What Does At the Money Mean in Options Trading?

What Does At the Money Mean in Options Trading?

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

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

What Is At the Money?

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

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

Understanding At the Money

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

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

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

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

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

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

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

Option

Strike price

ATM / ITM / OTM

ABC Call option 55 At the money
ABC Put option 55 At the money
ABC Call option 70 Out of the money
ABC Put option 70 In the money
ABC Call option 40 In the money
ABC Put option 40 Out of the money

Recommended: Call vs. Put Options: The Differences

At the Money and Near the Money

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

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

Pricing At-the-Money Options

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

At the Money and Volatility Smile

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

Pros and Cons of Trading At-the-Money Options

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

Pros of trading at-the-money options

Cons of trading at-the-money options

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

The Takeaway

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

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

Trade options with low fees through SoFi.

FAQ

What does buying at the money mean?

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

How do at the money and in the money differ?

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

Is it best to buy at the money?

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


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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 Collars in Options Trading

A collar is an options strategy used by traders to protect themselves against heavy losses. The strategy, also known as a hedge wrapper, involves taking a long position in an underlying stock, buying an out-of-the-money put, and selling an out-of-the-money call.

Essentially with an option collar, you’re buying a protective put and a covered call at the same time on a stock that you already own or have long exposure to. While collars in options protect against heavy losses, they also limit potential gains. Read on to learn more about collar breakeven points, max loss, and max profit.

What Is a Collar Option?

In collar options strategies, an options trader limits the range of their returns by taking a long position in the underlying stock, buying a lower strike put, and selling a higher strike call. Typically, the stock price will be between the two strike prices. A trader uses a collar when they are bullish on the underlying stock but want to be protected against the risk of large losses.

A collar is also a useful option strategy when the goal is to protect unrealized gains on the stock.

How Do Collars Work?

A collar works by protecting a trader’s existing long stock position by buying a put option, limiting any further losses should the stock price fall below the strike of the put. At the same time, the sale of an out-of-the-money call helps finance the trade, making the cost of protection cheaper than purchasing a put on the underlying shares, with the trade-off that gains will be capped should the stock rise above the strike of the call. The trader constructs a collar through their brokerage when they think there could be near-term weakness in the stock but do not want to sell their stock position.

Buying a put gives the trader the right, but not the obligation, to sell the stock at the put’s strike price. Selling the call obligates the writer to sell the stock at the call’s strike if the option is assigned. Meanwhile, the trader remains long shares of the underlying stock.

Maximum Profit

The short call position in a collar option strategy caps upside, limiting the maximum potential profit. The max profit depends on if the investor established the options trade at a net debit or a net credit.

•   Net debit: Maximum profit = Call strike price – stock price – net debit, or

•   Net credit: Maximum profit = Call strike price – stock price + net credit = max profit

At a high level, the trader makes the most money when the stock price is at or above the call’s strike at expiration.

Maximum Loss

The protective put limits losses in the event the underlying share price falls below the put’s strike. So either

•   Net debit: Maximum loss = Stock price – put strike price – net debit paid, or

•   Net credit: Maximum loss = Stock price – put strike price + net credit received

Breakeven Points

Once established, a collar option has two possible break even points – again, dependent on whether the trade was executed at a net credit or debit.

•   Net debit: Break even point = current stock price + net debit, or

•   Net credit: Break even point = current stock price – net credit

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Impact of Price Changes

A collar keeps a trader’s long-term bullish stance but it protects unrealized profits from a short-term share price decline. If the underlying stock price rises, the collar provides some exposure to upside gains, capped at the short call’s strike. The real value of a collar comes if the stock price drops through the long put strike. The collar protects the trader from further losses.

Another way to look at the impact of price changes is to view it from a perspective of time – a collar can help a trader with a short-term bearish outlook but a bullish long term view. Collars have a positive Delta.

Impact of Volatility Changes

Changes in volatility have a relatively smaller impact on a collar options strategy versus other options trades because the trader has simultaneous long and short option positions. The collar trade usually has a near-zero vega.

