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10 Options Trading Strategies for Beginners


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.

Although options investing involves significant risk and may not be suitable for all investors, those who understand how to trade derivatives contracts can use them to make a speculative bet or offset risk in another position.

Options trading involves buying and selling options contracts. These contracts give investors the right — but not always the obligation — to buy or sell securities at a specified price before a certain date. Options contracts are commonly used for speculation (investors who want to turn a profit on a presumption about the market) or as a way to hedge other investments (as an attempt to offset potential losses).

Trading options can offer profit opportunities but also carries substantial risk, and requires a clear understanding of the strategies involved.

Key Points

•   Options trading involves buying and selling contracts to speculate or hedge investments, offering unique profit opportunities but with significant risks.

•   Understanding risks and mechanics in options trading is crucial for aligning strategies with market outlook, goals, and risk tolerance.

•   Key strategies include long calls, long puts, covered calls, short puts, short calls, straddles and strangles, cash-secured puts, bull put spreads, iron condors, and butterfly spreads.

•   Effective options trading requires aligning strategies with one’s expertise, market outlook, and risk tolerance.

•   Advanced strategies like iron condors and butterfly spreads target low volatility environments, utilizing complex positions to capitalize on minimal price movements.

10 Important Options Trading Strategies for Every Investor

In options trading, investors can either buy existing contracts, or they can “write” or sell contracts for securities they currently hold. The former is generally used as a means of speculation, while the latter is most often used as a way of generating income.

Many option strategies can involve one “leg,” meaning there’s only one contract that’s traded. More sophisticated strategies involve buying or selling multiple options contracts at the same time in order to minimize risk.

Here’s a closer look at important options strategies for beginner, intermediate, and more advanced investors to know.

1. Long Calls

Level of Expertise: Beginner

A long call is an options strategy where an investor buys a call option (also known as “going long”), anticipating that the price of the underlying asset will rise before the contract expires. This strategy is often used when an investor has expectations that the share price of a stock will rise but may not want to outright own the stock. It’s therefore considered a bullish trading strategy.

For example, an investor believes that a stock will climb in one month. The investor could buy an option with a strike price that’s higher than the current share price, with an expiration date at least one month from now. If the stock’s price rises to $12 within a month, the premium on the option will likely rise as well, which can generate a profit for the investor (minus fees).

If the stock does not rise to the strike price, the contract expires worthless, costing the investor the premium.

2. Long Puts

Level of Expertise: Beginner

Put options can be used to take a bearish position, similar to shorting a stock. They can also function as a hedge, which is a strategy traders use to offset potential losses in other positions. Here are examples of both uses.

Let’s say an options trader believes that a firm will have disappointing quarterly results and wants to take a position that could benefit from a decrease in its share value. The options trader doesn’t want to buy the company’s shares outright, so instead they purchase put options tied to the company.

If the company’s stock falls before the expiration date of the puts, the value of those options will likely rise. The options trader can sell them in the market, realizing a gain. If the stock price stays above the strike price, the puts expire worthless, and the trader loses the premium they paid.
An example of a hedge might be a trader who buys shares of a company that is trading at a level they are satisfied with. The investor might also be concerned about the stock falling, however, so they buy puts with a strike price that’s lower than the current stock price, and with an expiration date that is two months from now.

The potential losses on the trader’s position are capped at the strike price of the puts, minus the premium paid. If the stock falls below the strike price of the contracts, they can sell at the strike price instead, capping their losses. Alternatively, if the stock price stays the same or goes higher, the contracts expire worthless and the trader loses the premium.

Recommended: Popular Options Trading Terminology to Know

3. Covered Calls

Level of Expertise: Beginner

The covered call strategy requires an investor to own shares of the underlying stock. They then write a call option on the stock and receive a premium payment.

If the stock rises above the strike price of the contract, the stock shares will be called away from them, and the shares (along with any future price rises) will be forfeited. This strategy is considered relatively conservative because it can generate income from the premium while capping potential upside. Risks still exist if the stock price declines significantly.

If the price of a stock stays below the strike price when the option expires, the call writer keeps the shares and the premium, and can then write another covered call if desired. If the shares rise above the strike price when the option expires, the call writer must sell the shares at that price.

4. Short Puts

Level of Expertise: Beginner

Being short a put is similar to being long a call in the sense that both strategies are bullish. However, when shorting a put, investors actually sell the put option, earning a premium through the trade. If the buyer of the put option exercises the contract however, the seller would be obligated to sell those shares.

Here’s an example of a short put: shares of a stock are trading higher than usual, and an investor wants to buy the shares at a slightly lower price. Instead of buying shares however, the investor sells put options with a strike price that reflects the price they are willing to pay for the stock. If the shares never hit strike price, the seller of the options contracts gets to keep the premium they made from the sale of the puts to the investor.

However, if the options buyer exercises those puts, the seller would be obligated to purchase the shares at the strike price, regardless of the current market price. This could result in a loss for the seller if the market price is significantly lower than the strike price.

5. Short Calls or Naked Calls

Level of Expertise: Intermediate

When an investor is short on call options, they are typically bearish or neutral on the underlying stock, and may sell the call option to another person. Should the person who bought the call exercise the option, the original investor needs to deliver the stock.

Short calls are similar to covered calls, but in this case, the investor selling the options doesn’t already own the underlying shares, hence the term “naked calls.” This makes them riskier, and not a fit for beginner investors.

For example, if an investor sells a call option at a strike price higher than the stock price to a trader. If that stock never rises to the strike price, the investor pockets the premium they earned from selling the call option.

However, if the shares rise above the strike price, and the trader exercises the call option, the investor is obligated to sell the underlying shares to the trader. In this case, the investor must then purchase the shares at the current market price to sell them to the trader at the agreed-upon strike price to cover the transaction.

6. Straddles and Strangles

Level of Expertise: Intermediate

Straddles are an options strategy in which an investor either buys or sells call and put options on the same underlying asset, both sharing the same strike price and expiration date. This allows the investor to potentially benefit from significant price changes.

