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Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

Many investors assume that buying a put may lead to profits if the underlying security’s price falls, or that buying a call may pay off if the price rises. This isn’t always true, however. In cases of implied volatility (IV) crush, a drop in implied volatility may reduce an option’s value regardless of the stock’s direction.

Investors may correctly guess which way a security will move, make the appropriate options purchase, and still lose money. That’s because the option’s value is tied not only to direction, but also to implied volatility. IV crush refers to a sudden drop in implied volatility that reduces an option’s value, even if the underlying stock moves as expected. This may happen due to several moving parts of an options contract, which include:

•   Strike price

•   Expiration date

•   Time decay

•   Implied volatility

While the strike price and expiration date remain fixed, the other two variables vary throughout the length of the contract. This can lead to unexpected outcomes for options traders.

What Is IV Crush?

The term IV crush refers to a sharp drop in the implied volatility of an options contract, which can lead to significant losses in the premium. This can happen even if the trader correctly predicts the stock’s direction.

Sometimes implied volatility can drop suddenly, reducing the value of an existing options contract. This often happens after scheduled corporate events, such as earnings announcements.

Understanding IV crush in options trading starts with a closer look at implied volatility.

What Is Implied Volatility?

Implied volatility is the market’s expectation of how much a security’s price may fluctuate over a given period. The greater the implied volatility, the higher the odds of significant price movements. This idea is especially relevant when it comes to trading options, as it influences how contracts are priced.

The factors that influence the price of an option include:

•   The distance between the strike price and the underlying security’s current price

•   The length of time until the expiry date

•   The anticipated volatility during that time (implied volatility)

Options with higher implied volatility tend to come with higher premiums. That’s because larger price swings may increase the likelihood of an option becoming profitable, which, in turn, may increase the potential value of an option.

The term “implied volatility” may be more generally thought of as the expected uncertainty in a security’s price, especially as it relates to options pricing. The more uncertainty in a contract, the higher the premium. As uncertainty decreases, so does the premium.

An option’s premium then may — at least in part — reflect the level of implied volatility investors anticipate between the present moment and the expiry date.

Premiums also tend to go up when the expiry date is further into the future. The additional time and greater distance between the strike and underlying price increase uncertainty.

What Creates an IV Crush?

IV crush is a trading term meant to describe a situation where implied volatility declines rapidly. This often occurs after a significant market event, like a corporate earnings report or a product release, when market uncertainty sharply decreases.

Ahead of the event, implied volatility typically increases as traders buy calls and puts in anticipation of earnings results that may differ — either positively or negatively — from market expectations.

Then, after the event happens, many investors close their positions (an options contract can be sold or “closed” at any time before the expiry date), either taking profits or cutting losses. The result is often a sharp drop in implied volatility and a corresponding decline in option premiums, which may occur even if the underlying asset moves as expected. This is referred to as the IV crush. When the premium drops below what the trader originally paid, it could result in a loss upon exit.

Example of IV Crush

A common example of an IV crush, as mentioned above, is what often occurs when a company releases its quarterly earnings report. Each quarter, companies release earnings reports that provide financial details about their operations and profitability. Volatility often increases ahead of an earnings report amid the uncertainty of what information will be released, then drops sharply once traders have more clarity about how the company performed.

For example, a trader might buy a call contract ahead of an earnings report, expecting the stock to rise. The option premium at the time of purchase might be $3.20 due to elevated implied volatility. If the stock does increase slightly after the announcement but implied volatility drops sharply, the option’s premium could fall to $2.00, resulting in a potential net loss — even though the trader was correct on the direction it took.

What Events Can Cause an IV Crush?

An IV crush could occur with any scheduled corporate (or political or government) event when the outcome is uncertain. Some other potential examples include:

•   A company being granted a patent for a new product.

•   A pharmaceutical product receiving FDA approval or completing late-stage trials.

•   The Federal Reserve announcing a change in interest rates or other monetary policy following a scheduled meeting.

Events like these can trigger a rise in implied volatility, followed by a sharp drop once the anticipated information is released.

How to Take Advantage of (Or Hedge Against) IV Crush

Several strategies may help traders manage the risks of IV crush or position themselves for potential gains.

Strategies Seeking to Benefit From High IV

Options traders hoping to benefit from an IV crush scenario may pay close attention to the volatility of an asset in the time period before a scheduled event. When implied volatility is high, option premiums tend to be expensive. That’s when sellers may enter the trade, writing options contracts in an attempt to collect high premiums. When volatility falls, those options may be bought back at lower prices, potentially locking in profit.

Sellers may also use familiar strategies like cash-secured puts and covered calls to collect higher premiums when IV is high. Cash-secured puts involve setting aside enough money to buy shares at the strike price of a put option if the stock price falls and the option is exercised, while covered calls involve selling a call option on a stock that the trader already owns. Both strategies work best if the stock stays flat or moves modestly in a favorable direction, as this lets the seller keep the premium as IV falls.

A short options position also comes with the risk of seeing substantial losses. If the underlying stock moves sharply against the position, the trader may be forced to buy or sell the underlying asset at a loss or to buy back the contract at a much higher price, both of which could incur significant losses.

Buyers, on the other hand, may prefer to enter positions when implied volatility is relatively low. Buying options ahead of a known event (when premiums are elevated) could result in losses, even if the stock moves in the expected direction. Avoiding trades immediately before these announcements may help reduce exposure to volatility-driven premium decay.

Traders anticipating a decline in market volatility may consider taking a short position on Volatility Index (VIX)-linked products, which track expectations for future volatility. These include VIX futures or inverse volatility exchange-traded funds (ETF). A decline in the VIX often reflects falling implied volatility, so traders who shorted the index during a period of high volatility may see those positions gain value as IV crush unfolds.

Ways to Manage or Hedge IV Crush Risk

Managing IV crush means understanding who’s most exposed. Buyers are generally hit hardest, as falling implied volatility reduces option premiums — even when the trade is directionally correct. Sellers — those who write options — receive a premium upfront, but still face risk if the stock moves sharply against their position. This could take the form of falling below the strike on a short put or rising above the strike on a covered call.

To hedge against IV crush, traders may use options-trading strategies that involve multiple legs, such as spreads that are intended to reduce the impact of changing implied volatility.

A spread involves buying one option and selling another to balance risk and reward.

