, sell it out to other traders, then buy it back — hopefully at a lower price — so you can return it profitably to the broker.

If you’re ready to enter the options market, you might consider SoFi’s options trading platform. This intuitive and approachable platform lets you trade options from the web platform or mobile app. There’s also a stacked library of educational resources about options, so you can answer any questions that may arise.

Pay low fees when you start options trading with SoFi.

FAQ

Are short positions riskier than long positions?

Yes, short positions can be riskier than long positions. That goes for selling shares of a stock short and when you write options. Speculators often face more risk with their short positions while hedgers might have another position that offsets losses from the short sale.

What makes short positions risky?

You face unlimited potential losses when you are in a short position with stocks and call options. Selling shares short involves borrowing stock, selling it out to the market, then buying it back. There’s a chance that the price at which you buy it back will be much higher than what you initially sold it at.

How long can you hold a short position?

You can hold a short position indefinitely. The major variable to consider is how long the broker allows you to short the stock. The broker must be able to lend shares in order for you to short a stock. There are times when shares cannot be borrowed and when borrowing interest rates turn very high. As the trader, you must also continue to meet margin requirements when selling short.

Photo credit: iStock/Charday Penn

Mar

2022

What Is a Derivative?

By Laurel Tincher | Growing Wealth, invest, Investing, Terminology | Comments Off

A derivative is a financial instrument that derives its value from an underlying asset, such as a stock or bond, or a benchmark, such as a market index. Derivatives can also represent statistics or numerical indexes not related to financial assets.

Derivative investments work as a contract between two parties, a buyer and seller. The derivative is a secondary security, meaning it is not an asset itself, but rather it tracks the value of an underlying asset. This puts it into the category of secondary securities. The value of a derivative is based on market events, price changes, and other factors related to the underlying asset.

Experienced investors often use derivative finance to hedge their investments against future loss or profit from upcoming market shifts, but some investors also use them to profit or speculate on commodities like gold or oil. They can serve different purposes for different people, such as limiting risk related to possible future events.

How Does a Derivative in Finance Work?

A derivative is a contract that includes information about rules and asset costs for a particular future transaction that may take place. For instance, if an investor has a significant amount of a particular stock with an unrealized gain, they might choose to enter into a derivative contract that gives them the ability to sell it at today’s prices on a future date. This will give them some protection against future losses.

Derivatives are also a way to give investors exposure to a certain asset class without having to actually buy the assets. The seller of a derivative doesn’t have to actually own the underlying asset. They can give the buyer money to buy the asset, or they can give the buyer another derivative contract of the same value of the first one.

Derivative Example

You might have a derivative that provides you with the right to purchase 50 shares of a particular stock for a set price of $1,000 per share in six month’s time. This will be a valuable contract if the stock is trading higher than $1,000 and continues to trade at that level in six months. But if the stock goes down in value and trades under $1,000 per share then the derivative won’t have any value.

3 Types of Derivatives

There are two categories of derivatives: lock and option. Lock contracts include swaps and futures. These form an obligation between the two parties. Option contracts give the parties the right, but not the obligation, to fulfill the contract transaction.

Options

One of the most common examples of a derivative is an options trade, which gives traders the right to buy or sell a stock at a specific price within a certain period of time. The options buyer will pay a “premium” is paid upfront, but when the contract expires the right to buy or sell is no longer valid.

If a call option is “in the money,” that means that the strike price is lower than the stock price, while a put option is “in the money” when the strike price is higher than the stock’s price. “Out-of-the money” options are the opposite, and “at the money” options have a value that’s roughly equal to their strike price.

The difference between options and futures is that options give traders the right to buy or sell but they are not obligated to do so. If the options contract doesn’t go the way the option buyer had hoped, they wouldn’t exercise their right and they would only lose the premium they paid upfront. There are many different options-trading strategies.

For example, some options traders use a straddle technique, which is a neutral options trading strategy creating the opportunity for an investor to profit whether the underlying asset goes up or down in price.

Investors may also sell naked options, in which they have not set aside the cash or underlying security to meet the obligation of the contract. If the option holder in that case decides to execute their option, the seller will need to buy the security or provide the cash that they now owe.

Futures

With futures derivatives, the buyer and seller set a price for the future exchange of an asset or commodity. The contract includes the price, the amount, and the future settlement date. The contract obligates them to execute on the transaction.

Only a small amount of the total asset value is deposited into one’s account, but a higher amount must be kept in the account to cover losses that might occur. Once the contract is entered into, the price of the underlying asset is tracked daily, and any gains or losses are added to or removed from the trader’s account until the contract is sold or expires.

There are specific futures exchanges set up to monitor and standardize futures trading. But some similar contracts known as forwards are sold in over-the-counter markets that are unregulated and allow for more negotiation.

Swaps

Swaps are contracts traded over the counter for the exchange of financial terms or cash flows such as interest rates and currencies. Companies can swap types of interest rates in order to get better terms. Oftentimes one rate is variable and the other rate is fixed. With currency swaps, companies can invest overseas with a lower risk of exchange rate fluctuations.