Recommended: What Are the Greeks in Options Trading?

Impact of Time

With a collar options trade, the effect of time decay depends on how close the stock price is to the option strike prices.

Time decay works to the trader’s benefit when the underlying stock price rallies up to the short call’s strike. On the flip side, the impact of time hinders the trade when the stock price nears the long put’s strike. When the stock price is about equally between the two strikes, time decay is neutral since both option prices erode at approximately the same rate. So, while the short put value drops, the long call offsets those gains from time decay.

Pros and Cons of Collars

Pros

Cons

Limits losses from a falling share price Limits gains from a rising share price
Allows for some upside exposure Exposes the trader to some risk of loss
Cheaper than only buying puts Can be a complicated strategy for new traders
Ownership of the stock retained

Collar Option Examples

Here’s a collar option example that will help put these concepts into context: Suppose a trader is long shares of XYZ stock that currently trades at $100. The trader worries about limits to near-term upside and wants to protect against a material share price decline. A collar strategy is a good trade to address these beliefs.

The trader sells a covered call at the $110 strike, receives a $5 premium, and buys a protective put at the $90 strike at a cost of $4. The net credit is $1 and the trader has not paid any commissions. With these two options trades, the trader has capped their upside at the call’s strike and the downside at the put’s strike. The breakeven point is $99 (the current stock price minus the net credit).

Let’s say the stock rallies to the call’s strike by expiration. In this case, the trader makes $10 on the long stock position, keeps the $5 call premium, and lets the put expire worthless. The gain is $11 (the stock price gain plus the options’ net credit received).

If the stock price drops to $80, the trader loses $20 on the stock position, keeps the $5 call premium, and makes $6 on the $90 strike long put. Thus, the net loss is just $9. The trader benefitted from the collar as opposed to just owning the stock which was down $20. The payoff diagram below shows how losses are limited in our trade scenario, but gains are also capped at the $110 mark.

Collar Payoff Diagram

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Reasons to Consider Using a Collar Option Strategy

A collar is an effective strategy when an investor expects a stock to trade sideways or down over a period. A trader might also use it when they expect a stock to go up over time and do not want to sell their shares, but they do want to protect unrealized gains – perhaps for tax reasons. A collar option trade is less bearish than buying puts outright, but it protects a trader from large losses. Also, selling the upside call helps finance the protective position.

Limiting Risk

A collar option strategy limits risk beyond the protective put’s strike. Even if a stock price goes to zero, the trader’s loss maxes out at the protective put’s strike.

Protecting an Asset

Another way to protect your stock position is to implement a protective put. With a protective put, a trader buys a put in addition to their long position in the underlying stock. This trade would be more expensive than a collar, since there is no sale of a call option to offset the cost of buying the put, but retains the unlimited upside of the underlying stock position.

The Takeaway

A collar is a strategy whereby a trader protects an unrealized gain on a stock at a reduced cost while still allowing some upside equity participation. Traders might use this strategy for tax purposes, or to limit the overall risk in their portfolio.

While SoFi does not currently offer options traders, it does help investors learn more about options. Investors can also get started by opening a brokerage account on the SoFi Invest investment platform where you can build a portfolio of stocks and exchange-traded funds.

FAQ

What is the maximum profit on a collar option?

The maximum profit on a collar is when the stock price rallies up to the call’s strike price. Above that level, gains are constant since the long stock position is offset by the short call.

Maximum profit = (call option strike price – net of option premiums) – stock purchase price

What is maximum loss on a collar option?

The maximum loss on a collar option trade is when the stock price declines to the put’s strike price. Below that level, losses are limited since the long stock position is offset by the long put.

Maximum Loss = stock purchase price – (put option strike price – net of option premiums)

What is breakeven on a collar option?

The breakeven on a collar strategy at expiration is the current stock price minus the net credit received or the current stock price plus the net debit paid.

Breakeven = stock price + put option premium paid – call option premium received


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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 Is a Calendar Spread Option?