For example, a vertical credit spread involves selling one option and buying another at a different strike price with the same expiration date. Because the position collects premium upfront, it may benefit from a drop in implied volatility. The contract may be bought back at a lower price if IV falls after the event. Potential gains are capped at the net premium collected, and the potential losses are limited to the width of the spread minus the premium.

Spreads may offer more controlled risk exposure as an options trading strategy, but they also cap potential gains.

The Takeaway

Options traders may want to pay close attention to implied volatility when planning the entry and exit points of a trade. Buying options before a major event may expose traders to an IV crush, which is when the implied volatility of an underlying asset drops precipitously following the event, resulting in a drop in the options’ premiums. This can happen even when the trade moves in the direction the trader expected. Using spreads or writing options contracts may help reduce risk in high-IV environments, while some traders may try to benefit from elevated volatility by selling options when premiums are high.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is IV crush in options trading?

IV crush refers to a rapid decline in an option’s implied volatility (IV), typically following a significant event, such as an earnings announcement. This drop in IV may reduce the option’s premium and lead to losses, even if the underlying asset moves in the anticipated direction.

How does IV crush affect option prices?

When implied volatility decreases sharply, the extrinsic value of an options contract may decline. This decrease could lead to lower premiums, which may impact traders who bought options before the IV drop and were planning to sell their contract at a profit. An option’s premium may decline as a result of an IV crush, even if the stock moved in the expected direction.

What causes IV crush?

An IV crush typically follows events that introduce uncertainty into the market, such as earnings reports, Fed decisions, or other economic announcements. Implied volatility tends to rise before these events as a result of the uncertainty about which direction an asset’s price may move, then drop sharply once the outcome of the event is known. This results in an IV crush.

How can traders mitigate the risk of losses from IV crush?

To mitigate the risk of an IV crush, traders may consider strategies such as selling rather than buying options ahead of key events, using spreads (e.g., short straddles, short strangles), or choosing longer-dated options. While these approaches may limit exposure to sudden drops in implied volatility, they still may come with substantial loss.

Is IV crush always a risk for options traders?

Not always. While IV crush can pose substantial risks for traders, particularly for options buyers, it may create opportunities for sellers who write contracts when implied volatility is elevated. For example, sellers who successfully sell options for a higher premium ahead of a major financial event, when an asset’s implied volatility is high, may benefit from declining premiums if the implied volatility drops after the event. Attempts to profit from high volatility come with high risk, however.

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This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

SOIN-Q226-118

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Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

Futures are contracts between two parties to buy or sell an underlying asset or security — such as commodities, currencies, or even stock indexes — at a specific price on a future date.

Starting in 2026, investors will be able to trade single-stock futures (SSF) contracts as well. Single-stock futures will be offered as standard and micro contracts.

The most commonly traded futures contracts use standardized terms, known as contract specs, which detail the underlying asset, the size of the contract (e.g., bushels of corn or barrels of oil), and the way in which price fluctuations are measured for that asset or commodity.

Every contract also includes an expiration date, by which the contract must be settled with a cash payment or physical delivery of the asset (unless the contract is traded beforehand). Futures contracts can enable traders and other market participants to speculate on market movements, or hedge against future price changes.

What Are Futures?

Futures are derivatives that take the form of a contract in which two traders agree to buy or sell an asset for a specified price on a future date via an online brokerage platform that supports futures trading, or a futures exchange.

Popular underlying assets may include physical commodities like gold, corn, or oil, as well as currencies, financial instruments like stocks, and more.

Futures contracts are priced based on models that factor in the spot price (i.e., the current market price), the risk-free rate of return, the cost of storing the asset (if applicable), and other factors like time to maturity, or the time before the contract expires.

Futures contracts must be settled on the expiration date, traded beforehand, or rolled over, which can contribute to volatility in contract values.

What Is Mark to Market?

An interesting aspect of the definition of futures contracts is that they are marked to market. This means that all open futures contracts are updated according to the price changes each day, with gains and losses credited or debited from the account.

This is in contrast to other assets, like stocks or options, where price changes aren’t settled until the asset is sold or the position is closed.

Futures Exchanges

The most commonly traded futures contracts use standardized terms, and are traded on a futures exchange. For example, if you want to buy or sell corn futures, one contract would equal 5,000 bushels and be traded via the Chicago Board of Trade (CBOT).

Oil is traded on the Chicago Mercantile Exchange (CME), and one oil futures contract equals 1,000 barrels of oil.

Traders buy and sell in increments specified by the contract. To buy 50,000 bushels of corn or 10,000 barrels of oil, you’d buy 10 contracts of each.

Given the quantities and dollar amounts of these trades, investors often use leverage, thereby paying only a fraction of the total cost of the open position.

What Are Micro Futures Contracts?

A micro futures contract is smaller than a standard contract for a given asset. In other words, the standardized amounts are reduced in micro futures contracts. For example, a standard oil contract, which represents 1,000 barrels of oil, might be 1/10th of that in a micro contract.

As such, micro contracts demand less capital to trade, which can be beneficial to retail investors who are learning the ropes of futures contracts.

How Do Futures Contracts Work?

Futures contracts work by obligating buyers and sellers to fulfill their end of the bargain no later than the expiration date.

Mechanics of a Futures Trade

A futures contract obliges the buyer to buy a certain asset, or the seller to sell an asset, at an agreed-upon price, on a certain date. Each party must fulfill the terms of the contract, no matter what the market price or spot price is when the contract expires (or trade the contract before the expiration date).

When trading futures, it’s important to know that these contracts are standardized according to each type of asset, as noted above. Each contract also spells out the contract terms, which includes:

•   The unit of the trade and how much one contract represents. As noted, one oil futures contract is worth 1,000 barrels of oil.

•   The grade or quality of the commodity, where relevant. For example, there are different types of corn, oil, soy, etc.

•   Terms of settlement (e.g., physical delivery or a cash settlement).

•   Expiration date.

•   Currency in which the contract is priced.

A futures contract allows investors to speculate on the direction of the underlying asset, either long or short, using leverage. (Leverage means the trader doesn’t have to put up the full amount of the contract. Instead, futures traders use a margin account.) As such, they’re a tool that allows investors to use leverage and speculation.

Recommended: How Does a Margin Account Work?

Types of Futures Contracts

There are numerous types of futures contracts, including those tied to underlying assets such as equities and various commodities.

Stocks, Commodities, and Currency Futures

Futures contracts allow investors to make bets on the prices of a wide array of assets:

•   Commodity futures, which allow investors to buy or sell physical goods like crude oil, pork bellies, natural gas, orange juice, corn, wheat, and more.

