Mar
24
2025

Tips for Helping Your Parents Retirement

By | invest, Investing, Preparing for Retirement | Comments Off on Tips for Helping Your Parents Retirement

Saving for retirement can have its challenges, and there’s one you might not be expecting. You may find yourself helping to plan your parents’ retirement if they’ve fallen short of their savings goals.

Learning that your parents have no, or very little, retirement savings may be disheartening, especially if you’re expected to help fill the gaps in their financial plan. Figuring out how to retire your parents while still keeping your own financial goals in sight can be tricky, but it’s not impossible.

Key Points

•   Encourage your parents to discuss retirement openly and build a support system to address financial concerns.

•   Your family or a financial advisor can help analyze parents’ financial situation, including savings, debts, and monthly expenses, to plan effectively.

•   Help parents find ways to save for retirement by reducing expenses and increasing income.

•   If your parents have earned income, ask them to consider opening a retirement investment account, like an IRA, to boost savings.

•   Utilize available resources and federal programs to support parents’ retirement planning and saving.

What to Do If Your Parents Didn’t Save for Retirement

When your parents can’t afford to retire your first instinct might be to get angry or place blame. However, it’s important to remember that you’re not alone and there are others like you in the same situation.

Consider this: More than half of retirees and pre-retirees aged 50 to 74 report feeling financially fragile. And the median retirement savings among them, per recent data, was just $128,000. Among pre-retirees, too, almost one-third said they had no plans for when to retire.

Statistically, women are less likely to have retirement savings than men. About 50% of women aged 55 to 66 have nothing saved for retirement, compared to 47% of men according to Census Bureau data. Being married more than once decreases women’s likelihood of having something saved for retirement.

The numbers aren’t encouraging, but it’s not too late to help your parents get back on track to retire. Assuming one or both of your parents are still working there are some things you can do to help them make the most of their current income in order to save for retirement.

How to Help Your Parents Retire

Retiring your parents may not be an easy task but it’s important to stay focused on the bigger goal. Also, remember that while it’s fine to want to help your parents retire, sidelining your own finances to do that could put your own retirement at risk.

1. Talk to Them About the Situation

Talking about money with your parents may be uncomfortable if they’ve never been forthcoming about their finances. However, it’s important to have an honest discussion about where they are with regard to retirement planning.

Doing so can help you both set realistic expectations. Some of the possible topics to discuss include:

•   Living arrangements: Will they continue to live in their current home? If so, is that home paid for? And if they don’t plan to stay in the home, will they expect to live with you or move somewhere else?

•   Financial support: If they lack retirement savings of any kind, will they expect you to help out financially? If the answer is yes, what does that translate to in hard numbers?

•   Long-term planning: Should one or both of your parents require nursing care, what will that look like? Will you be their caregiver or will they need to move to an assisted living or long-term care facility? How much will that cost and where will the money come from to pay for it?

Those are just some of the issues that might come as you dig into the retirement planning conversation. Keep in mind that it shouldn’t be a one-time chat, either. If you’re planning to help retire your parents, then you’ll all need to be comfortable with discussing it on an ongoing basis.

2. Get Support

Trying to help your parents retire can be overwhelming and it’s a good idea to look for outside support if possible. If you have siblings, for example, you can ask them to join in the discussions about money and retirement planning. You might enlist the help of your parents’ siblings if you’re an only child.

It may also be beneficial to get an expert’s opinion. If your parents are receptive, you might want to consult with an advisor who specializes in financial planning or starting a retirement plan for families, whether that entails opening an IRA online or managing debt. They may be able to offer outside perspectives on the biggest issues that need to be addressed right away to get their retirement plan in shape.

3. Break Down the Numbers

Figuring out how to help your parents retire means taking a close look at their finances. Depending on your family situation, there might be some pushback here but it’s important for you and your parents to sit down and do the math.

Specifically, it’s helpful to understand:

•   How much they have saved for retirement, if anything

•   What retirement benefits they have through their employer (i.e., a 401(k), pension, etc.)

•   How much debt they’re carrying and what types of debt they have

•   What their spending looks like in a typical month and how that might change once they retire

•   What type of assets they might have, such as a home, investments, or a life insurance policy

Having the numbers in front of you can help figure out what’s realistic, with regard to how much income they’ll need to fund their lifestyle in retirement and how much financial support you might need to provide.

4. Help Them Find Money to Save

If your parents have money coming in from working, then you’re already one step ahead of the game in helping them prepare for retirement. The challenge now is to help them find the money they need to set aside something for the future.

There are several ways to do that:

•   Reduce expenses

•   Increase income

•   Look for “free” money

If you’ve already gone over the details of their monthly spending, the next step is walking through their budget with them to find expenses they can cut out. The more drastically your parents can cut their expenses, the more money they may be able to free up for retirement savings.