With straddles in options trading, investors expect an asset’s price to move significantly, but they are unsure if it will move up or down in value. Thus, they take positions on both sides to capitalize on whichever way the asset moves.

Understanding Long Straddles

Long straddles involve buying call and put options on an asset with the same strike price and expiration date. The goal is for one of the two options positions to increase in value to offset the expense of the other. Investors risk losing the total premium paid for both options; this is the maximum loss so long as the asset’s price stays close to the strike price and neither option becomes profitable.

Let’s look at a hypothetical long straddle. An investor pays the same for a call contract as they do a put contract on the same asset. Both have the same strike. In order for the investor to break even, the stock must move enough in either direction to offset the combined premium cost.

If the asset’s price rises significantly, the call option can become profitable. If profitable enough, it can offset the cost of the premium of the put. The inverse is also true: if the asset’s value drops significantly, the put becomes profitable, and can offset the price of the call if it gains enough value. If the asset’s price remains close to the strike price, and neither the call nor the put options become profitable, the investor loses the entire premium paid for both options.

Recommended: Margin vs Options Trading: Similarities and Differences

Understanding Short Straddles

Short straddles are the opposite: investors sell both a call and put at the same time, profiting when the asset’s price stays close to the strike price. The goal is to benefit from minimal price movement, and to keep the premiums from both options. Unlike a long straddle, investors face unlimited risk if the asset moves significantly in either direction.

For example, let’s say an investor believes a stock is not likely to move during the length of an options contract. They may want to benefit from this anticipated inactivity by putting a short straddle in place, gaining the premium from selling their options on an asset that they don’t believe will move much outside the strike price.

If they’re right, they keep the premium. If not, they stand to lose significant amounts of money because they are required to fulfill their obligation whether that means buying or selling the asset above or below market price.

Understanding Long Strangles

In a long strangle, the investor buys calls and puts at different strike prices. The investor believes the stock is more likely to move up than down, or vice versa. In a short strangle, the investor sells a call and a put with different strike prices. The idea is to benefit from large price movements in either direction, and maximum loss is limited to the premiums paid.

Understanding Short Strangles

Short strangles are similar to long strangles, but involve selling rather than buying options. An investor sells both a call and a put option on the same asset with different strike prices, but the same expiration date.

The short strangle strategy looks to gain an advantage from low volatility, and the investor anticipates the asset’s price to stay between the strike prices of both options. Thus, the maximum profit is the total premium they receive from selling both options. If the asset’s price moves significantly beyond either strike price, however, the investor can face potentially unlimited losses, as they are obligated to buy or sell the asset at an unfavorable price.

Let’s say an investor sells a call and a put option on a stock with strike prices set above and below the current price. The investor does not foresee the stock price moving much outside the strike price. If the investor is right, and the stock stays between the two strike prices, they should be able to keep the premium. However, if the stock moves beyond either strike price, the investor faces potential losses as they must fulfill the option contracts at prices higher or lower than they may have expected.

7. Cash-Secured Puts

Level of Expertise: Intermediate

The cash-secured put strategy may generate income while positioning investors to potentially purchase a stock at a lower price than they might have through a simple market buy order.

With a cash-secured put, an investor writes a put option for a stock they do not own. The option has a strike price below the asset’s current trading level. The investor must have enough cash in their account to cover the cost of buying the shares per contract written, in case the stock trades below the strike price upon expiration (in which case they would be obligated to buy).

This strategy is often employed when the investor has a bullish to neutral outlook on the underlying asset. If exercised, the option writer receives shares below market price while also holding onto the premium. Alternatively, if the stock trades sideways, the writer will still receive the premium without being obligated to purchase the shares.

8. Bull Put Spreads

Level of Expertise: Advanced

A bull put spread strategy involves one long put with a lower strike price and one short put with a higher strike price. Both contracts have the same expiration date and underlying security. This strategy is intended to benefit from a rising stock price.

But unlike a regular call option, a bull put spread limits losses and can generate income from the premium received on the short put, as well as potentially from time decay. The maximum profit occurs if the stock price stays above the higher strike price at expiration, while the maximum loss occurs if the stock price falls below the lower strike price.

For example, a trader sells a put option with a higher strike price and buys a put option with a lower strike price, both on the same underlying asset. The maximum profit occurs if the stock price finishes above the higher strike price, making both options expire worthless. The maximum loss happens if the stock price falls below the lower put’s, as the trader incurs a net loss between the strikes, offset by the initial premium.

9. Iron Condors

Level of Expertise: Advanced

The iron condor consists of four option legs (two calls and two puts), and is designed to generate income in low-volatility environments through multiple options positions. Although the strategy has defined risk-reward limits, its potential for profit is small compared to the maximum possible loss if the asset price moves outside the defined range.

Here are the four legs. All four contracts have the same expiration:

1.   Buy an out-of-the-money put with a lower strike price

2.   Write a put with a strike price closer to the asset’s current price

3.   Write a call with a higher strike

4.   Buy a call with an even higher out-of-the-money strike.

An iron condor strategy works best in low-volatility conditions. The trade profits from net premiums collected if the underlying asset stays between the short call and short put strike prices by expiration. These trades have defined risk and reward parameters. The maximum loss is limited to the difference between the long and short strikes, minus the net premium, while the maximum profit is limited to the net premium collected.

Let’s say an individual makes an iron condor on shares of a company that show signs of low volatility. The trader’s best case scenario for these positions would be for all the options to expire worthless. In that case, the individual would collect the net premium from creating the trade.

Meanwhile, the maximum loss is the difference between the long call and short call strikes, or the long put and short put strikes, after taking into account the premiums collected from the trade.

10. Butterfly Spreads

Level of Expertise: Advanced

A butterfly spread is a combination of a bull spread and a bear spread and can be constructed with either calls or puts. Like the iron condor, the butterfly spread involves four different options legs. This strategy is used when a stock is expected to stay relatively flat until the options expire.