•   Financial futures, including stock index contracts and interest rate or debt contracts.

•   Precious metal futures allow investors to bet on the future prices of gold, platinum, and silver.

•   Currency futures for fiat currencies like the euro, yen, the British pound, and more.

•   U.S. Treasury futures allow investors to make bets on the future value of government bonds.

Single Stock Futures

What are stock futures? Like futures contracts where the underlying is a physical commodity, stock index futures are tied to the price movements of an index like the S&P 500 index or the Russell 2000.

Starting in 2026, the CME Group, the largest derivatives trading marketplace, will launch single-stock futures contracts (SSF). The CME Group manages well-known exchanges like Chicago Mercantile Exchange and the Chicago Board of Trade, among others.

Trading and Speculating with Futures

There are two key aspects to futures trading, which are hedging and speculating. Both play an important role in the markets, and determining whether futures are actually traded or not. There are also trading strategies to keep in mind, too.

There are many strategies for trading futures contracts, just as there are many strategies for trading almost any other type of security on the US stock market or derivative. Investors can consider price pullbacks, breakout trading, or even spread trading — each requires its own gameplan, and some background research to get started.

Hedging vs. Speculating

Hedging is a big reason why investors buy futures contracts: It’s a way to protect against losses resulting from price changes, especially in commodities.

Among the businesses that hedge using futures, the goal is to reduce the risk they face from unexpected price movements, and to guarantee the price they pay or receive for a particular asset.

If a large food manufacturer wants to lock in the price of corn, for example, they might enter into a contract for $10 a bushel. Since corn contracts are typically standardized at 5,000 bushels per contract, the total amount of the futures contract would be $50,000 ($10 x 5,000), to be delivered in six months.

Entering into this futures contract would offer the buyer some protection against the possibility of rising corn prices in the future.

Let’s say the price of corn does rise to $12 a bushel by the time the contract expires. In that case, the buyer still only pays the agreed-upon price of $10 per bushel, even though the spot price is now $12 a bushel.

For the corn producer in this scenario, even though it turned out that the futures contract terms weren’t quite as favorable as the actual market price — the contract guaranteed they would get at least $10 per bushel, which provided a hedge against a potentially bigger loss.

The Use of Speculation

Although it’s possible to settle a futures contract for the physical asset specified in the contract, most futures contracts are cash-settled. That’s because speculation on price movements is one of the main reasons that investors purchase futures contracts. A futures contract gives traders the opportunity to speculate whether a commodity will go up or down and potentially profit from the price change.

If the underlying asset of the futures contract — such as gold, oil, or corn — is above the price specified in the futures contract, then the investor can sell that contract for a profit before it expires. In that case, the contract would sell for the difference between the market price of the underlying commodity and the purchase price as specified in the contract.

In such a transaction, the underlying commodities don’t change hands between the counterparties of the contract. Instead, the trade would be cash-settled in the brokerage account of the investor.

Alternatively, an investor using futures for speculation could lose money if the price of the commodity is lower than the purchase price specified in the futures contract.

Recommended: Stock Market Basics for Beginners

Risks and Benefits of Trading Futures

Futures trading has some significant risks and potential rewards.

The Risks of Futures Trading

Owing to the nature of futures trading, i.e., the binding nature of the contracts and the use of leverage, there are some obvious risks to bear in mind.

In a speculative trade, a futures contract allows you to bet on a commodity’s price movement. If you bought a futures contract, and at expiration the price of the commodity was trading above the original contract price, you’d see a profit. However, you could also lose if the commodity’s price was lower than the purchase price specified in the futures contract.

The potential risks here can be greater than they seem, because margin trading permits a much larger position than the actual amount held by the brokerage. As a result, margin investing can amplify gains, but it can also magnify losses.

Imagine a trader who has $5,000 in their brokerage account and is in a trade for a $50,000 position in crude oil. If the price of oil moves against the trade, the losses could far exceed the account’s $5,000 initial margin amount. In this case, the broker would make a margin call requiring additional funds to be deposited to cover the market losses.

Speculators can also take a short position, as in shorting a stock, if they believe the price of the underlying asset will decline. An investor would realize a gain if the underlying asset’s price was below the contract price, and a loss if the current price was above the contract price.

Again, using leverage or margin to place these bets, long or short, can potentially expose investors to more risk than they intended.

The Benefits of Trading Futures

Some of the potential benefits of trading futures include the fact that investors can use leverage to try and generate outsized returns, the markets are liquid (meaning there’s plenty of trading action) and it offers up a chance to make some relatively quick (and potentially large) returns. That should, of course, be weighed against the risks.

Futures vs Options: What’s the Difference?

There are other financial derivatives with similar characteristics to futures contracts, such as options contracts.

American-style options grant the buyer the right, but not the obligation, to buy or sell the contract’s underlying asset at any time until the contract expires.

Unlike a futures contract, however, trading options doesn’t require the options buyer to purchase or sell the underlying asset. The options buyer can simply let the option expire, losing only the premium.

However, the option seller (or writer), has the obligation to buy or sell the underlying asset at the strike price (the contract price), if the options holder chooses to exercise their contract.

A futures contract, on the other hand, obligates the buyer to purchase the underlying asset, or to pay the seller of the futures contract the cash equivalent of that asset at the time of the contract’s expiration. Likewise, the seller of the asset must fulfill their end of the contract.

The Takeaway

Most investors in futures contracts have no interest in either receiving or having to deliver the physical commodities that underlie these contracts. Rather, they’re interested in the cash profit. The means of doing so is to trade the futures contract before its expiration date.

The standardized nature of most futures makes it so many (but not all) futures contracts will expire on the third Friday of each month. Some commodities are seasonal, and only trade during specific months. High-grade corn trades on the CBOT in March, May, July, September, and December, for example.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, from 5.00% to 9.75%*

FAQ

What is the main purpose of a futures contract?

Futures contracts enable buyers and sellers to set a price for a certain amount of an asset now, to be paid for (and/or delivered) in the future. These contracts help businesses and producers hedge against price risk, and enable some traders to bet on price fluctuations.

Do you have to buy the asset when a futures contract expires?

The buyer has to pay the agreed-upon price for the underlying asset, no matter what the spot price (or market price) is at the time, or trade the contract before the expiration date.

Are futures contracts safe for beginners?

Futures contracts trading is a high-risk and complex endeavor. Beginners may do better to explore other investing strategies before attempting to trade futures.