How Derivative Trading Works

A derivatives contract says that one will either earn or pay money related to the underlying asset. Although there is an initial deposit for the derivative contract, there is the risk of having to pay more depending on how the asset’s value shifts during the period of the contract.

There is additional risk involved in trading derivatives because there is a possibility that the losing party won’t pay the money owed, and this can lead to legal trouble as well. If there is a contract related to an unregulated market this can also be risky because there is potential for market manipulation.

Once a derivative contract is entered into, the buyer can either hold onto it until the expiration date when they purchase the asset at the agreed upon price, or they can sell the contract to someone else, potentially for a profit. Trading one derivative for another one prior to the contract end date is common. Generally the contract will sell for only a tiny amount of the value of the underlying asset, but the value of the contract can fluctuate along with asset price fluctuations.

There is a small down payment involved for entering into the contract, known as “paying on margin.” It’s typical for derivatives for stocks and market indexes to represent groups of 100 shares. For example, there could be a contract to purchase 100 shares of a stock for $3,000 per share, and the contract might trade at $3 per share per contract.

Before entering into a derivative contract, it’s important to understand how derivatives work and read what the contract entails, including the disclosure statement. There will be an agreement to sign stating that both parties have read and understand the terms.

Also, trading derivatives requires ongoing work and attention. Markets can change quickly and there may be obligations throughout the contract period such as tracking the value of the underlying asset.

Costs

When entering into a derivative contract, there may be a deposit and an initial fee, and there may also be a holding fee involved as well as additional hidden fees. Pricing for derivatives vary depending on the type and value of the underlying asset as well as the broader market for that derivative.

Pros and Cons of Trading Derivatives

There are several pros and cons to trading derivatives. Some of the main ones are:

Pros

Derivatives traders enjoy several advantages by using the financial instrument. Those include:

• A hedge against the risk of future losses

• An opportunity for speculation

• Exposure to an asset without having to purchase it

• Can help predict future cash flows

• Provides the ability to lock in prices

Cons

In addition to the advantages, there are several drawbacks that derivatives traders should understand.

• Trading derivatives is very complex and can be risky for inexperienced traders

• The derivative contract may not be liquid or easily sellable on the open market

• There is a risk of losing more than you invest, if you’re using naked options

• Online scams in derivatives trading are common, adding to the risk

• There are fees and costs associated with the contract

• There may be ongoing maintenance and time commitment required

Financial Derivatives Regulations

Regulations around derivatives depend on where they are traded. The Securities and Exchange Commission regulates derivatives traded on national securities exchanges, while over-the-counter derivatives may not have any regulating body.

In the latter case, the parties negotiate the terms of contracts on their own. Sometimes these parties include banks and financial institutions regulated by the SEC. Futures brokers and commercial traders must be registered with the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC).

The Chicago Board Options Exchange (CBOE) is the most well known options exchange platform and is regulated by the SEC. These regulating bodies help to prevent fraud and abusive trading practices and keep the markets running fairly and smoothly.

Start Investing Today with SoFi Invest

Derivatives can be a riskier type of investment but they can provide value to both institutional and retail investors’ portfolios when used wisely. Trading derivatives requires more work than simply buying and selling more traditional securities, but the additional risk and additional work can also yield greater rewards.

SoFi offers an intuitive and approachable options trading platform, thanks to its user-friendly design and the educational resources about options it provides. Investors can trade options from the mobile app or the web platform, depending on their preference.

Pay low fees when you start options trading with SoFi.

Photo credit: iStock/fizkes

Mar

2022

5 Most Private Cryptocurrencies

By Melanie Mannarino | Growing Wealth, invest, Investing | Comments Off

Bitcoin is one of the most secure cryptocurrencies, with a hash rate that climbed to an all-time high in January 2022. But transactions made on the Bitcoin blockchain are transparent and can be seen by anyone using widely-available blockchain explorer websites.

While future upgrades to the Bitcoin core code could make transactions more anonymous, for now any Bitcoin transaction can potentially be traced back to its source. This has led developers on a quest to create the most private cryptocurrency.

Top Privacy Coins and How They Work

There are a variety of technological methods that cryptocurrencies use to anonymize transactions. Which method works best to create the most secure cryptocurrency is a subject of heated debate within the community.

For investment purposes, it should be noted that all of these coins are highly speculative, risky, and can require opening a digital currency exchange account to trade them. As a general rule, the smaller the market capitalization and daily trading volume, the higher the risk.

Here are some of the top privacy coins available on the market today.

Bytecoin (BCN)
Monero (XMR)
Zcash (ZEC)
Dash (DASH)
Verge (XVG)

1. Bytecoin (BCN)

Bytecoin , which is based on the CryptoNote technology, claims to be the “first private untraceable currency.” CryptoNote was created with the goal of making transactions both a) untraceable and b) un-linkable.