What Are Calendar Spreads and How Do They Work?

Many options spread strategies consist of buying and selling call or put options that expire at the same time. Calendar spreads, on the other hand, are created by selling a short-dated option and buying a longer-maturity option with the same strike price. Rather than seeking favorable directional movement in the underlying stock, the calendar spread takes advantage of implied volatility and the way that it typically changes over time.

Like other option spread strategies, a calendar spread limits a trader’s potential losses, but it also caps their potential return. Calendar spreads are considered an advanced option trading strategy, so it’s important to have a handle on how they work and the potential risks. Read on to learn more about how to build calendar spreads and when to use them.

Calendar Spreads Defined

A calendar spread, also known as a horizontal spread, is created with a simultaneous long and short position in options on the same underlying asset and strike price but different expiration dates. Calendar spreads can be constructed using calls or puts. The longer-dated option is purchased and the shorter-dated option is sold. Typically, the option that is sold has a near-term expiration date.

How Calendar Spreads Work

Calendar spreads are typically established for a net debit, meaning you pay at the outset of the trade. This is because generally speaking, a longer-dated option will be more expensive than a shorter-dated one if the strike prices are the same.

Time decay is essential to how calendar spreads work. It tends to accelerate as an option’s expiration approaches, which means that all else equal, the short-dated option will lose more value due to time decay than the long-dated option over a given passage of time. If the stock price is at or near the strike price of the options at the time of the first expiration date, the trade should be profitable.

Calendar spreads function fairly similarly whether constructed with calls or puts. Depending on where the stock price is relative to the strike price selected at the outset of the trade, and whether calls or puts are used, a calendar spread can be neutral, slightly bearish, or slightly bullish.

Maximum Profit on Calendar Spread

A calendar spread strategy hits max profit when the stock price settles at the near-term strike price by that option’s expiration. That is not the end of the trade, however. The trader benefits when the stock price rises after the near-dated option’s expiration since they are long the later-date call option.

A rise in implied volatility after the front-month call expires also benefits the later-dated long options position. However, some traders might choose to close the later-dated option position when the near-dated option expires.

Maximum Loss on Calendar Spread

A calendar spread is considered a debit spread since the cost of the later-dated option is greater than the proceeds from the near-date option’s sale. So the trader can not lose more than the premium paid.

Breakeven

The precise breakeven calculation on a calendar spread option trade cannot be determined due to the two different option delivery dates. Traders must estimate what the value of the long-dated option contract will be on the near-dated option’s expiry.

One way to this is using online option strategy profit and loss calculator to estimate a breakeven price. Changing option Greeks – such as implied volatility levels and market interest rates – also make deriving a breakeven price difficult to pin down on this strategy.

Calendar Spread Example

An example helps to understand how calendar spread options work. Suppose XYZ stock is $100, and the trader believes the stock price will not change much in the next month. Based on that neutral thesis, the trader sells a $100 call option expiring in one month for $10 and buys a call at the same $100 strike price that expires in two months at a price of $15. The net debit is $5. The later-dated call option is more expensive because it has more time value than the near-dated call.

Over the next month, the stock fluctuates since the trade was executed, but settles back to $100 on the afternoon of the front-month’s option delivery date. Since time has passed and the stock has not drifted from $100, the near-dated call option has lost considerable time value. The short call expires worthless. The later-dated call is now worth $10.

The trade worked well. The trader exits the position by allowing the near-term call to expire worthless and selling to close the $10 later-dated long call. In essence, the trader made $10 on the short call and lost $5 on the long call for a profit of $5.

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Calendar Spread Payoff Diagram

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Source: https://www.warriortrading.com/calendar-spread-definition-day-trading-terminology/

Calendar Spread Risks

There are several risks that traders must keep in mind when using calendar spreads.

Limited Upside

This is the main risk in calendar spread strategies, if the trade closes at the near-dated option’s expiry. The options trader benefits from time decay and increases in implied volatility. Once the short option expires or is bought to close, there is unlimited upside potential with the remaining long call. If the trader uses puts they have a significant upside if the stock price goes to zero.