In this example, we’ll look at a long-call butterfly spread. To create a butterfly spread, an investor buys or writes four contracts:

1.   Buys one in-the-money call with a lower strike price

2.   Writes two at-the-money calls

3.   Buys another out-of-the-money call with a higher strike price.

The potential for maximum profit occurs if the stock reaches the middle strike price at expiration, since both short calls are exercised and the long calls no longer have intrinsic value. Maximum loss occurs when the stock price falls below the lower strike price, or if it rises above the higher strike price. Both would result in the loss of the total premium paid to open the position.

The Takeaway

Options trading strategies offer a way to potentially profit in almost any market situation — whether prices are going up, down, or sideways. The market is complex and highly risky, making it unsuitable for some investors, but for experienced traders, these strategies can be worth considering.

Each strategy comes with its own set of risks and rewards — as well as the potential for losses. Ensure that your strategy of choice aligns with your market outlook, investing goals, and risk tolerance.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

🛈 While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.


Photo credit: iStock/Rockaa
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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

SOIN-Q125-099

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What Is Cash Settlement in Options?

What Is Cash Settlement in Options?


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.

Cash settlement in options is a method where the buyer of an option contract receives a cash payment equal to the difference between the option’s strike price and the market price of the underlying asset, rather than the physical delivery of the underlying asset. This means that instead of receiving the stock or commodity, for example, the option holder will receive an equivalent amount of cash that’s determined when the option is exercised.

Cash settlement may be used in options trading because it allows traders to speculate on the price movement of securities without having to actually own or hold the underlying assets. This can be particularly useful for traders looking to hedge their positions or who want to avoid the potential market risks associated with holding the underlying assets.

Key Points

•   Cash settlement in options involves paying the difference between the strike price and the market price.

•   The cash settlement method is used for index options and other financial instruments.

•   Physical delivery of the underlying asset is not required.

•   Cash settlement simplifies the process and reduces transaction costs.

•   Settlement occurs on the expiration date or exercise date.

What Is Cash Settlement?

Cash settlement refers to a settlement method where the buyer of an option contract receives the cash difference between the strike price and the current market price of the underlying security. This is in contrast to the more traditional method of physical settlement, where the buyer of the option contract receives the underlying security upon exercise. Physical delivery and cash settlement are the two primary methods for settling a contract in options trading.

With physical delivery, the buyer of the option may receive, as an example, the shares of an equity or physical commodity when the option is exercised. Most listed equity options contracts are settled with the actual delivery of shares.

On the other hand, cash settlement allows the buyer of an option to receive the value of the underlying asset (per the contract terms) in the form of cash when the option is exercised rather than a stock or commodity. Equity index and binary options are often cash-settled.

Recommended: Options Trading 101: An Introduction to Stock Options

How Does Cash Settlement Work?

The purchaser of an options contract has the right, but not the obligation, to exercise their option, allowing them to buy (as with a call) or sell (as with a put) the underlying security at the agreed-upon price (called the strike price).

In a cash settlement, as noted above, the buyer of the option does not purchase or sell the underlying security. Instead, they receive a cash payout based on the difference between the strike price and the current market price of the underlying security.

Example of Cash Settlement

Suppose an investor buys a call option on a stock with a strike price of $50. This means the investor has the right to buy the stock at $50 per share at any time before the option expires, if the stock’s price is above the strike price. If the stock’s market price rises above $50, the option becomes “in the money,” and the investor can exercise their right to buy the stock at $50, even if the market price is higher.

Suppose that, when the option expires, the stock’s market price is $55 per share. If the option is cash-settled, the investor can exercise their right to buy the stock at $50 per share and thus receive a cash payment of $5 per share, which is the difference between the strike price and the market price, multiplied by the number of shares in the contract (typically 100). This means the investor would receive a total cash payment of $500 (assuming they exercised a standard options contract of 100 shares).

Alternatively, if the stock’s market price is below $50 when the option expires, the option becomes “out of the money,” and the investor will not exercise their right to buy the stock. In this case, the option would expire worthless, and the investor would not receive any cash payment.

Recommended: In the Money vs Out of the Money Options

Pros and Cons of Cash Settlement

There are certain advantages and disadvantages to settling options contracts with cash that are worth considering when trading options.

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Pros:

•   Improves liquidity across derivatives markets

•   Does not require delivery coordination and costs in commodities markets or delivery of shares in options trading

•   Allows parties to hedge and speculate financially on products that cannot be physically delivered

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Cons:

•   May not be available for all asset classes, such as equity options.

•   Primarily available on European-style options

•   Commodities producers and consumers might prefer physical delivery when the product is needed for use

Advantages of Cash Settlement

There are several advantages to using cash settlement in options trading. First, it can be more convenient for the buyer, as they do not have to worry about physically receiving and storing the underlying asset. Cash settlement can be beneficial for traders who cannot hold the underlying asset, such as those who are trading options on futures contracts of commodities.

Another advantage of cash settlement is that it can be more cost-effective. Since the buyer does not have to take possession of the underlying asset, they do not have to pay any additional fees or expenses associated with holding an asset like gold, oil, wheat, or other commodities. This can help to reduce the overall cost of trading options and make them more accessible to a broader range of investors.

In addition to these advantages, cash settlement can provide greater flexibility for options traders. With physical delivery, the buyer must take possession of the underlying asset when the option is exercised, which could limit their ability to trade the asset in the future. With cash settlement, the buyer could use the funds received from the option to buy or sell the underlying asset in the market, allowing them to potentially take advantage of changing market conditions.

Furthermore, cash settlement allows for a more efficient transaction in the overall derivatives markets — which includes options — adding to its liquidity.

Drawbacks of Cash Settlement

There are some drawbacks to cash settlement compared to physical settlement. For example, some investors may prefer the security and control that comes with physically owning and holding an underlying asset, rather than receiving a cash payment. This is because cash can be more easily lost, stolen, or subject to inflation, whereas physical assets may provide a more tangible form of wealth.

