SoFi

If you’re married or in a committed relationship, you may be wondering whether combining your finances with a joint bank account is the right choice, or if it’s better to keep things separate.

Opening a joint checking account can simplify budgeting and spending, especially if you’re sharing household expenses. In SoFi’s 2024 Love & Money survey (which included 450 adults who live with their partners and plan to marry in the next few years), nearly 30% said they already had a joint account with their significant other, and 39% said they were planning to open one.

But joint accounts also have some drawbacks, including loss of financial privacy and independence. If you are mulling over this decision, read on to learn the pros and the cons of opening a joint bank account, as well as what’s required to open this type of account.

What Is a Joint Bank Account?

A joint bank account is an account that is shared between two or more people. It allows all account holders to deposit, withdraw, and manage funds, and is often used by couples, family members, or business partners.

Sharing a checking account comes with a number of benefits, including the convenience of managing household expenses and promoting transparency between couples. However, joint accounts also have some potential downsides, such as increased risk for financial disputes and potential strain on the relationship.

One of the biggest decisions a couple will make is whether they decide to treat their money as a shared asset or as separate entities. As with any discussion about money, every individual or couple will have different goals and experiences, so it’s helpful to take a look at both sides. Considering the pros and cons of joint vs separate accounts may help you decide if this kind of account suits you.

How Does a Joint Account Work?

A joint account functions just like an individual bank account, except that more than one person has access to it.

Everyone named on a joint account has the power to manage it, which includes everything from deposits to withdrawals. Any account holder can also close the account at any time. In addition, all owners of a joint account are jointly liable for any debts incurred in relation to the account.

You can open a joint account with a spouse or partner you live with, but you don’t have to be a married couple or even live at the same address to open a joint checking or savings account. For example, you can open a joint account with an aging parent who needs assistance with paying bills and managing their money. You can also open a joint account with a friend, roommate, sibling, business partner, or (if your bank allows it) a teenage child.

What Are Some Pros of a Joint Bank Account?

Here are some of the benefits of opening a joint account:

•  Ease of paying bills. When you’re sharing expenses, such as rent/mortgage payments, utilities, insurance, and streaming services, it can be a lot simpler to write one check (or make one online payment), rather than splitting bills between two bank accounts. A shared account can simplify and streamline your financial life.

•  Transparency. With a joint checking account, there can’t be any secrets about what’s coming in and in and what’s going out, since you both have access to your online account. This can help a newly married couple understand each other’s spending habits and talk more openly about finances.

•  A sense of togetherness. Opening a joint bank account signals trust and a sense of being on the same team. Instead of “your money” and “my money,” it’s “our money.”

•  Easier budgeting. When all household and entertainment expenses are coming out of the same account, it can be much easier to keep track of spending and stick to a monthly budget. A joint account can help give a couple a clear financial picture.

•  Banking perks. Your combined resources might allow you to open an account where a certain minimum balance is required to keep it free from fees. Or, you might get a higher interest rate or other rewards by pooling your funds. Also, in a joint bank account, each account holder is typically insured by the FDIC (Federal Deposit Insurance Corporation), which means the total insurance on the account is higher than it is in an individual account.

•  Fewer legal hoops. Equal access to the account can come in handy during illness or another type of crisis. If one account holder gets sick, for example, the other can access funds and pay medical and other bills. If one partner passes away, the other partner will retain access to the funds in a joint account without having to deal with a complicated legal process.

Recommended: Money Management Guide

What Are Some Cons of a Joint Bank Account?

Despite the myriad advantages of opening a joint account, there are some potential downsides to a shared account, which include:

•  Lack of privacy. Since both account holders can see everything that goes in and comes out of the account, your partner will know exactly what you’re earning and how much you are spending each month.

•  Potential for arguments. While a joint account can prevent arguments by making it easier to keep track of bills and spending, there is also the potential for it to lead to disagreements if one partner has a very different spending style than the other.