Delivery Dates

Trader must make a choice when the near-dated option is on the precipice of expiring. The trader can let it expire if it is out of the money, but if it is in the money, then it might be worthwhile to buy to close the option.

Timing the Trade

Being correct about the near-term direction of the stock, as well as changes in implied volatility and time decay, can be challenging.

Types of Calendar Spreads

There are several types of calendar spreads. Here’s a look at some of the most popular strategies.

Put Calendar Spread

A calendar put spread option is a strategy in which a trader sells a near-dated put and buys a longer-dated put. A trader would put this trade on when they are neutral to bullish on the price change of the underlying stock in the near-term. Once again, this type of calendar spread options strategy aims to benefit from time decay or higher implied volatility.

Calendar Call Spread

A calendar call spread involves shorting a near-term call and buying a longer-dated call at the same strike. (This is the strategy outlined in the earlier example.) The near-term outlook on the underlying stock is neutral to slightly bearish while the trader might have a longer-term bullish view.

Diagonal Calendar Spread

A diagonal calendar spread uses different strike prices for the two options positions. This strategy still uses two options – either two calls or two puts – with different expiration dates. This strategy can be either bullish or bearish depending on how the trade is constructed. The term diagonal spread simply refers to the use of both a calendar spread (horizontal) and a vertical spread.

Short Calendar Spread

Traders can use a short calendar spread with either calls or puts. It is considered a “short” calendar spread options strategy because the trader buys the near-dated option while selling the longer-dated option. This is the opposite of a long calendar spread. A short calendar spread profits from a large move in the underlying stock.

Trading Stocks with SoFi

Calendar spreads are useful for traders who want to profit from changes in stock variables other than price direction. They’re an advanced strategy, however, that may not make sense for beginner investors.

However, you do not need to use any options at all to build a portfolio that helps you meet your goals. SoFi does not currently offer options, but it does provide an easy way to start building a portfolio. By opening an online brokerage account on the SoFi Invest® investment app, you can start trading in individual equities, fractional shares, and exchange-traded funds (ETFs) directly from your phone.

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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 Is Extrinsic Value?

What Is Extrinsic Value?

What is Extrinsic Value?

Extrinsic value is the difference between an option’s market price, known as the premium, and its intrinsic value. Extrinsic value reflects the factors outside of the price of the underlying asset. This value changes over time based on the time to expiration and the volatility of the underlying asset.

The intrinsic value is a straightforward calculation: It is simply the difference between an option’s strike price and the price of the underlying asset when the underlying asset is in-the-money. An out-of-the-money option has no intrinsic value.

Remember, an option is “in the money” would be profitable for the owner to exercise today, while it’s “out of the money” if the owner would lose money if they exercised their option today. An out-of-the-money option may present an investment opportunity because of its potential for the option to become in-the-money at expiration.

As expiration approaches, extrinsic value usually diminishes. So, for example, an option that has two weeks before expiry will have a higher extrinsic value than one that’s one week away. Extrinsic value equals the price of the option minus the intrinsic value.

Out-of-the-money option premiums are entirely made up of extrinsic value while deep-in-the-money options often have a small proportion of extrinsic value. Options that trade at-the-money might have a substantial proportion of extrinsic value if there is a long time until expiration and if volatility is high. On the other hand, a short-dated at-the-money option would likely feature little extrinsic value.

How Extrinsic Value Works

Beginners sometimes have a tough time grasping the extrinsic value concept. Simply put, the more time until expiration and the more a share price can fluctuate, the greater an option’s extrinsic value.

Factors that Affect Extrinsic Value

Two factors affect an option’s extrinsic value: contract length and implied volatility. In general, the longer the contract, the greater the extrinsic value of an option. That ‘s because the more time allowed until expiration, the more a stock price might move in favor of the holder. Options have the potential to be worth more money the more the underlying asset price varies.