How much money do you need to trade futures?

Trading futures can be volatile, and the risk of loss is high when using leverage. To protect yourself from potential losses, it’s important to know the minimum account and margin requirements at your brokerage, as well as other factors.

Can you trade futures on regular stocks?

Starting in 2026, there are plans to launch single stock futures (SSFs) for trading. Each standard contract will represent 100 shares of the underlying stock; micro contracts may also be available. Single stock futures will be cash-settled, as there is no physical delivery of stock assets.

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Photo credit: iStock/hopeist

This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
Before investing, carefully consider the investment objectives, risks, charges, and expenses detailed in a Fund’s prospectus. This document contains important information and must be read carefully prior to investing; you can find the current prospectus by clicking the link on the Fund’s respective page.
Alternative investments are highly risky and may not be suitable for all investors. These investments often involve leveraging, speculative practices, and the potential for complete loss of investment. They typically charge high fees, lack diversification, and can be highly illiquid and volatile. Be aware that both registered and unregistered alternative investments, including Interval Funds, are not subject to the same regulatory requirements as mutual funds, and their illiquid nature may restrict your ability to trade on your timeline. Always review the specific fee schedule for Interval Funds within their prospectus.
Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

SOIN-Q226-015

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Recession can be a scary word, but economic contractions are fairly common throughout the history of the United States. In fact, they’re perfectly normal parts of the overall business cycle, during which the economy expands, contracts, and then expands again.

It’s during certain contractions, usually referred to as recessions, that life can get difficult, as a brief walk through U.S. recession history shows. While the U.S. most recently experienced a short recession in the wake of the Covid-19 pandemic, and no one knows when the next recession might occur, it’s important to understand that recessions are common and so are the recoveries.

What Exactly Is a Recession?

A recession is a period of time during which the economy contracts, or shrinks. There are some typical hallmarks of a recession: Stock markets fall, businesses fail or close, and unemployment goes up. Indicators, such as U.S. gross domestic product (GDP), also dip into the negative.

While recessions are often “called” following two straight quarters of negative GDP growth, that’s more of a layman’s definition. Recessions are, in fact, officially declared by the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER).

The NBER, and the economists comprising it, look at a number of economic indicators when deciding whether to label a period of economic contraction a recession or not. Those might include employment numbers, production, personal income, and more. As such, it’s not an exact science. Also, as noted, a recession in the U.S. economy isn’t exactly uncommon. The NBER’s measures show that, prior to the Covid-19 pandemic, there were as many as 33 recessions.

The last time the U.S. experienced a recession was in 2020. But that was a relatively short recession. The biggest recession in U.S. history sparked the Great Depression between 1929 and 1933, though the Great Recession (2007-2009) was the worst in modern times. But U.S. recession history stretches way back nearly to the founding of the country itself.

Dive deeper: Understanding Recessions and What Causes Them

Earliest Known Recessions

The history of U.S. recessions goes back almost as far as the history of the nation.

1797-1798

Strikingly similar to the Great Recession of 2008 to 2009, the recession of 1797 is believed to have been caused by a credit expansion and an investment bubble that included real estate, manufacturing, and infrastructure projects.

Problems ensued, bringing about a recession that affected nearly everyone from investors to shopkeepers to laborers.

1857

The Panic of 1857 wasn’t the first financial crisis in the United States, but thanks to the invention of the telegraph, news about the crisis spread quickly across the country.

Most historians attribute the panic to a confidence crisis that involved the failure of the Ohio Life Insurance and Trust Company, but other events have also been cited, including the end of the Crimean War overseas (which affected grain prices), excessive speculative investing in various markets, and questions about the overall stability of the U.S. economy.

1873-1879

Often referred to as the Long Depression, the Depression of 1873-1879 started with a stock market crash in Europe. Investors there began selling their investments in American projects, including bonds that funded railroads.

Without that funding, the banking firm Jay Cooke and Company, which was heavily invested in railroad construction, realized it was overextended and closed its doors. Other banks and businesses followed, and from 1873 to 1879, 18,000 U.S. businesses went bankrupt, including 89 railroads and at least 100 banks.

At the same time, the Coinage Act of 1873 demonetized silver as the legal tender of the United States in favor of fully adopting the gold standard. The withdrawal of silver coins further contributed to the recession, as miners, farmers, and others in the working class had few ways to pay their debts.

1893-1897

Like many other financial downturns, this depression was preceded by a series of events that undermined public confidence and weakened the economy, including disputes over monetary policy (particularly gold vs. silver), underconsumption that led to a cutback in production, and government overspending.

Two of the country’s largest employers, the Philadelphia and Reading Railroad and the National Cordage Company, collapsed, and the stock market panic that followed turned into a larger financial crisis.

Banks and other financial firms began calling in loans, causing hundreds of businesses to go bankrupt and fail, and as a result, unemployment rates and homelessness soared.

Recessions Between 1900-2000

The last century also had its fair share of recessions.

1907-1908

The recession that occurred between May 1907 and June 1908 was preceded by the San Francisco Earthquake, which took a toll on the insurance industry, and was also influenced by the Bankers Panic of 1907, which caused a huge stock market drop.

Those events spread fear across the country and a lack of confidence in the financial industry, causing more banking failures. As a result, the banking industry experienced major changes, including the creation of the Federal Reserve System in 1913, which was designed to provide a more stable monetary and financial system.

1929-1938

Most recessions last months. The Great Depression lasted years and is generally regarded as the most devastating economic crisis in U.S. history. It had many causes, including reckless speculation, volatile economic conditions in Europe, and overvaluation that ended in a stock market crash in 1929. Consumer confidence crashed as well, and a downturn in spending and investment led businesses to slow down production and lay off workers.

By early 1933, after a series of panics caused investors to demand the return of their funds, thousands of banks closed their doors. Immediately upon taking office, President Franklin D. Roosevelt began implementing a recovery plan, including reforms known as the New Deal.

He also moved to protect depositors’ accounts with the new Federal Deposit Insurance Corporation (FDIC). And he created the Securities and Exchange Commission (SEC) to regulate the stock market.

America’s entry into World War II further solidified the recovery, as production expanded and unemployment continued to drop from a high of 24.9% in 1933 to 4.7% by 1942.

1945

The result of demobilization and a shift to a peacetime economy after World War II ended, this eight-month recession (February to October 1945) is mostly known for a precipitous 10.9% drop in the gross domestic product, or GDP.