Also, cash settlement may not be available for all asset classes. While it is commonly used for index options and certain derivatives, many equity options and commodity contracts still require physical settlement. This can limit the flexibility of traders or investors who prefer the convenience of cash settlement.

Other cash settlement drawbacks include the fact that it is usually only available to European-style options, where the option holder can only exercise the contract at expiration rather than early like American-style options. Also, physical settlement may be preferred by traders who need the underlying asset for use.

Cash Settlement vs Physical Settlement

There are several important differences between cash settlement and physical settlement.

Definitional Differences

Cash settlement of options is a financial settlement where a cash payment covers the difference between an option’s strike price and the market price of the underlying asset. Physical settlement involves the actual transfer of the underlying asset. A common physical delivery example is a commodity, but it can also take the form of shares of an underlying financial asset, such as stock.

Mode of Payment

Option cash settlement payments are typically processed quickly through the clearing house. They are straightforward financial account transfers of the difference between the underlying asset’s spot price and the strike price of the options contract.

Physical settlement consists of delivery of the option’s underlying asset, which could be delivery of shares or physical delivery of a commodity that may require storage, such as an agricultural product.

Level of Liquidity

Liquidity is better in markets with a cash settlement option versus those with physical settlement only. More market traders — hedgers and speculators — can participate in cash-settled derivative markets since there can be lower capital requirements. Options traders can also engage in rolling options instead of exercising them.

Time Taken

Option cash settlement transactions are generally processed rapidly via electronic clearing systems, whereas physical delivery involves the potentially lengthy delivery time of the underlying commodity.

Level of Risk

Another potential benefit of cash settlement is that the operational and logistical risks are typically lower. Physical settlement often involves transfer certificates and other documents that could be susceptible to manipulation, loss, and theft.

Convenience

It is hard to argue with the convenience of cash settlement. Two parties square up using straightforward price differences rather than figuring out the logistics of the physical delivery of an asset. In some cases, such as with most equity index options, the contracts must be cash-settled. Cash settlement may also involve fewer fees since there’s no need to complete additional trades to manage delivery. However, paying any potential additional fees and holding or storing the underlying asset may well be worth the cost and effort, depending on an investor’s objectives.

Practicality

Due to the potentially lower costs involved and the ease of receiving a quick cash payment, option cash settlement may be more practical than physical settlement. However, the practicality of an investment really depends on what an investor is hoping to achieve and how well it aligns with both their short- and long-term goals.

Costs Involved

Trades with cash settlements can have low or even zero cost until settlement when the buyer and seller reconcile with a payment. With physical delivery, there may be several costs, such as transportation costs, delivery expenses, and broker fees.

Simplicity

One advantage of cash settlement is its simplicity, as it involves a single net payment rather than the logistical steps of transferring assets. However, physical settlement may be preferred by investors who want direct ownership of the underlying asset. Each method has its own benefits and drawbacks, depending on the investor’s goals.

Popularity

Cash Settlement

Physical Settlement

Popular with retail traders who might not want to take large physical deliveries Popular with commodities firms that use the underlying asset
Popular with exchanges since more traders can transact, leading to more commissions and better liquidity Popular with large exchanges since a single exchange can become the primary exchange for a certain asset
Popular with large traders since they can quickly settle contracts with low costs Popular with listed stock options traders if they want to take delivery of shares

The Takeaway

Cash settlement in options trading may provide a convenient and cost-effective way for buyers of options contracts to exercise their rights in relation to the underlying asset. By receiving the asset’s value in cash, traders can avoid the costs and complications associated with physical delivery while still maintaining the flexibility to use the funds they receive to trade the underlying asset in the market.

However, investors should be aware that most equity options are not cash-settled but are settled with the delivery of underlying shares of stock.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is the difference between a physical and cash settlement?

Cash settlement is a financial payment for the value of a stock or commodity underlying an options or futures contract when the holder exercises. Physical settlement entails the actual delivery of the underlying asset. In commodities markets, that means the commodity is delivered to the buyer. With equity options, physical delivery happens when the buyer receives shares of the underlying asset specified in the options contract.

Can you trade with unsettled cash?

Yes. You can use the proceeds from a sale to make another purchase in a cash account while your funds remain unsettled. Unsettled cash from a day trade cannot be used for another purchase until the settlement date.

Which futures are cash settled?

According to the CME Group, equity indexes and interest rate futures are the most common cash-settled markets. Some precious metals and foreign exchange markets also settle in cash, along with agricultural products. In the options market, cash-settled options include digital options, binary options, and plain-vanilla index options. Note: Binary options are considered high-risk and may not be available on all trading platforms.


Photo credit: iStock/FreshSplash

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

SOIN-Q125-110

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Smart Short Term Financial Goals You Can Set for Yourself

Smart Short-Term Financial Goals to Set for Yourself

Table of Contents

Short-term financial goals are generally things you want to achieve within one to three years. They can be “one and done” in nature (say, “Save enough money for a Caribbean vacation”), or they might be incremental steps to much larger financial goals, such as beginning to save for a child’s college tuition).

Setting financial goals can be an important step toward achieving them. After all, it’s probably not enough to simply hope your dreams become reality. Making a plan can significantly increase the likelihood that you’ll meet the goal. It will focus you on what you want to attain and help guide you toward getting there.

Here are some common short-term financial goals you may want to adopt plus intel on how to achieve them.

Key Points

•   Short-term financial goals are things you want to achieve within the next couple of years, such as paying off credit card debt or saving for a vacation or wedding.

•   Building an emergency fund is an important short-term financial goal to cover unexpected expenses and avoid relying on high-interest credit cards.

•   Budgeting can help you track your spending, prioritize your expenses, and work towards short-term financial goals.

•   Paying down credit card debt is crucial as high-interest rates can hinder progress towards other financial goals.

•   Contributing to your retirement fund, even in the short term, can have long-term benefits due to the power of compounding interest or dividends.

What Are Short-Term Financial Goals?