The second factor that goes into extrinsic value is implied volatility. Implied volatility measures how much a stock might move over a specific period. It’s measured by the options Greek, vega.

1. Length of Contract

An option contract generally has less value the closer it is to expiration. The logic is that there is less time for the underlying security to move in the direction of the option holder’s benefit. As the time to expiration shortens, the extrinsic value decreases, all else equal.

The time to expiration is a key variable for traders. Suppose a trader bought a put option at-the-money with just one week left until expiration. That put option’s extrinsic value will likely decline more quickly than would an option with several months until expiration since there is less time for the underlying share price to decline.

To manage this risk, many investors use the options trading strategy of buying options with varying contract lengths. As opposed to standard option contracts, a trader might choose to buy or sell weekly options which usually feature shorter contract lengths. On the opposite side of the spectrum, Long-Term Equity Anticipation Securities (LEAPS) sometimes have contract lengths that measure in years. Extrinsic value could be a large piece of the premium of a LEAPS option.

Some traders will also use a bull call spread, in order to reduce the impact of time decay (and the loss of extrinsic value) on their options.

Recommended: Guide to Options Spreads: Definitions and Types

2. Implied Volatility

Implied volatility measures how much analysts expect an asset’s price to move during a set period. In general, higher implied volatility means more expensive options, due to higher extrinsic value. That’s because there is a greater chance a stock price will significantly move in the favor of the owner by expiration. High volatility gives an out-of-the-money option holder more hope that their position will go in-the-money.

So, if implied volatility rises from 20% to 50%, for example, an option holder benefits from higher extrinsic value (all other variables held constant). On the flip side, an out-of-the-money option on a stock with extremely low implied volatility has a lower chance of ever turning in-the-money.

3. Others Factors

Savvy traders might know that it is not just the length of the contract and implied volatility that affect the premium of an option.

•   Time decay. Changes in time decay, or the rate at which time decreases an option’s value, can greatly impact the premium of near-the-money options, this is known as theta. Time decay works to the benefit of the option seller, also known as the writer.

•   Interest rates. Even changes in interest rates, or gamma, impact an option’s value. A higher risk-free interest rate pushes up call options’ extrinsic value higher, while put options have a negative correlation to interest rates.

•   Dividends. A stock’s dividend will decrease the extrinsic value of its call options while increasing the extrinsic value of its put options.

•   Delta. An option’s delta is the sensitivity between an option price and its underlying security. In general, the lower an option’s delta, the higher it’s extrinsic value.

Extrinsic Value Example

Let’s say a trader bought a call option from their brokerage account on shares of XYZ stock. The premium paid is $10 and the underlying stock price is $100. The strike price is $110 with an expiration date in three months. Also assume there is a company earnings report due out in the next month.

Since the share price is below the call’s strike, the option is out-of-the-money. The option has no intrinsic value because it is out-of-the-money. Thus, the entire $10 option premium is extrinsic value, or time value.

As expiration draws nearer, the time value (otherwise known as time decay) declines. A trader long the call option hopes the underlying asset appreciates by expiration. A jump in the call option’s extrinsic value can also push its price higher.

Higher volatility, perhaps the earnings report or some other catalyst, might move an option’s vega higher. Let’s assume the stock has risen to $120 per share following strong quarterly earnings results. The call option trades at $11 immediately before expiration.

The call option’s intrinsic value is now $10, but the extrinsic value has declined to just $1 since there is little time to expiration and the earnings date volatility-driver has come and gone. In this case, the trader can sell the call for a small profit or simply hold through expiration.

Extrinsic vs Intrinsic Value

Extrinsic value reflects the length of the contract plus implied volatility while intrinsic value is the difference between the price of the stock and the option’s strike when the option is in the money.

Extrinsic Value Factors (Call Option)

Intrinsic Value Factor (Call Option)

Length of Contract Stock Price Minus Strike Price
Implied Volatility

Extrinsic Value and Options: Calls vs Puts

Both call options and put options can have extrinsic value.