When there’s debt in the picture, whether it’s credit cards, car loans, or a mortgage, consider how they could get rid of those expenses. Taking a personal loan to consolidate credit cards, for example, could help them save on interest while paying off what they owe faster. The same goes for refinancing their mortgage.

Increasing income may be trickier, but you could suggest things like getting a part-time job or second job, or starting a small side hustle. Even something like selling things around the house they don’t need can bring in extra income they could use to save for retirement.

Finally, consider what free money they might be passing up. If they have a 401(k) at work, for example, but aren’t contributing enough to get the full company match then a simple adjustment to their annual contribution rate could fix that. That’s a smart way to encourage them to start investing or at least reviewing stock market basics in retirement with the income they already have.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

5. Open a Retirement Investment Account

If your parents don’t have a 401(k) or similar plan at work, it’s never too late to think about starting a retirement plan. And even if they do have a workplace plan, they could still benefit from opening a secondary account for retirement savings.

Among the different types of retirement plans, an Individual Retirement Account (IRA) is the most accessible for savers who have earned income. You could encourage your parents to open a traditional or Roth IRA, depending on their current tax situation and where they expect to be tax-wise once they retire.

With traditional IRAs, contributions are typically tax-deductible and anyone can contribute. A Roth IRA, on the other hand, allows for tax-free qualified withdrawals in retirement. Eligibility to contribute is based on income and filing status. Understanding the differences can help with choosing a retirement plan for your parents, or yourself if you have yet to start saving.

6. Take Advantage of Available Resources

There are numerous federal programs that are designed to help retirees manage their financial lives. Researching what’s available can help you figure out what benefits your parents might qualify for once they retire.

For example, it’s important to consider when parents should take Social Security benefits if they don’t have retirement savings. The earliest age for claiming benefits is 62, but taking benefits early can reduce the amount retirees receive. Delaying benefits to age 70 can increase their monthly payments, but that may not be realistic.

Other options for getting financial help include:

•   Medicare, which provides health insurance coverage for seniors 65 and older

•   Medicaid, which provides healthcare services for low-income families and individuals

•   HUD public housing (for seniors with disabilities or limited income)

•   Assistance programs that help with utility bills, heating bills, or phone bills

•   Food assistance programs, including Supplemental Nutrition Assistance Program (SNAP) Benefits, and Meals on Wheels

•   Assistance programs for military veterans if either of your parents served in the armed forces

•   Property tax or homestead exemptions for seniors

•   Programs that help with home repairs for eligible seniors

Your parents may not need all of these programs, but it’s still a good idea to know what’s out there. If you’re not sure how to find resources for retirees, you can contact your local departments of health, social services, or adult services to ask for guidance. You can also try your local council on aging, if one exists in your area.

7. Address Long-Term Financial Planning

One of the most staggering costs in retirement for many seniors is healthcare. At the low end, the cost may average almost $25,000 per year for adult assisted living or community care. At the high end, you might pay almost $117,000 on average annually for a private room in a nursing phone.

Purchasing long-term care insurance can help to pick up the tab but policies can be expensive. Medicaid could pay for coverage but your parents would need to meet the income and resource guidelines set by their state to qualify for help.

A hybrid life insurance policy could kill two birds with one stone, so to speak. These policies can pay out benefits toward long-term care during your parents’ lifetime should they need them. They can also pay out a death benefit when they pass away, which could help you to cover things like final expenses or any remaining debts they leave behind.

Again, it may be in everyone’s best interest to sit down and talk these things through with a financial advisor, which may help them think about starting a retirement plan.

Investing for Retirement With SoFi

Discussing their financial plan and sharing tips for investing can help your parents to feel more comfortable about the idea of retirement. At the same time, it’s important to consider where you are on your financial journey. It’s generally a good idea to start saving for retirement as early as possible, but if your parents did not, there are still options.

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 grow your nest egg with a SoFi IRA.

FAQ

Can I open a retirement account for my parents?

No, but you can help them open a retirement account of their own. For example, you could walk them through opening a traditional or Roth IRA at a brokerage. You can also help them to review their retirement account options at work to make sure they’re getting the most benefit possible.

What do you do when your parents haven’t saved for retirement?

When parents have no retirement savings, it’s important to take a deep breath and not panic. It’s possible to help your parents get on track with retirement savings if they’re committed to setting realistic expectations and taking action to set aside as much money as possible in the remaining years before they retire. You may also encourage them to talk to a financial advisor about how to get their finances in shape.

How much does the average family need to retire?

The amount of money one family needs to retire may be very different from another’s, depending on the number of family members and their desired retirement lifestyle. Saving at least $1 million for retirement is a commonly-accepted target, though it may be possible for one person to retire with just $500,000 while someone else might need $2 million to live comfortably.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.


Photo credit: iStock/Fly View Productions

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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Mar
24
2025
What Is a Guaranteed Minimum Income Benefit (GMIB)?