Short-term financial goals are typically objectives you want to attain within the next couple of years, unlike long-term financial goals (retirement, paying off a mortgage). Some examples of short-term financial goals include:

•   Paying off credit card debt

•   Saving for a vacation

•   Saving for a wedding

•   Stashing away money in an emergency fund.

Of course, goals will vary with your unique situation and . You might be totally focused on getting together enough money for the down payment on a new car, while your best friend might want to pay off their $10K in credit card debt.

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6 Short-Term Financial Goals

Take a closer look at some of the most common short-term financial goals.

1. Build an Emergency Fund

Often, a short-term financial goal involves saving for an emergency fund. This kind of fund usually contains enough cash to cover three to six months’ (or more in some cases) worth of living expenses. The idea is that, just in case something unexpected comes up — such as job loss or a major car repair — you can afford your bills without resorting to high-interest forms of funding, such as credit cards.

Not only can an emergency fund keep you out of debt, it can provide peace of mind. Knowing that it’s in place and that it’s growing can be an important form of financial security. Some tips:

•   You can build an emergency fund by putting some money towards it every month. Consider setting up a recurring automatic transfer to send whatever you can spare (even $20 per paycheck) to the fund.

•   It can be wise to set up a separate savings account for your emergency fund so you won’t be tempted to spend it. Look for a high-yield savings account to help your money grow faster.

•   To build your emergency fund more quickly, funnel a large payment, such as tax refund or bonus, right into this account. A money windfall can really help plump up your savings.

💡 Learn how much you should save for emergencies by using our Emergency Fund Calculator.

2. Make a Budget

Getting a sense of how much you are actually earning, spending, and saving each month is a critical step in working towards both short-term and long-term financial goals.

You can do this by tracking your income and expenses for a couple of months, to see what is flowing into and out of your checking account.

This will help you make a budget that helps keep your finances on track to meet your daily expenses and short-term savings goals. A few ways to accomplish this:

•   Review and test-drive a couple of budgeting techniques. One popular method is the 50/30/20 budget rule, which can guide you to put 50% of your take-home pay towards needs, 30% toward wants, and 20% toward saving. See if one type of budget clicks for you.

•   You might use a budgeting app to help you connect your accounts, categorize where your money is going, and see at a glance how you are progressing toward your short-term financial goals. A good place to start: See what kinds of financial insights tools your bank provides. You may find just what you are looking for.

•   Consider third-party budgeting apps. You might search online or ask trusted friends if they are using one that they would recommend.

Once you see where your money is actually going, you may discover some surprises (such as $200 a month on lunches out) and also find places where you can easily cut back. You might decide to bring lunch from home a few more days per week, for example. Or you might want to cut back on streaming services or ditch the gym membership and work out at home.

This money you free up can then be redirected towards your savings goals, like creating an emergency fund, buying a house, or funding your retirement.

3. Pay Down Credit Card Debt

Another important financial goal example is paying down credit card debt. If you carry a balance, you may want to make paying it off one of your top short-term financial goals. The reason: Credit card debt is typically high-interest debt. The average annual percentage rate, or APR, charged by credit cards was above 20% in mid-2024, according to the Federal Reserve Bank of St. Louis. That means that items you buy with a credit card could potentially cost you a hefty amount more than if you pay with cash.

What’s more, because the interest on credit card debt can be so costly, it can make achieving any other financial goals much more difficult. Here’s how you might work toward paying off your credit card debt:

•   You could try the debt avalanche method, which involves paying the minimum on all but your highest-rate debt. You then put all available extra funds toward the card with the highest interest debt. When that one is paid off, you would roll the extra payment to the card with the next-highest interest rate, and so on. By knocking out your highest-interest debt first, you may be able to save a chunk of money.

•   Another option for paying off debt is the debt snowball method. With this technique, you pay the minimum on all cards, but use extra money to pay off the debt with the smallest balance. When that’s paid off, you move to the next smallest debt and so on. This can give you a sense of accomplishment as you get rid of debt which in turn can help keep you motivated.

•   You might consider consolidating your debt by taking out a personal loan to pay off all of your cards. These usually offer a lump sum of cash to be paid off in two to seven years at a lower interest rate than credit cards. Having only one payment each month can help simplify the payoff process.

If you feel your debt burden is too great to be resolved with these options, you might want to speak to a certified credit counselor for advice.

4. Pay Off Student Loans

Student loans can be a drag on your monthly budget. Paying down student loans, and eventually getting rid of these loans, can free up cash that will make it easier to save for retirement and other goals.

One strategy that might help is refinancing your student loans into a new loan with a lower interest rate. You can check your balances and interest rates across your federal and private loans, and then plug them into a student loan refinancing calculator to see if refinancing offers an advantage.

Keep in mind, however, that if you refinance federal student loans with a private loan, you will lose access to such benefits as deferment and forgiveness. Also, if you refinance your loans into one with a longer term, you could wind up paying more in interest over the life of the loan.

Also note that not all refinancing options are created equal. There are bad actors out there who might promise to get rid of all your debt but will only damage your credit score. If you do refinance your student loans, you’ll want to make sure you’re working with a reputable lender.

5. Focus on Your Retirement Fund

Yes, saving for retirement is typically a long-term goal, but if you’re not yet saving for retirement, a great short-term financial goal may be to start doing so. Or, if you’re putting in very little each month, you may want to work on upping the amount. Here are a couple of specific ideas:

•   If your employer offers a 401(k) and gives matching funds, for example, it’s normally wise to contribute at least up to your employer’s match. You can then start increasing your contributions bit by bit each year.

•   If you don’t have access to a 401(k), consider an individual retirement account, or IRA. You may be able to set up an IRA online and start funding your retirement there. (Keep in mind that there are limits to how much you can contribute to a retirement plan per year that will depend on your age and other factors.)

While retirement is a long-term vs. short-term financial goal, taking advantage of this savings vehicle can reduce your taxes starting this year. Here’s why: Money you put into a retirement fund likely offers tax advantages, such as lowering your taxable income.