Calls

Extrinsic value for call options can be high. Consider that a stock price has no upper limit, so call options have infinite potential value. The more time until expiration and the greater the implied volatility, the more extrinsic value a call option will have.

Puts

Put options have a lower potential value since a stock price can only drop to zero. Thus, there is a limit to how much a put option can be worth — it is the difference between the strike price and zero. Out-of-the-money puts, when the stock price is above the strike, feature a premium entirely of extrinsic value.

Start Investing Today with SoFi

Understanding the fundamentals of intrinsic and extrinsic value is important for options traders. While intrinsic value is a somewhat simple calculation, extrinsic value takes a few more factors into consideration. Traders should make sure they understand all of these factors before they begin trading options.

It’s also possible to build a strong portfolio without using options at all. While SoFi does not offer options right now, the SoFi Invest® online brokerage is a great way for investors to start building a portfolio of stocks, exchange-traded funds, and initial public offerings.

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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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Can Cryptocurrency Go Negative?

Can Cryptocurrency Go Negative?

Cryptocurrency may be a virtual currency, but its value can never go negative. In short: The value of a cryptocurrency cannot be worth less than $0.

That said, the crypto market is volatile and it’s possible for investors themselves to lose considerable amounts of money, especially if they use higher-risk strategies such as short selling and margin trading, as these can potentially result in significant losses as well as gains.

So, can cryptocurrency go negative? Not in the technical sense, but an investor’s account could end up in the red if they don’t fully understand the risks of this fast-moving market. Keep reading to learn more.

Can Cryptocurrencies Go Negative? An Investigation

Cryptocurrency trading is one of the more volatile investment strategies, which is part of the attraction for high-risk traders. The largely unregulated crypto market can manifest huge profits for some, but cause severe losses for others.

As an example: In 2021 alone, bitcoin (BTC) saw a low of about $29,000 in July, and reached a record high of about $67,000 in November. By January of 2022, however, BTC had plunged to about $35,000 — off nearly 50% from the peak in November 2021. While that’s just one example of how volatile a single cryptocurrency can be, this type of fluctuation is common among most forms of crypto.

💡 Recommended: Bitcoin Price History from 2009 to 2022

Is it possible then that crypto can go negative? The short answer is no, though your investment account can.

The Short Answer

As mentioned earlier, no asset, virtual or not, can ever be worth less than zero. That includes property, security, or currency. So the lowest price crypto can ever reach is $0.

However, that doesn’t guarantee a bitcoin investor will not see losses from investing in cryptocurrency.

The Long Answer

The long answer is more complex. It is possible for an investor’s crypto account to fall into negative territory, especially if they open a short position or trade using a margin account — two strategies that involve leverage, i.e. debt.

Using leverage means an investor opens a margin account and borrows funds from their broker-dealer to buy securities in the hope that the price will go up (or down, in the case of short selling), and they will make a profit.

By using margin funds, loaned to them at a certain interest rate, investors can typically purchase greater amounts of a security than they could using only cash. Thus, if the security appreciates beyond the purchase price (and the amount of interest charged in the margin account), the investor could see a substantial gain, pay back what they owe, and pocket the rest.

Here’s the rub, though: If the price of the asset drops below the purchase price, the investor would be on the hook for all the money they lost plus the interest owed on the money they borrowed. (More on margin trading below.)

Can You Lose Cryptocurrency Investments?

Unfortunately yes, you can lose cryptocurrency — but not because a coin’s value can sink so low that it’s underwater. Rather, cryptocurrencies themselves are vulnerable to being hacked, and sometimes crypto literally gets lost, thanks to human error.

There are two factors to understand here: how the blockchain works, and how crypto wallets work.

What Happens When the Blockchain Is Hacked?

Blockchain technology, which emerged with the launch of Bitcoin in 2009, is a decentralized web of computers that essentially allows for the creation and trading of various types of crypto. Typically, each form of crypto (e.g. bitcoin, ether, dogecoin, ada, polka dot) exists on its own blockchain.