1948-1949

Economists generally blame this 11-month downturn (November 1948 to October 1949) on the Fair Deal social reforms of President Harry Truman, as well as a period of monetary tightening by the Federal Reserve in response to rampant inflation. Although it is generally considered a minor downturn, the unemployment rate did reach a 7.9% peak in October 1949.

1953-1954

A combination of events led to this 10-month recession (July 1953-May 1954), including a post-Korean War economic contraction, the tightening of monetary policy due to inflation, and the separation of the Federal Reserve from the U.S. Treasury in 1951.

Unemployment peaked at 6.1% in September 1954, four months after the recession was officially over.

1957-1958

The Federal Reserve’s contractionary monetary policy (restricting the supply of money in an overheated economy) is often cited as the cause of this economic downturn. GDP fell 4.1% in the last quarter of 1957, then dropped another 10% at the start of 1958. Unemployment peaked at 7.5% in July 1958.

1960-1961

This recession lasted 10 months (from April 1960 to February 1961) and spanned two presidencies. When it began, Dwight D. Eisenhower was in office, but John F. Kennedy inherited the problem (after using the downturn to defeat then-Vice President Richard Nixon in the 1960 presidential election).

Although the recession caused serious problems for many sectors of the economy (a drop in manufacturers’ sales and, therefore, manufacturing employment was one of the first signs of trouble), its overall effects were mostly mild.

Personal income continued to rise through much of 1960 and declined less than 1% from October 1960 to February 1961. Unemployment was high, however, peaking at 7.1% in May 1961.

1969-1970

Though it lasted almost a year (from December 1969 to November 1970), this recession is considered to have been relatively mild, because it brought about only a 0.6% decline in the GDP. However, the unemployment rate was high, reaching a peak of 6.1% in December 1970.

The downturn’s causes include a rising inflation rate resulting from increased deficits, heavy spending on the Vietnam War, and the Federal Reserve’s policy of increasing interest rates.

1973-1975

This recession, which lasted from November 1973 to March 1975, is usually blamed on rocketing gas prices caused by OPEC (the Organization of Petroleum Exporting Countries), which raised oil prices and embargoed oil exports to the United States.

Other major factors in this 1970s recession included a stock market crash that caused a bear market from 1973 to 1974 and several monetary moves made by President Richard Nixon, including implementing wage-price controls and ending the gold standard in the U.S. The result was stagflation, a slowing economy with high unemployment and high inflation.

1980-1982

There were actually two recessions during the early 1980s, according to the NBER. A brief recession occurred during the first six months of 1980, and then, after a short period of growth, a second, more sustained recession, lasting from July 1981 to November 1982.

That second recession, known as a double-dip recession, is largely blamed on monetary policy, as high interest rates (in place to fight inflation) put pressure on sectors of the economy that depended on borrowing, such as manufacturing and construction.

1990-1991

The “Reagan Boom” of the early and mid-1980s came to an ugly end at the beginning of the 1990s, as stock markets around the world crashed, and the U.S. savings and loan industry collapsed.

When Iraq invaded Kuwait in 1990, driving up the price of oil, consumer confidence took another hit.

The recession lasted from July 1990 to March 1991, according to the NBER, but it took the economy a while longer to fully rebound. Unemployment peaked at 7.8% in June 1992, and then-presidential candidate Bill Clinton’s focus on the struggling economy helped him unseat President George H.W. Bush later that year.

Recessions Between 2000-2025

Here’s a rundown of the most recent recessions.

2001

The 2001 recession lasted just eight months, from March to November, according to the NBER. And yet, the story behind the dot-com bubble trouble that triggered it remains a cautionary tale.

Investors looking for the next big thing cast aside fundamental analysis, and a frenzy grew over tech companies in the late 1990s. Many became overvalued, and the Y2K scare at the start of 2000 made investors jittery and took things up another notch.

When the tech bubble burst in 2001, equities crashed, and the 9/11 terrorist attacks only made matters worse. The Nasdaq index, one of several different stock exchanges, tumbled from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct 4, 2002, totaling a 76.81% fall.

On June 7, 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which used tax rebates and tax cuts to help stimulate the economy. And by 2003, the Federal Reserve had lowered its target for the federal funds rate by 0.25% to 1.0% in an effort to further lift economic activity.

2008-2009

The Great Recession, also known as the financial crisis of 2008-2009, is as notable for its severity as for its length. U.S. GDP fell 4.3% from its highest level at the end of 2007 to its lowest point in mid-2009. Meanwhile, the unemployment rate kept rising, from 5% at the end of 2007 to 10% in October 2009.

The average home price fell about 30% between mid-2006 and mid-2009. The S&P 500 fell 57% from October 2007 to March 2009. And the net worth of U.S. households and nonprofit organizations also took a hit, dropping from approximately $69 trillion in 2007 to $55 trillion in 2009.

Though the recession was especially devastating in the U.S., where it was triggered by the subprime mortgage crisis, it was an international crisis as well. A global economic downturn resulted in an unprecedented number of stimulus packages being introduced around the world.

How the US Responded

In the U.S., the Federal Reserve reduced the federal funds rate from 5.25% in September 2007 to a range of zero to 0.25% by December 2008. And a $787 billion stimulus package, the American Recovery and Reinvestment Act of 2009, included tax breaks and spending projects credited with helping revive the sagging economy.

Causes of the Recession

As for the causes of the recession of 2008? It’s complicated, but regulatory changes to how banks were allowed to invest customers’ money (specifically, into derivatives) were a main cause.

From there, derivative products were created from subprime mortgages, and as demand for homes increased (and interest rates rose), many borrowers could no longer afford to pay their mortgages. Finally, a collision of security fraud and predatory lending practices nearly overwhelmed the financial sector, as banks stopped lending to each other, and a game of derivative hot potato ended with notable bank failures.

2020

The pandemic in 2020 caused a short recession that lasted only two months. It was largely due to businesses needing to shut down or curtail work in response to the pandemic, and though the recession itself was fairly short, the effects were felt for years.

The Takeaway

U.S. recession history is a long, complicated topic. But if there’s one thing you should take away from it, it’s that recessions happen, they happen fairly frequently, and they’re not the end of the world. There are many reasons that a recession could or might happen, too, and there’s often no way to accurately predict a recession.