Even more importantly, starting early can pay off dramatically down the line. Thanks to the power of compounding returns (when the money you invest earns returns, and that then gets reinvested and earns returns as well), monthly contributions to a retirement fund can net significant gains over time.

6. Begin to Build Wealth

If you already have an emergency fund, you may want to start thinking about what you are hoping to buy or achieve within the next several years, and also building your wealth in general. As you save money, think about where to keep it to help it grow. The power of compounding returns, as mentioned above, or compounding interest in the case of a bank account, can really help in this pursuit.

•   For financial goals you want to reach in the next few months or years, consider putting this money in an online bank account that offers a high interest rate vs. a traditional savings account, but allows access when you need it. Options may include a HYSA (high-yield savings account, often found at online banks) or a money market account.

•   For longer-term savings, you may want to look into opening a brokerage account. This is an investment account that allows you to buy and sell investments like stocks, bonds, and mutual funds. A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA, but it is probably much more flexible in terms of when the money can be accessed.

Just keep in mind that there’s risk here: These funds will not be insured as accounts at a bank or credit union usually are. Bank or credit union accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000 per depositor, per account ownership category, per insured institution.

How Do You Create a Short-Term Financial Goal?

To create a short-term financial goal, identify what you want and how much money you need. Then, looking at your budget and seeing what cash you have available, see how long it will take to save up enough money. For instance, if you want to have $2,400 in a travel fund a year from now, you will need to put $200 a month aside. Check your cash flow and see where you can free up funds (maybe reduce takeout food and fancy coffees, for starters) to meet this goal.

How to Set SMART Financial Goals

In addition to the short-term financial goals examples and guidance above, there’s another way to think about this topic: using the acronym S.M.A.R.T. This system can help you both with identifying and achieving your goals. Here’s what this stands for and how considering your financial aspirations through this lens can be helpful:

•   Specific: A goal should identify exactly what you are saving for, whether that’s paying off credit-card debt or buying a used car.

•   Measurable: How much is your goal? How much do you need to save? Perhaps your credit card balance is $5,673. That would be your measurable goal.

•   Attainable: Make sure your goal is realistic (you may not be able to pay off your entire credit card debt in a month or even a few months) and develop strategies to achieve it, such as working on alternate Saturdays to bring in more money (a benefit of a side hustle).

•   Relevant: Check that your goal really matters to you and isn’t just something you’re doing to, say, keep up with your friend group. Do you really need to save towards a potentially budget-busting vacation?

•   Time-bound: Set “by when” dates for your goals. This helps to keep you accountable. If you want to save $3,600 for an emergency fund within a year, figure out how you will come up with the $300 per month to put aside.

Using the SMART method can help you crystallize and achieve your short-term financial goals.

Difference Between Short-Term and Long-Term Financial Goals

In discussing short-term financial goals, it’s likely that you might wonder how these differ from long-term goals. Here are a few examples that can help clarify the aspirations above from those that require a longer timeline.

Examples of Long-Term Goals

•   Save for retirement

•   Pay off a mortgage

•   Buy a second home or investment property

•   Save for a child’s (or grandchild’s) college education

•   Fund a business idea

•   Take out life insurance and/or long-term care policies

Of course, long-term goals will vary from person to person. One individual might be focused on being able to retire at age 50 while another might aspire to make a significant charitable contribution.

The Takeaway

Short-term financial goals are the things you want to do with your money within the next few years. Some typical (and important) short-term goals include setting a budget, starting an emergency fund, and paying off debt. In addition, opening a retirement account and otherwise building wealth can be valuable goals, too.

Having the right banking partner can help you reach your near-term money goals. See what SoFi offers.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.


About the author

Julia Califano

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.



SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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


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.

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Guide to Writing Call Options: What You Should Know

Guide to Writing Call Options: What You Should Know


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.

Writing a call option refers to selling a call option contract to a buyer in exchange for a premium, or fee. The writer agrees to sell the option’s underlying stock at a fixed price (the strike price) if the buyer exercises the option within a set time frame.

There are two ways to write a call option — sell a covered call or sell a naked call.

•   Writing a covered call means selling an option on an underlying stock that you own.

•   Writing a naked call means selling an option on a stock you do not currently own.

The biggest difference between these two paths is the risk profile. Your risk with covered calls is that you may miss out on some of the upside gains if the stock’s price goes above the strike price of your call option.

When you sell a naked call, however, you have no risk protection and theoretically unlimited risk.

Key Points

•   Writing call options involves selling the right to buy an asset at a fixed price, in a set time frame.

•   Writing call options generates income through the premiums received.

•   Covered calls limit risk because the seller owns the underlying shares and can deliver them if assigned.

•   Risk in covered calls is limited to the difference between the strike price and the market price of the underlying asset.

•   Naked calls have higher risk and potential for theoretically unlimited losses.

What Are Calls?

To understand writing call options, it can be helpful to consider the basics of call vs. put options: When you buy a call option at a specific strike price, you have the right (but not the obligation) to purchase the underlying stock at the strike price of the option over a given time period.

Buying a put gives you the right, but not the obligation, to sell the underlying stock at the strike price before expiration.

To learn how to trade options, it’s important to understand the differences between calls and puts, when to buy or sell options, and how to develop options strategies to minimize risk. When you buy an option, your maximum risk is capped at the amount of the premium, or fee, that you initially paid for the option. But when you write a call option or put option, your risk can be substantial or theoretically infinite.

Writing Call Options

Writing call options is similar to writing put options in that you initially sell the option for a premium. When you write a call option, you are creating a new option contract that allows the buyer the right to buy the stock at the specified strike price at any time on or before the expiration date.

When you write a call option, the option holder may exercise their right to buy the stock at the strike price at any time. In practice, early exercise is rare and typically occurs when the option is deep in-the-money, particularly if there is little time value remaining before expiration.