What Is a Guaranteed Minimum Income Benefit (GMIB)?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is a Guaranteed Minimum Income Benefit (GMIB)?

A guaranteed minimum income benefit (GMIB) is an optional rider that can be included in an annuity contract to provide a minimum income amount to the annuity holder. An annuity is an insurance product in which you pay a premium to the insurance company, then receive payments back at a later date. There are a number of different types of annuities, with different annuity rates.

A GMIB annuity can ensure that you receive a consistent stream of guaranteed income. If you’re considering buying an annuity for your retirement, it’s helpful to understand what guaranteed minimum income means, and how it works.

Key Points

•   A Guaranteed Minimum Income Benefit (GMIB) is an optional rider in an annuity contract ensuring a minimum income.

•   GMIBs protect annuity payments from market volatility, offering stable income in retirement.

•   These benefits are available in variable or indexed annuities, which tie earnings to market performance.

•   The cost of GMIBs can be high, as adding riders increases the overall expense of the annuity.

•   Evaluating the financial stability of the annuity provider is crucial, as the company’s health impacts the security of the guaranteed income.

GMIBs, Defined

A guaranteed minimum income benefit (GMIB) is a rider that the annuity holder can purchase, at an additional cost, and add it onto their annuity. The goal of a GMIB is to ensure that the annuitant will continue to receive payments from the contract — that’s the “guaranteed minimum income” part — without those payments being affected by market volatility.

Annuities are one option you might consider when starting a retirement fund. But what are annuities and how do they work? It’s important to answer this question first when discussing guaranteed minimum income benefits.

As noted, an annuity is a type of insurance contract. You purchase the contract, typically with a lump sum, on the condition that the annuity company pays money back to you now or starting at a later date, e.g. in retirement.

Depending on how the annuity is structured, your money may be invested in underlying securities or not. Depending on the terms and the annuity rates involved, you may receive a lump sum or regular monthly payments. The amount of the payment is determined by the amount of your initial deposit or premium, and the terms of the annuity contract.

A GMIB annuity is most often a variable annuity or indexed annuity product (though annuities for retirement can come in many different types).

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How GMIBs Work

Let’s look at two different types of annuities for retirement: variable and indexed.

•   Variable annuities can offer a range of investment types, often in the form of mutual funds that hold a combination of stocks, bonds, and money market instruments.

•   Indexed annuities offer returns that are indexed to an underlying benchmark, such as the S&P 500 index, Nasdaq, or Russell 2000. This is similar to other types of indexed investments.

With either one, the value of the annuity contract is determined by the performance of the underlying investments you choose.

When the market is strong, variable annuities or indexed annuities can deliver higher returns. When market volatility increases, however, that can reduce the value of your annuity. A GMIB annuity builds in some protection against market risk by specifying a guaranteed minimum income payment you’ll receive from the annuity, independent of the annuity’s underlying market-based performance.

Of course, what you can draw from an annuity to begin with will depend on how much you invest in the contract, stated annuity rates, and to some degree your investment performance. But having a GMIB rider on this type of retirement plan can help you to lock in a predetermined amount of future income.

Recommended: Types of Retirement Accounts

Pros & Cons of GMIBs

Guaranteed minimum income benefit annuities can be appealing for investors who want to have a guaranteed income stream in retirement. Whether it makes sense to purchase one can depend on how much you have to invest, how much income you’re hoping to generate, your overall goals and risk tolerance.

Weighing the pros and cons can help you to decide if a GMIB annuity is a good fit for your retirement planning strategy.

Pros of GMIBs

The main benefit of a GMIB annuity is the ability to receive a guaranteed amount of income in retirement. This can make planning for retirement easier as you can estimate how much money you’re guaranteed to receive from the annuity, regardless of what happens in the market between now and the time you choose to retire.

If you’re concerned about your spouse or partner being on track for their own retirement, that income can also carry over to your spouse and help fund their retirement needs, if you should pass away first. You can structure the annuity to make payments to you beginning at a certain date, then continue those payments to your spouse for the remainder of their life. This can provide reassurance that your spouse won’t be left struggling financially after you’re gone.

Cons of GMIBs

A main disadvantage of guaranteed minimum income benefit annuities is the cost. The more riders you add on to an annuity contract, the more this can increase the cost. So that’s something to factor in if you have a limited amount of money to invest in a variable or indexed annuity with a GMIB rider. Annuities may also come with other types of investment fees, so you may want to consult with a professional who can help you decipher the fine print.

It’s also important to consider the quality of the annuity company. An annuity is only as good as the company that issues the contract. If the company were to go out of business, your guaranteed income stream could dry up. For that reason, it’s important to review annuity ratings to get a sense of how financially stable a particular company is.