With that in mind, you can keep an eye on the news, monitor the markets, and follow economic indicators to try and get a sense of what might happen in the economy. As discussed above, recessions may spell bad news, but typically only for a period of time, after which markets tend to recover.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest®. You can trade stocks, ETFs, or options through self-directed investing with SoFi Securities, or simply automate your investments with a robo advisor from SoFi Wealth. You'll gain access to alternative investments and upcoming IPOs, and can plan for retirement with a tax-advantaged IRA. With SoFi, you can manage all your investments, all in one place.

Take a step toward reaching your financial goals with SoFi Invest.

Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

What is a recession?

A recession is a period when economic activity declines across the economy. It can lead to falling production, higher unemployment, weaker consumer spending, and business closures.

How long do US recessions usually last?

U.S. recessions vary in length, but many last only a few months to about a year. The 2020 recession was unusually short, lasting just two months, while the Great Depression involved a much longer and more severe economic downturn.

What causes a recession?

Recessions can have many causes, including financial crises, falling consumer spending, high interest rates, credit problems, and major economic shocks. Often, several factors work together rather than one event causing the downturn.

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This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.

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Where to live in retirement depends on several factors, but it’s a uniquely personal choice. If you could use some help deciding where to spend that chapter of your life, read on. Our quiz can help you zero in on some options, and you’ll also learn more about the factors that can help you decide where to retire, some common retirement destinations, and more.

Where to Retire Quiz

First, here is a “where to retire quiz” to help you to create your plans.

Factors to Consider When Choosing Where to Retire

There are several criteria you’ll want to consider when choosing where to retire. But first, it may be helpful to think about whether you’ll want to relocate at all.

Should You Relocate?

There are many reasons that you may want to relocate when you retire, but there are also plenty of reasons that you may want to stay where you are. It may be difficult to reacclimate to a new area, for instance, and be away from long-established networks, habits, and friends. If your family is nearby, too, it may make it even more difficult to move away.

But each retiree’s decision will depend on their own circumstances, and whether they’re ready to pack up and move on, or stay put. With that in mind, here are some factors to consider if you are thinking of moving away during retirement.

Climate and Topography

When you picture yourself in your ideal location, what is the weather like? Are you the type who wants to live the “70-plus degrees and sunny” lifestyle year-round? Or do you want to experience the full array of seasons, with fall leaf-peeping and some wintertime snow?

As you think about your surroundings, it can be smart to daydream a bit and envision where you’d like your retirement to be. One person might want to be in the mountains, another in a small city with lots of walking trails.

As you contemplate these options, it can be worthwhile to delve into climate reports for each of the states in the U.S. and check out the “past weather” tabs to see what patterns you may observe.

Friends and Family

When thinking about retirement, don’t overlook the value of having loved ones and their social support nearby. Your dream may be to live where your children or your grandchildren do. If that sounds like you, consider whether these family members are rooted in their communities or if they frequently move (say, for work).

If the first is true, then the situation is probably simpler than if there’s a good chance that your family might move, leaving you in a community that you chose because they were living there.

Do you have close friends that have decided where they want to retire? If so, you might want to consider the area they have in mind. Having the continuity of their friendship could add to your quality of life and help you transition into retirement.

Peace and Quiet? Or Action?

You might love the peace and quiet of small towns, rural areas, and the like, where you can fish, stroll through the woods, and otherwise appreciate the beauty of nature. Or you may want to retire right where the most action is, living in a big city with everything you need within a block or two of your place, plus an array of restaurants, shows, museums, and other attractions to keep you busy. Or you might prefer a suburb that offers the best of both worlds.

Also worth thinking about: Do you want to be in a place where there’s always something going on that you can join? For some people, a 55+ community with ongoing planned activities can be most appealing.

Career Plans

Do you envision saying a permanent goodbye to the workplace in the future, or do you plan to keep working after retirement — perhaps part-time or as a consultant — through your 60s and 70s, and maybe even beyond? Or perhaps you’re looking forward to having a second act in a field of great interest.

You may have pursued your original career because you needed to earn a certain income, but now you can work in an area that brings you joy, perhaps in animal rescue. Or maybe you want to volunteer for an organization you feel passionate about. There are lots of buzzwords describing the new ways people may work as they reach retirement age, such as semi-retirement and unretirement. Regardless of what you call it, some retirement locations may offer more opportunity than others, depending on the path you envision.

Taxes

It’s important to consider the impact of finances on where you choose to retire. Some states are more tax-friendly than others. There can be income tax, property tax, sales tax, and other taxes in the mix, so it can be wise to consider the best places to retire for tax purposes before you commit. For some people, where they choose to live in retirement can wind up making a difference of tens of thousands of dollars in taxes.

As you think about your options of where to live when retired, it can be wise to research the potential tax burden of a move (you can find information online) or meet with a professional who can advise you.

On the subject of taxes and affordability, another factor to keep in mind when thinking about retirement is cost of living. If you imagine retiring to, say, Austin, Texas, you are likely going to need to spend more for that in-demand city life than to live in a small town a couple of hours away from it.

Cost of Living

Taxes may only be one part of a larger concern: The cost of living. Different areas have different associated costs of living. You’re likely going to be paying less for housing and groceries in, say, Minot, North Dakota than you would in San Francisco, for example. There can be a lot of things to take into consideration when thinking about the cost of living and how much you’ll need to retire, but it should be on your list of things to think about – perhaps prominently.

Top 10 Retirement Destinations

Many publications crunch the numbers and release lists of top retirement destinations every year. One such publication is U.S. News & World Report, which analyzes data from 150 cities in the U.S. to assess how well they meet Americans’ retirement needs and expectations. For 2026, here are the top ten cities:

1.    Midland, Michigan

2.    Weirton, West Virginia

3.    Homosassa Springs, Florida

4.    The Woodlands, Texas

5.    Spring, Texas

6.    Rio Rancho, New Mexico

7.    Spring Hill, Florida

8.    Altoona, Pennsylvania

9.    Palm Coast, Florida

10.    Lynchburg, Virginia

Key Findings from Recent Retirement Surveys

Beyond the U.S. News & World Report resource mentioned above, there is a wide variety of information online, whether you want to research housing prices in a given area on a real-estate listing site or read a blog about what it’s like to retire in a foreign country.

Don’t forget about the value of word-of-mouth. Talking to friends, neighbors, colleagues, and family members about their plans and those of members of their circle can help you learn about what like-minded people are thinking. Again, there’s a lot of data to sift through, but it can be worth your time to sit down and do some research.