Recommended: Margin vs Options Trading: Similarities and Differences

Writing Call Option Strategies

There are different options trading strategies you could use when writing call options, depending on whether you have a bullish or bearish outlook for a given stock. Here are two of the most common call writing option strategies:

Writing Covered Calls

One common options strategy is writing covered calls. A call is considered a “covered” call when you also own at least 100 shares of the underlying stock. Writing covered calls is a popular income strategy if you think that the stock you hold will move within a specific range. You then might write a covered call with a strike price a little above the expected price range.

When you write covered calls, you will collect an initial premium since you are the seller of the option contract. Your best case scenario is that the underlying stock will close below the strike price of the call option at expiration. That means that the call will expire worthless, and you will keep the entire premium. If the stock closes above the strike price at expiration, you will be forced to sell your shares of stock at the strike price. This means that you may miss out on any additional gains for the stock.

Writing Naked Calls

Understanding what naked calls are is essential for options traders. A naked call is written when the seller does not own the underlying stock, creating the potential for unlimited losses. Unlike covered calls, writing naked calls comes with significant risk. Since a stock has no maximum price, you have unlimited exposure. The more a stock’s price rises above the strike price of the call option, the more money you will lose on the trade.

Due to the potential for unlimited losses, writing naked calls is considered a high-risk strategy and is typically used by traders with significant options experience or investors with a high risk tolerance. It’s important to understand these risks before writing naked calls, and you should also have a plan for what you will do if the stock moves unfavorably.

Writing Call Options Example

To understand the difference between writing covered calls and naked calls, here are two examples.

Covered Call Example

Say that an investor owns 100 shares of a stock with a cost basis of $65. Expecting the stock to trade between $60 to $70, the investor writes a covered call with a one-month expiration and a strike price of $70, collecting $1.25 in premium, or $125 ($1.25 x 100 shares).

If the stock closes below $70 at expiration, the investor retains their shares and the full $125 premium. Since the stock remains in their portfolio, another covered call could be written in the following month, which may generate additional premium income.

If the stock rises to $75 by the expiration date, the writer will be obligated to sell 100 shares of stock at the strike price of $70. Because the investor already owns 100 shares, they would be assigned. A broker facilitates the sale at $70/share, resulting in a $500 opportunity loss versus the $75 market price.

Naked Call Example

Assume that an investor has a bearish outlook on a stock that is currently trading at $100 a share. The investor decides to execute a naked call, meaning writing a call option for stock they don’t already own. They sell a call option with a $110 strike price for a premium of $4.25, collecting $425 upfront ($4.25 x 100 shares per the option contract). If the stock closes below $110/share at expiration, the contract expires worthless, allowing the investor to keep the entire $425 option premium.

If the stock price rises to $250 per share, for example, the seller would need to buy 100 shares for $25,000 and then sell them at a strike price of $110 per share to the buyer, incurring a $14,000 loss. This loss is offset slightly by the $425 premium initially collected.

The Takeaway

Writing call options may serve as an income-generating options trading strategy under certain market conditions. Writing covered calls on stocks already held in a portfolio may provide additional income, but limits profit potential if the stock price rises significantly.

A naked call involves writing calls on stocks the seller does not own. This strategy could result in substantial losses, depending on price movement, making risk management essential.

Explore SoFi’s user-friendly options trading platform.

🛈 While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

FAQ

Is writing a call option the same thing as buying a put?

Writing a call option and buying a put are different strategies with distinct risk profiles. An investor writing a call collects a premium but may be required to sell shares of the underlying asset at the strike price if assigned. A put gives the buyer the right to sell shares at a set price. Put buyers risk only the premium paid, whereas uncovered call writers face significant risk, as losses can increase indefinitely if the stock price continues to rise.

Does a writer of a call option make an unlimited profit?

No, a call option’s writer’s profit is capped at the premium collected. If the stock closes below the strike price at expiration, the option expires worthless, and the writer keeps the full premium. Unlike buyers, call writers do not benefit from stock price gains beyond the premium received.

How are call options written?

Writing a call option is another way to say that an investor is selling a call option. The call option seller receives a premium in exchange for giving the buyer the right (but not the obligation) to buy 100 shares of the stock at a predetermined strike price before expiration. If the option is exercised, the seller must deliver shares at the strike price, regardless of the market price at the time.


Photo credit: iStock/PeopleImages

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
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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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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TFSA vs RRSP: What’s the Difference?

TFSA vs RRSP: What’s the Difference?

Both TFSAs and RRSPs are accounts that provide Canadian consumers with a chance to save while enjoying investment earnings and unique tax benefits. While a TFSA acts as a more general savings account, an RRSP is used for retirement savings.

Saving is never a bad idea, so here you can learn the difference between these accounts and how they can play a role in securing your financial future.

Keep reading for a more detailed breakdown of a TFSA vs. RRSP so you can make the right financial move for your needs.

🛈 Currently, SoFi does not provide RRSP and TFSA accounts.

What Is the TFSA?

A Tax-Free Savings Account (TFSA) is a type of registered tax-advantaged savings account to help Canadians earn money on their savings — tax-free. TFSA accounts were created in 2009 by the Canadian government to encourage eligible citizens to contribute to this type of savings account.

Essentially, a TFSA holds qualified investments that can generate capital gains, interest, and dividends, and they’re tax-free. These accounts can be used to build an emergency fund, to save for a down payment on a home, or even to finance a dream vacation.

A TFSA can contain the following types of investments:

•   Cash

•   Stocks

•   Bonds

•   Mutual funds

It’s possible to withdraw the contributions and earnings generated from dividends, interest, and capital gains without having to pay any taxes. Accountholders don’t even have to report withdrawals as income when it’s time to file taxes.

There is a limit to how much someone can contribute to a TFSA on an annual basis. This limit is referred to as a contribution limit, and every year the Canadian government determines what the contribution limit for that year is. If someone doesn’t meet the contribution limit one year, their remaining allowed contributions can be made up for in following years.

To contribute to a TFSA, an individual must be at least 18 years of age and be a Canadian resident with a valid Social Insurance Number (SIN).

What Is the RRSP?