Because most cryptocurrencies are decentralized, they don’t require a third party like a bank or government agency to verify buying, selling, crypto payments, and other transactions. Also, most forms of cryptocurrency are not regulated by the government or a body like the Securities and Exchange Commission (SEC), although that may change.

In effect, it’s the people who own the crypto who monitor the platforms and each other.

That kind of self-policing works well, until it doesn’t — and there have been some well-known instances where a blockchain or crypto exchange was penetrated by hackers who stole millions of coins. In some cases, the hackers managed to fraudulently “mint” additional coins (sort of like digital counterfeit).

Unfortunately, individual traders can’t do much about these vulnerabilities, but crypto platforms continue to evolve new ways to keep investor’s crypto secure.

You Can Lose Crypto When You Lose Your Keys

Then there’s the unfortunate impact of human error.

When you buy crypto you become the sole owner of the cryptographic string of numbers and letters that comprise the private key that gives you, and only you, access to your cryptocurrency. You cannot buy, sell, or trade your crypto without the private keys.

Unfortunately, some people have simply lost the private keys to their own crypto — effectively losing all their coins. A study done in January 2021, for example, found that about 20% of the existing 18.5 million bitcoin has been lost or is inaccessible.

So, while the unregulated nature of crypto platforms and exchanges may allow for some independence and anonymity, the downside is that there are fewer legal guardrails to protect ordinary investors. The cash in your traditional checking or savings account is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, but that’s not always the case with crypto exchanges.

Some crypto exchanges may store your crypto offline to keep it secure. Others may offer FDIC protection for the cash in your custodial account, up to $250,000, but terms vary from exchange to exchange. Often it falls to investors to suss out how secure their crypto is — and decide how much risk they’re comfortable with. According to Cryptonews.com, exchanges lose $2.7 million every day on average.

Some exchanges are more secure than others. The better ones use valid HTTPS certificates; secure passwords with two-factor authentication (2FA); cold storage where crypto is secured offline rather than held in a hot wallet accessible on a computer or mobile device; and whitelisted IP and withdrawal addresses so that funds can only be withdrawn by approved addresses.

The best line of defense against hackers is to use a private crypto wallet and to back it up.

Can You Lose More Than You Put In?

We’ve established that the value of crypto can never fall below zero. But investors can lose money on crypto investments and see a negative balance depending on their investing strategy. How? By over-leveraging. Two situations where this can occur are short selling and buying on margin.

Margin and Leverage Risks and Possible Benefits

To margin trade crypto, a user will put down a certain percentage of the margin position they want to open, and borrow money from an exchange to cover the rest. (Depending on the crypto exchange, margin trading may or may not be allowed, and margin terms may vary.)

If the price of the security rises, the trader makes money. However, if the price drops, and the exchange requires a certain borrowing ratio or margin balance, the buyer will have to deposit more money. In some cases, the exchange may automatically sell the investor’s assets to cover the difference — this is known as a margin call.

The United States is cracking down on margin trading so that only qualified investors with plenty of capital can access these accounts. Investors also have the option of limiting their losses with crypto futures contracts. Futures contracts can protect short and long positions because speculators can also buy the opposite option contract.

Pros and Cons of Buying on Margin

Pros

Cons

Profitable opening positions compared to other asset vehicles Higher risk of losses if prices drop
Profits are possible in a bear market if you sell short on margin Losses could theoretically exceed committed assets
Investors have more buying power, which means they can purchase additional securities and diversify their portfolios. Interest is charged on borrowed amounts

Short Selling Crypto: Risks and Possible Benefits

To short sell, investors borrow crypto at current market price, sell it, and then hope to buy it back at a lower price, making a profit. Of course, if the price of the asset being sold short continues to rise, the potential loss is unlimited. The higher the price goes, the more the investor will lose. As with any high-risk strategy, there are also benefits to shorting crypto.