Affordable Places to Retire

Some of the most recent data out there shows that states like North Carolina, Texas, South Carolina, and Tennessee are attracting a lot of domestic migration. And that some of the least expensive states in the country include Mississippi, Arkansas, West Virginia, and Oklahoma.

And when it comes to tax burdens, the states with the lowest total tax burdens (which includes property taxes, sales taxes, excise taxes, and income taxes) are Alaska, New Hampshire, Tennessee, Florida, and Delaware.

Conversely, states like Hawaii, Massachusetts, California, and New York tend to have the highest costs of living — so, you may want to keep that in mind, too.

Safest Places to Retire

If safety is your top concern, then you may be looking for states with relatively low crime rates, low mortality rates, and perhaps that are even shielded from disastrous weather patterns like hurricanes. While there isn’t a perfect place, by any measure, there are some cities and towns that tend to be safer than others.

Here are some of the safest affordable places to retire as of 2026, according to an analysis from GOBankingRates:

1.    Columbus, Indiana

2.    Broadview Heights, Ohio

3.    Auburn, Indiana

4.    Mayfield Heights, Ohio

5.    Savannah, Georgia

Happiest Places to Retire

If happiness is your aim — and why shouldn’t it be? — you may be interested in the key findings from a 2026 SoFi study that outlines the happiest cities in the U.S. for retirees. The study identified key elements that contribute to happiness — social well-being, financial security, and health — and examined 13 pivotal rankings within them, such as community, cost of living, and health care access.

Here’s the list:

1.    Portland, Maine

2.    Madison, Wisconsin

3.    Appleton, Wisconsin

4.    Manchester, New Hampshire

5.    Sioux Falls, South Dakota

Best Places to Retire Early

Some people want to retire before they reach 65 or 70. If you are among that group, consider the Rule of 25, which says that someone should save 25 times their annual expenses to retire — not annual earnings, but annual retirement expenses.

So if you are calculating how to retire early with annual expenses of $75,000, that means that someone would need to save about $1,875,000 to stop working (at a minimum).

Important note: As you do the math, remember that this figure can’t include Social Security benefits because those aren’t available until the designated time (meaning, not during early retirement).

It can also make sense to spend less and save more now to maximize what you’ll have saved for retirement. This can have a doubly good impact. First, spending less can lower the amount needed to save for early retirement, because you’ll have fewer expenses. In addition, the money not being spent today may be invested.

Here’s another way to calculate what may be needed. Take a look at the current budget, cut out what you reasonably can, and then figure out how this budget may change in retirement years. What may require more funds (health care, for instance)? Less (like money spent on your kids)? This can help you forecast what your line item budget may look like in the years ahead.

As for some of the best states in the U.S. to retire early? Smart Asset lists Kentucky, South Dakota, Wyoming, and Tennessee as top choices. That can give you a headstart on places to check out, but there are many more.

Recommended: The Strategic Guide to Early Retirement

Planning Your Retirement

As far as when to start saving for retirement, the answer is as soon as possible. If you’re not sure how to start, you can consult a retirement planning guide, and in terms of how to save, you may have such options as:

•   401(k) Retirement Plans: These are employer-sponsored plans and can be a convenient way to start saving for retirement.

•   IRAs (Individual Retirement Accounts) Whether or not your employer offers a retirement plan, you can open an IRA yourself. There are two popular types — traditional and Roth — which are treated differently, tax-wise.

•   Self-Employment Retirement Plans: There are several types of retirement plans for the self-employed, including SEP IRAs, Simple IRAs and a Solo 401(k). Contribution limits are generally higher, because you’re both the employer and the employee.

•   Pension Plans: If you work for the government or military (or possibly for a large company), you may also benefit from a pension plan. These are less common than they used to be, but they still exist.

As you save, it can be wise to frequently check in on how your savings are performing. This can help you monitor whether you’re on track, regardless of which of the different types of retirement plans you are utilizing, and make any necessary adjustments.

If you find you aren’t heading towards your targets, you may want to rebalance your portfolio to help meet your goals.

The Takeaway

Deciding where to retire is a big decision. Lifestyle factors and proximity to family play a key role, as do cost of living, affordability, and taxes. Saving for retirement and calculating how much will be needed to retire comfortably, are important for making sure individuals will be able to enjoy their golden years — wherever they may choose to spend them.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help build your nest egg with a SoFi IRA.

FAQ

What is the #1 best place to retire?

The best place to retire depends on a number of factors, but many lists and analyses rank cities in states with low taxes, low costs of living, and relatively mild weather near the top. The best place to retire will ultimately come down to an individual’s preference, however.

When should I retire?

It’s difficult to say when any individual should retire, so perhaps the best answer is when you’re prepared. That means having enough money saved and invested to carry you through your retirement, and being prepared financially and emotionally to walk away from full-time employment.

Am I ready to retire?

Every person’s situation is unique, so you may wish to consult with a financial professional to gauge whether you’re ready to retire from a financial perspective. Other than that, you may want to sit down and consider your lifestyle, health, social well-being, and other factors that may change after you retire.

How much do I need to retire?

How much you’ll need to retire will depend on your specific circumstances, including where you live and your lifestyle choices. You might want to consider some common rules of thumb. For example, the 80% rule says you will need 80% of your pre-retirement income per year when you retire. Another guideline recommends having 10 times your annual salary saved by the time you’re 67. However, depending on your specific personal circumstances and financial situation, you may need to save more or less than the guidelines suggest.

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This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

A derivative is a secondary security, meaning it is not an asset itself but rather a contract that tracks the value of an underlying asset, such as stocks, commodities, foreign currencies. A derivative is so named because it derives its value from the underlying asset.

Derivative contracts are a legal financial agreement between two parties: a buyer and seller. Common types of derivatives include options, futures, swaps, and forward contracts.

The value of these derivatives fluctuates based on market events, changes to the underlying price, and other factors related to the underlying asset.

Experienced investors often use derivatives to place bigger bets, to help hedge their investments against future loss, or to try to profit from upcoming market shifts. Some investors also use them to profit or speculate on commodities, such as gold or oil. They can serve different purposes for different people, such as limiting risk related to possible future events.

How Does a Derivative Work in Finance?

A derivative is a legally binding contract that can take the form of futures, swaps, and options trading. A derivative contract outlines the terms, rules, and costs for a potential future transaction based on the performance of an underlying asset.

For instance, if an investor decided to buy stock and 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 a specific price on a future date. This may provide them with 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, when investing online or through a traditional brokerage.