A Registered Retirement Savings Plan (RRSP) is, as the name indicates, a type of savings plan specifically designed to help boost retirement savings. To obtain one, a Canadian citizen must register with the Canadian federal government for this financial product and can then start saving.

When someone contributes to an RRSP, their contributions are considered to be tax-advantaged. What this means: The funds they contribute to their RRSP are exempt from being taxed the year they make the contribution (which can reduce the total amount of taxes they need to pay for that year). On top of that, the investment income these contributions generate will grow tax-deferred. This means the account holder won’t pay any taxes on the earnings until they withdraw them.

Unlike a TFSA, there isn’t a minimum age requirement to open and contribute to an RRSP. That being said, certain financial institutions may require their customers to be the age of majority in order to contribute. It’s possible to contribute to an RRSP until the year the account holder turns 71 as long as they are a Canadian resident, earned an income, and filed a tax return.

Keep reading for a TFSA vs. RRSP comparison.

Similarities Between a TFSA and an RRSP

How does a TFSA vs. RRSP compare? There are a few similarities between TFSAs and RRSPs that are worth highlighting. Here are the main ways in which they are the same:

•   Only Canadians citizens can contribute

•   Contributions can help reach savings goals

•   Investments can be held in each account type

•   Both accounts offer tax advantages.

Differences Between a TFSA and RRSP

Next, let’s answer this question: What is the difference between an RRSP and a TFSA? Despite the fact that both an RRSP and a TFSA share similar goals (saving money and earning interest on it) and advantages (tax benefits), they have some key differences to be aware of.

•   Intended use. RRSPs are for retirement savings whereas TFSAs can be used to save for any purpose.

•   Age eligibility. To contribute to a TFSA one must be 18 years old, but there isn’t an age requirement to open an RRSP.

•   Contribution limit. The limits are usually set annually and are different for TFSAs and RRSPs. The contribution limit for an RRSP is the lesser of either 18% of earned income reported on an individual’s tax return for the previous year or the contribution limit, which is $31,560 for 2024 and $32,490 for 2025. The limit for a TFSA is $7,000 for 2024 and 2025.

•   Taxation on withdrawals. While RRSP withdrawals are taxable (but subject to certain exceptions), TFSA withdrawals can be made at any time tax-free.

•   Taxation on contributions. Contributions made to a TFSA aren’t tax-deductible, but RRSP contributions are.

•   Plan maturity. An RRSP matures at the end of the calendar year that the account holder turns 71. TFSAs don’t have age limits for account maturity.

•   Spousal contributions. There is no form of spousal TFSA available, but someone can contribute to a spousal RRSP.

How Do I Choose Between a TFSA and RRSP?

Choosing between a TFSA and an RRSP depends on someone’s unique savings goals and tax preferences. That being said, if someone’s main goal is saving for retirement, they’ll likely find that an RRSP is the right fit for them. When someone contributes to an RRSP, they can defer paying taxes during their peak earning years. Once they retire and make withdrawals (which they will need to pay taxes on), they will ideally have a lower income (and be in a lower tax bracket) and smaller tax liabilities at that point in their life.

If someone wants to be able to use their savings for a variety of different purposes (perhaps including a medium-term goal like the amount needed for a down payment on a home), they may find that a TFSA offers them more flexibility.
That said, there’s no reason TFSA savings can’t be used for retirement later on. Contributing to a TFSA is a great option for someone who has already maxed out their RRSP contributions for the year, but who wants to continue saving and enjoying tax benefits.

Recommended: What Tax Bracket Do I Fall Under?

Can I Have Both a TFSA and RRSP?

It is indeed possible to have both an RRSP and TFSA and to contribute to them at the same time. Putting money into both of these financial vehicles can be a great way to save. There are no downsides associated with contributing to both an RRSP and TFSA at the same time if a person can afford to do so.

Can I Have Multiple RRSP and TFSA Accounts?

Yes, it’s possible to have more than one TFSA and RRSP open at the same time, but there’s no real benefit here. The same contribution limits apply.

That means that opening more than one version of the same account or plan only leads to having more accounts to manage and incurring more administration and management fees. Just as you don’t want to pay fees on your checking account and other bank accounts, you probably don’t want to burn through cash on fees here.

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*Earn up to 4.00% Annual Percentage Yield (APY) on SoFi Savings with a 0.20% APY Boost (added to the 3.80% APY as of 7/10/25) for up to 6 months. Open a new SoFi Checking & Savings account and enroll in SoFi Plus by 8/12/25. Rates variable, subject to change. Terms apply here. SoFi Bank, N.A. Member FDIC.

Should I Prioritize One Over the Other?

Which type of account someone should prioritize depends on their savings goals. Their preferences regarding the unique tax advantages of each account may also come into play. That being said, if someone is focused on saving for retirement, they’ll likely want to make sure they max out their RRSP contributions first.

The Takeaway

Both RRSP and TFSA accounts are great ways for Canadian citizens to save for financial goals like retiring or financing a wedding. Each account has unique advantages and contribution limits. While an RRSP account is designed to help with stashing away cash for retirement, a TFSA account can be used to save for any type of financial need. Whether you choose one or both of these products, you’ll be on a path towards saving and helping to secure your financial future.

FAQ

Is it better to invest in TFSA or RRSP?

When it comes to TFSA vs. RRSP, there’s no right answer to whether investing in one is better than the other. Someone focused on saving for retirement may want to prioritize an RRSP, while someone who wants to save for other expenses (like a home or wedding) may find a TFSA more appealing.

Should I max out RRSP or TFSA first?

If someone is focused on saving for retirement, they may want to max out their RRSP first. That being said, this is a personal decision that depends on unique financial goals and tax preferences.

When should you contribute to RRSP vs TFSA?

Typically, the contribution deadline for RRSPs is around March 1st. A Canadian citizen can put funds in a TFSA at any point in a calendar year, and if they don’t max out their account, they will usually be able to contribute the remaining amount in the future.


About the author

Jacqueline DeMarco

Jacqueline DeMarco

Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.



Photo credit: iStock/anilakkus

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