Pros

Cons

Opening positions could be more profitable High risk
Profits are possible in a bear market Losses could theoretically exceed committed assets
Because positions are short term, there is limited risk It requires a margin account, which comes with fees and interest charges
Short positions can reduce a portfolio’s volatility Rapid price spikes, or short squeezes, can add risk
Borrowing crypto could be difficult

Tips on Preventing Crypto Losses

The crypto market is volatile without a doubt. So, the wise crypto investor does what they can to reduce exposure and minimize losses. Three ways to do this are:

•   Realize losses to offset gains. (Note that the wash sale rule does not apply to crypto, which makes this strategy easier.)

•   Set up a trading strategy with entry and exit points and stick to it. Some investors use stop losses as a fundamental risk mitigator.

•   Lastly, crypto futures trading allows traders to use leverage to hedge the market.

Losses and Taxes

Crypto gains are taxable, but the taxes that apply depend on whether the gains are treated as investment gains, income, or profit from the sale of a property.

But there are some rules that can help with losses. Losses and gains in the crypto market can be substantial. But there is an upside to the downside — as of early February 2022, the wash sale rule doesn’t apply to crypto (although there is a movement to change that, so be sure to check if you think wash sale terms may apply to you).

According to the SEC, a wash sale occurs when a trader sells or trades a security at a loss and buys a “substantially identical” stock or security, or acquires a contract or option to do so, within 30 days.

The loophole is that crypto is not technically considered a “security,” it’s considered property. Crypto investors can sell crypto for a loss, use that loss to reduce or eliminate capital gains tax on winning investments, and also buy back the crypto they sold and avoid missing out on a subsequent rebound in price.

Let’s say a bitcoin investor incurs a $20,000 loss in one year but then sells another crypto and realizes a $20,000 gain. The bitcoin loss would cancel the capital gain, and the investor could also buy up bitcoin at its low price. A stock investor who incurred a loss could not buy back stock they had sold in the same way because of the wash sale rule.

Stop Losses

Many traders use stop loss orders to reduce their exposure. A stop loss order allows the investor to automatically buy or sell once the price of an asset, like bitcoin, touches a specified price, i.e. the stop price. This limits losses or locks in profits on a long or short position.

For example, setting a stop-loss order for 15% below the buy price would limit losses to 15%. The advantage of stop-loss orders is that they can prevent investors from making decisions based on emotion. The best traders choose entry and exit points and stick to their plan.

Futures

Crypto futures trading is another way to limit losses in cryptocurrency trading. Similar to commodity futures trading, the trader does not need to own the crypto assets. Rather, the trader only takes risks on the price changes.

For example, let’s say a trader enters a bitcoin futures position at $50,000 each. They take a long position. When the futures contract expires, if the bitcoin futures price settles at $55,000 for each contract, the trader receives a profit of $5,000 from the exchange.

Crypto traders also use leverage in crypto futures trading, which is capital efficient. For example, one bitcoin might cost $50,000. A futures contract would allow a trader to open a position with only a fraction of that cost, perhaps $5,000 worth of bitcoin.

Alternatives to Crypto Investing

Crypto is probably the most volatile asset there is, and few alternatives have the same level of risk. Thus finding ways to diversify your holdings may help manage risk.

The obvious alternatives to crypto investing are stocks, bonds, and precious metals. ETFs and mutual funds may also offer some options for diversification. Fine art, jewelry, and other collectibles are an example of alternative investments for those with a talent for selecting those kinds of valuables.

TheTakeaway

While cryptocurrency can never go negative in the true sense, it is possible that traders can lose money, particularly if they use strategies like margin trading or futures contracts.

Wise investors can choose risk mitigation strategies like stop losses and hedging.

Lastly, bear in mind that cryptocurrency is largely an unregulated asset class, and the ways to make money using crypto are still evolving. Still, fake crypto schemes are rife. According to the Federal Trade Commission, from October 2020 to May 2021, some 7,000 people reported combined losses of more than $80 million total, with an average loss of $1,900. So, buyer beware applies here. Investors can protect themselves by signing up with a reputable trading platform and explore potentially profitable ways to invest in crypto.

Photo credit: iStock/Dilok Klaisataporn


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.

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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