Untraceable means observers cannot tell who sent a transaction to a specific recipient, while un-linkable means that observers cannot tell whether or not any two transactions were sent to the same source. The untraceable aspect is accomplished through ring signatures.

These ring signatures make its transactions opaque, meaning observers can’t see who sent the transaction, how much it was for, or who received it. Ring signatures basically string transactions together in a way that makes it difficult (but not entirely impossible) to tell them apart from each other.

To achieve un-linkable transactions, CryptoNote uses one-time keys. With ring signatures, it’s still possible to see incoming transactions to a single public key (wallet address). To fix this, CryptoNote automatically generates one-time keys whenever someone receives coins. It’s based on an encryption method known as the Diffie-Hellman Key Exchange, which allows for the sharing of secret data between two parties.

When someone sends Bytecoin to another Bytecoin address, the sender creates a unique code that gets used in the transaction. This unique code makes it look like the coins were sent to a different crypto wallet each and every time.

As of late February 2022, BCN had a market cap of $30.2 million and daily trading volume of about $30,695.

2. Monero (XMR)

Like Bytecoin, Monero is a private cryptocurrency that has privacy features built into all its transactions. XMR is actually a hard fork of BCN. That means Monero uses the same privacy tech as Bytecoin and shares most of the underlying characteristics.

When Bytecoin was created in 2012, 80% of the total supply was already in existence, as opposed to most mineable cryptocurrencies that begin with very little supply in existence.

This led seven of the developers working on Bytecoin to create a new coin by hard forking the BCN network. They called this new coin Bitmonero, which was then changed simply to Monero, which means “coin” in Esperanto.

As of late February 2022, Monero is worth over $2.7 billion with a daily trading volume of about $128 million.

3. Zcash (ZEC)

Zcash uses a technology called “zk-SNARKs,” short for zero-knowledge succinct non-interactive arguments of knowledge.

The exact details are about as complicated as the name makes it sound. What matters is that zk-SNARKs allow one party to prove to another that something is true without revealing anything specific, making this solution ideal for private crypto transactions.

However, privacy is not a default feature of Zcash, meaning that transactions are not automatically made anonymously. Zcash allows for four different types of transactions with varying levels of privacy.

The pros of Zcash is that it has some of the strongest privacy protocols on the market and the second-highest market cap of any coin on this list. The con might be the different types of transactions leading to confusion among users, some of whom might assume all Zcash transactions to be private.

As of late February 2022, Zcash is valued at $1.5 billion with a daily trading volume of about $265 million.

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4. Dash (DASH)

Dash was the first private cryptocurrency created in 2014. Originally called DarkCoin, the coin eventually rebranded itself as DASH, short for “digital cash.”

As the name implies, Dash is meant to be used as a medium of exchange. Transactions can clear in a second and can cost less than a penny.

In addition to the typical crypto miners, Dash uses something called “masternodes.” These central masternodes receive 45% of all DASH mining rewards in exchange for performing essential functions on the network, including making transactions private and processing them quickly.

One of the potential cons of DASH is that these masternodes make the network more centralized than some other crypto networks.

As of late February 2022, DASH is valued at more than $968 million with $176 million in daily trading volume.

5. Verge (XVG)

Verge describes itself as a “cryptocurrency designed for people and everyday use.” Verge was created in 2014 as DogeCoinDark. Like Dash, DogeCoinDark rebranded itself shortly after its inception, changing its name to Verge.

Verge uses a technology called the Wraith Protocol to make transactions private. Wraith Protocol anonymizes transactions through the Tor Network.

By routing internet connections through multiple anonymous nodes around the world, The Tor Browser works to hide IP addresses. Wraith Protocol uses this tech for the purpose of anonymizing cryptocurrency users. This feature is optional and must be turned on.

Some benefits of Verge include fast transactions, low fees, and the potential to scale and be used by more people. The big drawback is that most of the total supply of XVG is already in circulation, so the coin will likely lose value in the long-term due to inflation, just like Bytecoin.

As of late February 2022, Verge is valued at around $155 million with a daily trading volume of around $6.4 million.

The Takeaway

Privacy coins have only existed since 2012, and didn’t really burst onto the scene in a big way until 2014. The tech is even newer than Bitcoin, and the landscape is constantly changing.

Monero is thought to be one of the most private cryptocurrencies, so much so that it has been the subject of scrutiny by regulatory agencies. But some privacy enthusiasts argue that coins like Zcash have better privacy protocols and that they might be the most secure cryptocurrencies. The subject is still up for debate.

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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.

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5 Most Private Cryptocurrencies

Top Privacy Coins and How They Work

1. Bytecoin (BCN)

2. Monero (XMR)

3. Zcash (ZEC)

Up to $100 in bitcoin2 – just for you.

With 30 coins available, our app offers a secure way to trade crypto 24/7.

4. Dash (DASH)

5. Verge (XVG)

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