Examples of GMIB Annuities

Variable or indexed annuities that include a guaranteed minimum income benefit can be structured in different ways. For example, you may be offered the opportunity to purchase a variable annuity for $250,000. The annuity contract includes a GMIB order that guarantees you the greater of:

•   The annuity’s actual value

•   6% interest compounded annually

•   The highest value reached in the account historically

The annuity has a 10-year accumulation period in which your investments can earn interest and grow in value. This is followed by the draw period, in which you can begin taking money from the annuity.

Now, assume that at the beginning of the draw period the annuity’s actual value is $300,000. But if you were to calculate the annuitized value based on the 6% interest compounded annually, the annuity would be worth closer to $450,000. Since you have this built into the contract, you can opt to receive the higher amount thanks to the guaranteed minimum income benefit.

This example also illustrates why it’s important to be selective when choosing annuity contracts with a guaranteed minimum income benefit. The higher the guaranteed compounding benefit the better, as this can return more interest to you even if the annuity loses value because of shifting market conditions.

It’s also important to consider how long the interest will compound. Again, the more years interest can compound the better, in terms of how that might translate to the size of your guaranteed income payout later.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

The Takeaway

As discussed, guaranteed minimum income benefits (GMIB) are optional riders that can be included in an annuity contract to provide a minimum income amount to the annuity holder. Annuities can help round out your financial strategy if you’re looking for ways to create guaranteed income in retirement.

Annuities may be a part of a larger investment and retirement planning strategy, along with other types of retirement accounts. To get a better sense of how they may fit in, if at all, it may be a good idea to speak with a financial professional.

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Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

What are guaranteed benefits?

When discussing annuities for retirement, guaranteed benefits are amounts that you are guaranteed to receive. Depending on how the annuity contract is structured, you may receive guaranteed benefits as a lump sum payment or annuitized payments.

What is the guaranteed minimum withdrawal benefit?

The guaranteed minimum withdrawal benefit is the amount you’re guaranteed to be able to withdraw from an annuity once the accumulation period ends. This can be the annuity’s actual value, an amount that reflects interest compounded annually or the annuity contract’s highest historical value.

What are the two types of guaranteed living benefits?

There are actually more than two types of guaranteed living benefits. For example, your annuity contract might include a guaranteed minimum income benefit, guaranteed minimum accumulation benefit or guaranteed lifetime withdrawal benefit.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.


Photo credit: iStock/Luke Chan

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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Mar
23
2025
What Are Vanilla Options? Definition & Examples

What Are Vanilla Options? Definition & Examples

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Are Vanilla Options? Definition & Examples

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.

Vanilla options are put or call contracts that give traders the right to buy or sell an underlying asset at a predetermined price before a set expiration date. The most basic type of options contracts, vanilla options follow standard contract terms (e.g., fixed expiration dates and strike prices) and are traded on exchanges like the Chicago Board Options Exchange (CBOE). This is in contrast to exotic options which allow for more customization and are generally traded over-the-counter (OTC) through a broker-dealer network.

Key Points

•   Vanilla options are standard contracts with fixed features, including expiration dates and strike prices.

•   Vanilla options are traded on exchanges, unlike exotic options.

•   Calls allow options buyers to buy an option’s underlying asset at a fixed price, while puts allow buyers to sell the asset at a fixed price.

•   Premiums are paid for options, representing the cost of the contract.

•   Options can be used for hedging, income, or speculation, with associated risks.

Vanilla Option Definition

The term “vanilla options” refers to standard contracts in options trading. They come with fixed features, including expiration dates, strike prices, and contract sizes.

What Are Options Contracts?

Buying an option is purchasing a contract that represents the right, though not the obligation, to buy or sell an underlying security at a fixed price (the strike price) by a specified date (the expiration).

•   The options buyer (or holder) has the right, but not the obligation, to buy or sell the underlying asset (e.g. stock shares) at a certain price by the expiration date of the contract. Buyers pay a premium for each option contract; this is the cost of the option.

•   The options seller (or writer), who is on the opposite side of the trade, has the obligation to fulfill the contract terms, such as selling or buying the underlying asset at the agreed-upon price (i.e. strike price) if the options holder exercises their contract.

What Are Exotic Options?

To understand what makes an exotic option exotic, let’s review a traditional vanilla options contract and how it works.

When trading a traditional option, the owner can buy or sell the underlying security for an agreed-upon price, either before or at the option’s expiration date. The holder is not, however, obligated to exercise the option, hence the name.

An exotic option typically has all of those features, but with complex variations in the times when the option can be exercised, as well as in the ways investors calculate the payoff. For those features, they typically charge a higher price than traditional options. Also, unlike standard vanilla options which are traded on an exchange, exotic options are usually traded in over-the-counter (OTC) markets.


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

What are the Different Types of Vanilla Options?

There are two types of vanilla options: calls and puts.