In addition: Derivatives are leveraged contracts, in that the investor pays a fee that’s a fraction of the total cost to control the underlying position. The seller of a derivative doesn’t always need to own the underlying asset. In many cases, the buyer never owns the asset directly either. Derivatives provide exposure to the asset’s value rather than trading it directly.

Derivative Example

A derivative contract, such as a call option, would grant the option buyer the right, but not the obligation, to purchase shares of a particular stock at a predetermined price of, say, $150 per share (the strike price) within a six-month period (the expiration).

The standard options contract is for 100 shares of stock.

The appeal of this strategy, and the appeal of derivatives in general, is that the buyer is able to purchase the right to buy the underlying asset at the strike price, on or before the expiration — but only pay the cost of the contract, which is the premium. If the trade moves in the wrong direction, they are not obligated to buy the underlying shares.

In other words, options (like other types of derivatives) enable investors to make bigger trades than they could with just cash.

Recommended: Options Trading 101

Types of Derivatives

There are two categories of derivatives: obligation-based contracts and option-based contracts. Obligation-based contracts include swaps and futures. These form an obligation between both parties to fulfill the terms of the agreement.

Option contracts give the parties the right, but not necessarily the obligation, to fulfill the contract transaction.

Options

Options are a common type of derivative that give traders the right, but not necessarily the obligation, to buy or sell an underlying asset at a predetermined price within a set time frame. Since the value of an option contract depends on the price movements of the underlying asset, it’s considered a derivative.

Traders use options for speculation or to hedge against potential losses, but they carry risks, including the possibility of losing the premium paid upfront (for buyers), and the potential for significant losses, particularly for uncovered (naked) option sellers.

Recommended: Popular Options Trading Terminology to Know

Futures

With futures contracts, the buyer and seller set a price to buy or sell an asset or commodity on a specific date in the future. The contract includes the price, the amount, and the future settlement date. The contract obligates both parties to fulfill the contract.

Traders are required to deposit margin funds, which is a fraction of the contract value. They may also need to post additional funds, known as maintenance margin, to cover potential losses.

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.

Futures contracts are traded on regulated exchanges, while similar contracts, known as forwards, are sold over the counter (OTC), allowing for more negotiation but less regulatory oversight and greater risk exposure.

Swaps

Swaps are contracts traded OTC 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. Often, 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.

What Is Margin?

Margin requirements for derivatives trading differ somewhat from standard margin trading in stocks.

In futures trading, traders must deposit an initial margin, which is a fraction of the total contract value, to open a position. They may also need to post maintenance margin to cover potential losses if the trade moves against them.

In options trading, margin requirements depend on whether an investor is buying or selling an option. Buyers pay a premium upfront, while sellers (writers) may need to post margin to ensure they can fulfill their obligations if the option is exercised.

Swaps may also involve margin requirements, particularly in over-the-counter markets, to mitigate counterparty risk. The specifics vary based on the contract terms and the regulatory environment.

How Derivative Trading Works

A derivatives contract says that the investor will either earn or pay money related to the underlying asset. Although there is an initial cost for the derivative contract, traders may be required to contribute additional maintenance margin if the underlying asset moves against their position.

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 the underlying asset price fluctuations — and as the expiration date draws closer.

There is a small initial deposit, sometimes called a premium, required to enter into the contract. This amount varies depending on the type of derivative and market conditions. For example, there could be a contract to purchase 100 shares of a stock for $300 per share, and the option contract might trade at a premium of $3 per share.

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.

Trading derivatives also 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

Derivative contracts come with various costs depending on the type of contract and the market where they are traded. Common costs include:

•   Options: Premiums, commissions, and potential assignment fees

•   Futures: Initial margin, maintenance margin, and exchange fees

•   Swaps and Other OTC Derivatives: Transaction fees and counterparty costs

Derivatives are best suited for experienced investors who understand the potential risk of loss involved. Consider consulting with a financial professional to understand the full costs for specific trades.

Pros and Cons of Trading Derivatives

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

Potential Benefits

Derivatives traders may benefit from potential upsides, including:

•   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

Potential Risks

In addition to the advantages, there are several potential 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

•   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 vary depending on where they are traded. The Securities and Exchange Commission regulates derivatives traded on registered national securities exchanges, while over-the-counter (OTC) derivatives — which are the majority of derivatives — are typically subject to less oversight and may involve bilateral agreements between parties.

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 promote fair, orderly markets.

The Takeaway

Derivatives can be a riskier type of investment but they can provide value to both institutional and retail investors’ portfolios when used appropriately, and with a clear understanding of the risks involved.

Trading derivatives requires more work than simply buying and selling more traditional securities, chiefly owing to the representational nature of a derivative contract (i.e., you’re not trading the asset directly) and the use of leverage.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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FAQ

What are derivatives in simple terms?

Derivatives are contracts that represent a certain amount of an underlying asset (e.g., stocks, commodities, a benchmark index). Investors can pay a relatively small amount to purchase a derivative such as an options contract, which they can then trade.

What are the four main types of derivatives?

The four main types of derivative contracts are options, futures, swaps, and forwards. These contracts represent different types of sophisticated, higher-risk investing strategies. Less experienced investors may want to do their due diligence before trading derivatives.

Are derivatives a type of alternative investment?

Derivative products can be used in some alternative strategies, such as hedge funds, but they aren’t considered alternative assets in the same way that, say, commodities, private equity or real estate are. Many derivatives, such as options and futures, are highly regulated, and many derivative contracts are tied to traditional underlying assets such as stocks. That said, the majority of derivatives are traded over-the-counter, making them less liquid and less transparent and more like alternatives.

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Photo credit: iStock/fizkes

This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.

Before investing, carefully consider the investment objectives, risks, charges, and expenses detailed in a Fund’s prospectus. This document contains important information and must be read carefully prior to investing; you can find the current prospectus by clicking the link on the Fund’s respective page.
Alternative investments are highly risky and may not be suitable for all investors. These investments often involve leveraging, speculative practices, and the potential for complete loss of investment. They typically charge high fees, lack diversification, and can be highly illiquid and volatile. Be aware that both registered and unregistered alternative investments, including Interval Funds, are not subject to the same regulatory requirements as mutual funds, and their illiquid nature may restrict your ability to trade on your timeline. Always review the specific fee schedule for Interval Funds within their prospectus.

Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

SOIN-Q326-026

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