Calls

A call option allows an investor to buy 100 shares of an underlying stock or other security at the agreed-upon strike price. A call option gives a buyer a way of profiting from a stock’s price increase without having to purchase the underlying 100 shares. The call buyer only pays a premium per share, which is much lower than the price of the stock.

The profit from a call option is determined by both the premium an investor pays and whether they’re able to exercise the option to buy the underlying asset at the lower strike price. (On the opposite side of the trade, the call writer is obligated to sell the buyer the shares if they decide to exercise.)

A call option buyer can also sell the call option for a premium. By selling the option itself, an investor doesn’t have to take delivery of the underlying shares and may profit from the increasing value of the option.

Note: If the price of the stock falls instead of rises, the maximum loss for the buyer is limited to the cost of the premium paid. However, the potential loss for the option writer can be substantial — theoretically unlimited — since the stock price could continue rising with no cap.

Puts

A put option is essentially the inverse of a call option. Instead of giving the buyer the right to purchase an asset at a fixed price, a put allows the buyer to sell an asset at a fixed price before expiration. Investors may buy puts to try to profit from a stock’s decline, or to hedge against losses on stocks they already own.

For example, if a stock’s price declines before the option’s expiration and falls below the strike price, the buyer can exercise the option, selling the stock for a higher price than the market price. Their profit is reduced by the premium paid for the option.

Protective puts involve purchasing a put option while simultaneously holding shares of the underlying stock. This strategy ensures the investor can sell at a predetermined price even if the stock declines, limiting potential losses. If the stock price rises, they still benefit from the gains, minus the cost of the put premium.

Puts do come with risk. If the stock price rises instead of falls, the put option expires worthless and the buyer’s maximum loss is limited to the premium paid. The put writer, however, faces substantial losses if the stock price plummets.

Recommended: Popular Options Trading Terminology to Know

Characteristics of Vanilla Options

Like all investments, purchasing vanilla options carries a level of risk and volatility. Option buyers risk losing the entire premium paid if the option expires worthless. Call writers risk unlimited losses since stock prices could rise indefinitely, while put writers may be forced to buy the asset at the strike price even if the market price is significantly lower.

Premiums

Whether you are interested in buying a vanilla call or put, you will pay a premium in addition to what you would pay to purchase the stock with the call (should you choose to exercise the option). The premium is nonrefundable, so if you don’t exercise the option, you’ve lost what you paid for the premium.

Volatility

The volatility of an option determines its price. Higher volatility generally results in a higher premium because there is more opportunity for a profit (as well as the risk of loss).

Risk Level

Like most other types of investments, buying options are not without risk. If a stock is lower in price on the market than a call option, the option is worthless. And if a stock has a higher price on the market, the put option won’t net more return on investment.

However, a vanilla option may sometimes be less risky than buying a stock outright for buyers, since the only thing you’re guaranteed to spend is premium. For option writers, however, the risk can be significantly higher. A call writer faces potentially unlimited losses if the stock price keeps rising, while a put writer may be forced to buy the asset at the strike price, even if the market value is significantly lower.

Pros and Cons of Vanilla Options Trading

Options trading is complex and involves risks, but for experienced investors who understand the fundamentals, options can be a useful tool for hedging, income, or straight speculation — as long as you know the risks.

Pros

•   Options trading allows investors to put up a smaller amount of money upfront, which can help minimize potential losses. For buyers, the maximum risk is limited to the premium paid for the option.

•   Selling options allows the writers to collect premiums, although there is the risk of significant losses. (Again, when selling a call option, potential losses can be unlimited if the underlying asset’s price continues to rise with no cap.)

•   Some investors offset risk with options. For instance, buying a put option while also owning the underlying stock allows the options holder to lock in a selling price, for a specified period of time, in case the security declines in value, thereby limiting potential losses.

Cons of Options Trading

•   A key risk in trading options is that losses can be outsized relative to the cost of the contract. When an option is exercised, the seller of the option is obligated to buy or sell the underlying asset, even if the market is moving against them.

•   While premium costs are generally low, they can still add up. The cost of options premiums can eat away at an investor’s profits.

•   Because options expire within a specific time window, there is only a short period of time for an investor’s thesis to play out. Securities, like stocks, do not have expiration dates.

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Pros:

•   Less money upfront than owning an asset outright

•   Potential for income

•   Hedging portfolio risk

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Cons:

•   Potential for outsized losses

•   Premiums can add up

•   Limited time for trades to play out

Examples of Vanilla Options

If you’re considering vanilla options as part of your options trading strategy, here are a few examples to illustrate how they work for both calls and puts.

Example of a Vanilla Call Option

A call option allows you to purchase a stock at a certain price within a specified time period. Bullish investors who expect a stock to go up in price typically purchase call options.

For our example, let’s say you’re interested in a stock that trades at $53 per share, and you can buy a call option with a strike price of $55 per share. The premium for the option is $0.15 per share, or $15 total for 100 shares of the stock.

Your breakeven point is the strike price plus the premium. In this case, that would be $55.15. If the stock trades above this price, your option is profitable. Let’s say that, after two weeks, the stock is trading at $59 per share. It is now “in the money” because the market price exceeds the strike price.

At this point, you have two choices. You can either exercise the option and buy the shares at $55 per share (and then sell them at the market price of $59 per share), or you can sell the option contract itself based on its intrinsic value (roughly $4 per share or $400 for the contract, less any transaction costs).

Each approach allows you to realize a profit from the rising stock price without owning it outright until you purchase the call option, if you choose to do so.

Example of a Vanilla Put Option

A put can act as a form of insurance, allowing you to protect against losses if the price of the stock you’re holding falls. It’s also one way that investors might short a stock. Here’s an example.

Let’s say you own 100 shares of a stock that is currently trading at $25 per share. You buy a put option at a premium of $1 per share that expires in two months at a strike price of $30. So in total, you paid $100 for a premium for 100 shares.

In a month, the stock price drops to $18 per share. This is a good time to exercise your put option, selling your 100 shares at the strike price of $30 per share, rather than the market price of $18 per share.

The Takeaway

Vanilla options, which are simply standard puts and calls, can be a way to diversify your investment portfolio and potentially hedge against other losses. 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.

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.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. 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.

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.

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.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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Introduction to Options Volume and Open Interest

Introduction to Options Volume and Open Interest

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Introduction to Options Volume and Open Interest

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.

Options volume measures the total number of contracts traded during a session, while open interest indicates how many contracts remain open at the start of each trading day. Traders use these metrics to evaluate market liquidity, investor activity, and potential price trends.

Understanding how these metrics work, how they’re calculated, and what they can reveal about the market can help investors sharpen their trading strategies.

Key Points

•   Option volume monitors all transactions in real-time, reflecting market activity.

•   Open interest measures the number of open contracts at the start of a trading session.

•   Volume serves as an indicator of liquidity and cash flows in the market.

•   Open Interest provides confirmation of cash flows and market sentiment.

•   Technical traders use both volume and open interest to validate trends and make decisions.

How Is Option Volume Calculated?

Option volume differs fundamentally from stock volume. In stock investing, volume represents the number of shares trading hands. Typically, trading volumes for stocks are much lower compared to options volumes.

Options volume frequently surpasses the total contracts outstanding represented by open interest. Options volume is calculated in real-time after every transaction. This information is typically reported within the options chain, and will be updated as frequently as your particular brokerage and account provides.

Every contract traded is counted toward total volume.

•   Buying 10 call contracts increases option volume by 10 during the trading session.

•   Selling those same 10 call contracts to a second investor, increases volume by another 10. Closing those 10 call contracts increases volume by another 10.

Recommended: Popular Options Trading Terminology

How Is Open Interest Calculated?

Open interest is calculated the same way for options trading as it is for futures trading. This information is also reported within the options chain, but it’s updated once daily prior to the market opening and will not change during the course of a trading session.

Open interest represents all contracts that remain open and nets out trades from the previous session that offset one another.

Using the same trades as above:

•   If you buy to open 10 calls, open interest does not change during the trading session.

•   If you then sell these calls to a second investor, the open interest does not change.

•   If this second investor then closes these 10 calls, the open interest decreases by 10, since the contracts are no longer active.

However, at the end of the session, the Options Clearing Corporation (OCC) nets out any offsetting trades and reports only the remaining open contracts.

In this example, since the options were opened and closed on the same day, and despite having changed hands, the net effect on open interest is zero.

What Do Option Volume and Open Interest Indicate About Options?

As far as assessing what these two data points indicate, it depends on whether you consider yourself a “fundamental” trader or a “technical” trader.

•   Traders who use fundamental analysis believe in analyzing company and market data to evaluate the intrinsic worth of a stock. They look at corporate metrics such as profits, operating margins, and debt ratios, as well as some limited market data.

•   Traders using technical analysis focus primarily on market data, and use this data to predict market sentiment and price movements.

Fundamental Analysis

Fundamental traders look at the open interest as an indicator of liquidity in the market. Higher open interest typically corresponds with narrower bid-ask spreads, indicating greater liquidity.

Taken together, these two factors result in faster order execution and more competitive pricing.

Fundamental traders view options volume as an early indicator of trading activity. But the direction of this activity — whether investors are opening or closing positions — becomes clear only after comparing open interest from the previous day. An increase in open interest can confirm new money entering positions, and declining open interest can indicate positions are being closed.

Recommended: What Are Calls vs Puts?

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

Technical Analysis

Technical traders also look at open interest and options volume as indicators of liquidity and cash flows, but their analysis doesn’t stop there.

Technical traders look at these increased cash flows and liquidity improvements and believe that the strength in the options volume and open interest indicate confirmation of the trends occurring in the price of the underlying asset.

For example, if the underlying asset is seeing price increases and call volumes and open interest are also increasing, then the technical trader sees confirmation of the trend and these factors reinforce the likelihood of the trend continuing.

Conversely, slowing changes in options volume and open interest may signal that current underlying market trends could be weakening.

Unusual Volume and Open Interest

Although the following phenomenon falls under technical trading, it should really be its own brand of trading.

Experienced traders sometimes interpret sudden spikes in volume and open interest as signs that institutional or well-informed market participants are taking positions. However, these spikes do not always indicate a clear trend and can be misleading. These interpretations can be speculative. Institutional investors often have access to more data and advanced strategies, but their trades do not always indicate a clear direction for the market. Retail investors should be cautious when assuming that increased activity reflects a predictable trend.

It’s also important to consider why these investors may have made the decisions they have. For example, it might be part of a single position, multiple investment types, or a combination trade, all of which could involve different goals than those of a retail investor.

Option Volume

 Open Interest
Total of all transactions during a trading session Total of all open contracts at the start of a trading session
Updated continuously after every transaction Updated once per day prior to the trading session
Opening a transaction increases the volume Opening a transaction will increase Open Interest
Closing a transaction increases the volume Closing a transaction will decrease Open Interest
Indication of liquidity Indication of liquidity
Indication of cash flows Confirmation of cash flows

The Takeaway

By tracking changes in options volume and open interest, investors may gain insights into market trends and liquidity. For instance, rising open interest coupled with increasing volume may signal that a price trend could continue.

Conversely, declining open interest could indicate weakening market momentum or trend reversals. Investors who integrate these signals into their trading strategies may enhance their ability to make informed and timely decisions.

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.

Photo credit: iStock/BartekSzewczyk

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. 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.

Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.

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Commodity vs Security: What Are the Differences?

By | Growing Wealth, invest, Investing | Comments Off on Commodity vs Security: What Are the Differences?

The main difference between a commodity vs. security lies in what you own. Commodities are raw materials and basic goods, while securities represent an ownership stake (e.g. stock) or a debt obligation (e.g. bonds).

As such, investing in commodities and securities can offer two different paths to diversification.

Both commodities and securities can be traded on market exchanges. Between the two, commodities are typically categorized as alternative investments to the traditional array of stocks, bonds, and cash many investors hold.

Understanding Commodities

What are commodities? The Commodity Futures Trading Commission (CFTC) recognizes three categories of commodities:

•   Agricultural

•   Natural resources

•   Financial instruments

In simple terms, commodities are raw materials typically used in the production of other goods. Commodities are considered a type of alternative investment because these products — whether oil, corn, or copper — don’t move in sync with traditional stock and bond markets, and may provide portfolio diversification.

Types of Commodities

Broadly speaking, commodities may be classified as hard or soft. Hard commodities are mined or extracted, while soft commodities are produced through agriculture.

Examples of agricultural commodities include wheat, soybeans, corn, and livestock. Natural resource commodities include gold, silver, copper, and timberland investments. Financial instruments include U.S. or foreign currencies, or options and futures contracts that invest in an underlying commodity.

The Commodity Exchange Act (CEA) regulates the trade of commodity futures in the U.S. Trading futures commodities must generally be done through a commodity exchange, with some limited exceptions. The CEA also enables the CFTC to regulate the commodities industry.

Recommended: What Is a Gold IRA?

Alternative investments,
now for the rest of us.

Explore trading funds that include commodities, private credit, real estate, venture capital, and more.

Understanding Securities

Now, what are securities? The term securities refers to a broad range of investments where there’s an expectation that value or profit will be returned to the investor. Examples of securities include:

•   Stocks

•   Bonds

•   Mutual funds and exchange-traded funds (ETFs)

•   Mortgage notes

•   Promissory notes

•   Limited partnerships

•   Oil and gas interests

•   Debentures

•   Investment contracts

Stocks and bonds are among the most commonly traded securities. When you buy shares of stock you’re getting an ownership stake in the underlying company. Should the value of your shares increase you could sell them at a profit.

Bonds are a debt obligation between the bond issuer and investors. When you buy a bond, you agree to let the bond issuer use your money for a certain period. During that time you’ll earn interest, and when the bond matures you can reclaim your original investment.

Certain types of financial instruments are excluded from this list. Checks, bank accounts, and traditional life insurance policies don’t meet the definition of a security.

How Securities Are Regulated

The Securities and Exchange Commission (SEC) regulates securities trading in the U.S. Some of the most significant laws relating to securities include:

•   The Securities Act of 1933

•   The Securities Exchange Act of 1934

•   Investment Advisers Act of 1940

•   Sarbanes-Oxley Act of 2002

•   Dodd-Frank Wall Street Reform and Consumer Protection Act of 20105

Many securities are publicly traded on market exchanges. The New York Stock Exchange (NYSE), for example, is the world’s largest stock exchange. Securities that do not trade on an exchange may be traded privately or over the counter. Over-the-counter trading relies on a network of broker-dealers to complete the sale or purchase of securities.

Comparing Commodities and Securities

Commodities and securities can be used to achieve different goals in a portfolio. Both allow for diversification but they differ in how they work, what you’re trading, and the associated risks and rewards.

Here’s a simpler way to think of the difference between a security vs. commodity. Securities often represent the end product, while commodities are the building blocks of that product.

For example, take a company that produces computer chips. If you invest in the precious metals used to make computer chips (e.g. gold, silver, platinum), you’re investing in commodities. If you buy shares of company stock, those are securities.

Here are some of the important things to know if you’re weighing security vs. commodity trading.

Commodities

 Securities
Nature of the investment Raw materials and basic goods Stocks, bonds, mutual funds, investment contracts
Trading mechanism Futures contracts and options can be bought and sold on a commodity exchange; commodity mutual funds and ETFs can be traded on a stock exchange Publicly traded stocks and bonds can be bought and sold on stock exchanges
Potential Benefits Portfolio diversification, potentially higher returns, inflationary hedge, potential insulation against market volatility Potential gains through active trading, potential for long-term capital appreciation, potential for passive income from dividends
Potential Risks Supply and demand, weather/climate conditions, geopolitical events can influence commodity pricing Supply and demand, investor sentiment, economic conditions, interest rates, and company health can influence stock and bond prices
Regulatory body Commodity Futures Trading Commission Securities and Exchange Commission

Recommended: What Is a Silver IRA?

Investing in Commodities vs Securities

Purchasing physical commodities isn’t realistic for the average investor, as doing so requires you to store them (or pay for storage) until you’re ready to sell. Instead, commodities are typically traded through one of the following:

•   Options contracts

•   Futures contracts

•   Commodity mutual funds and ETFs

•   Hedge funds (often the domain of high-net-worth investors)

Options and futures contracts are derivatives, meaning their value is determined by an underlying investment, i.e., the commodity you’re trading. Commodity funds and ETFs can offer exposure to a basket of investments, which may include individual securities.

For instance, rather than trading oil futures contracts, you might purchase an ETF that holds gas stocks. Or you could buy individual shares of energy stock if you prefer.

With securities, you have some of the same avenues for investing. You can purchase stand-alone stock shares or individual bonds. Mutual funds, an array of index funds, and ETFs can offer broad diversification. You could also trade stock options if you’re comfortable with speculative investments.

Whether it makes sense to choose a security vs. a commodity for your portfolio can depend on your risk tolerance and objectives.

Portfolio Diversification With Commodities and Securities

Commodities can offer exposure to alternative investments beyond traditional stocks and bonds. Thanks to options, contracts, and commodity funds you don’t need to purchase physical commodities. You can select which areas you’d like to target, based on whether you prefer hard vs. soft commodities.

You might choose to focus on a single category, such as agriculture. Or you might spread your investment dollars across agricultural commodities, natural resources, and financial instruments for a more well-rounded approach.

Diversifying with securities often means finding the right mix between stocks and bonds. Your optimal asset allocation may depend on your age, your time horizon for investing, and how much risk you’re comfortable taking. Within each securities category, you can decide how to invest based on:

•   Whether you’re looking for a quick profit vs. longer-term gains

•   Your preference for earning passive income from dividends or interest

•   How much risk you need to take to achieve your goals

All investments carry some risk, though some are riskier than others. Commodities tend to veer toward the riskier side which is important to remember when deciding how to allocate your portfolio.

The Takeaway

The main difference between a commodity vs. a security lies in what you own. With commodities, you’re most often trading futures or options contracts for an underlying good, such as pork bellies, oil, or aluminum. With securities, you’re typically buying stocks or bonds, or derivatives contracts.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What is the difference between a security and a commodity?

The main difference comes down to what you’re investing in. With commodities, you’re most often trading futures or options contracts with an underlying raw material or good, such as pork bellies, oil, or aluminum. With securities, you’re typically buying shares of a company or funding bonds with the expectation of earning interest.

Can a commodity become a security?

A commodity can become a security if it meets the definition of an investment contract under the Howey Test. This test, which was formulated through a 1946 Supreme Court decision, defines an investment contract as being an investment of money in a common enterprise, with the reasonable expectation of profits due to the managerial efforts of others.

Is gold considered a commodity?

Yes, gold is considered a commodity. In terms of its uses as a raw material, gold is often a key element in jewelry production and electronics manufacturing. Historically, gold has also been used as a form of currency and is a form of legal tender in the United States, but it is not considered a security.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.


Photo credit: iStock/Jacob Wackerhausen

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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.

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

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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 Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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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