•  No individual protection. As joint owners of the account, you are both responsible for everything that happens in the account. So if your partner overdraws the account, you will both be on the hook for paying back that debt and covering any fees that are charged as a result. If one account holder lets debts go unpaid, creditors can, in some cases, go after money in the joint account.

•  It can complicate a break-up. If you and your partner end up parting ways, you’ll have the added stress of deciding how to divide up the bank account. Each account owner has the right to withdraw money and close the account without the consent of the other.

•  Reduced benefits eligibility. If you open a joint account with a teenage child who is going to, or is already in, college, the joint funds will count towards their assets, possibly reducing their eligibility for financial aid. The same goes for an elderly co-owner who may rely on Medicaid long-term care.

How to Open a Joint Bank Account

If you decide opening a joint account makes sense for your situation, the process is similar to opening an individual account. You can check your bank’s website to find out if you need to go in person, call, or just fill out forms online to start your joint account.

Typically, you have the option to open any kind of bank account as a joint account, except you’ll select “joint account” when you fill out your application or, after you fill in one person’s information, you can choose to add a co-applicant.

Whether you open your joint account online or in person, you’ll likely both need to provide the bank with personal information, including address, date of birth, and social security numbers, and also provide photo identification. You may also need information for the accounts you plan to use to fund your new account.

Another way to open a joint account is to add one partner to the other partner’s existing account. In this case, you’ll only need personal information for the partner being added.

Before signing on the dotted line, it can be a good idea to make sure you and the co-owner know the terms of the joint account. You will also need to make decisions together about how you want to manage and monitor the account, such as which account alerts you want to set up.

Should I Open a Joint Bank Account or Keep Separate Accounts?

As you consider your options, know that it doesn’t have to be all or nothing. You might find that the best solution is to pool some funds in a joint account for specific purposes, from paying for basic living expenses to saving for the down payment on a house or building an emergency fund.

You might keep your own separate accounts as well, where you can spend on what you like without anyone watching (or judging). In SoFi’s Love & Money newlywed survey (which included 600 adults who have been married less than one year), the most popular banking set-up, chosen by 42% of couples, was a hybrid approach — having both joint and individual accounts.

Recommended: Emergency Fund Calculator.

The Takeaway

Opening a joint bank account offers convenience by allowing shared access to funds for bills, savings, or everyday expenses. Joint accounts also promote transparency and can simplify money management for couples who share financial responsibilities.

But joint accounts also come with some downsides and potential risks. All transactions on the joint account are visible to both account holders, which can lead to a lack of privacy regarding personal spending habits and potential conflict. Plus, either holder can withdraw money without the other’s consent. If one person mismanages funds, both may be affected.

Some couples choose to maintain separate accounts alongside a joint one for shared expenses to achieve a balance of independence and collaboration.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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.

FAQ

What are the disadvantages of a joint account?

A joint bank account can create financial complications if one account holder mismanages money or racks up overdraft fees, as both parties are equally responsible. Disagreements over spending habits may also come up, which could strain a relationship. Also, in the event of a breakup or divorce, separating funds can become more complicated.

Are joint bank accounts a good idea?

Joint accounts can be a good idea for couples, family members, and business partners who share financial goals and trust each other fully. They simplify bill payments, budgeting, and managing shared expenses. However, they also require communication and mutual agreement on spending. If that trust breaks down or if one person is less financially responsible, problems can arise. Whether it’s a good idea depends on the relationship and financial compatibility.

Is it better to have joint or separate bank accounts?

Whether to have joint or separate bank accounts depends on the relationship and financial habits of the individuals involved. Joint accounts offer transparency and make shared expenses easier to manage, which can work well for couples or family with aligned goals. Separate accounts allow more financial independence and privacy. Some people prefer a hybrid approach — maintain both joint and individual accounts. The best setup depends on trust, communication, and lifestyle needs

Who owns the money in a joint bank account?

In a joint bank account, both account holders have equal legal ownership of the funds, regardless of who deposits the money. This means either person can withdraw or use all the money at any time without the other’s permission.

About the author

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.

The marginal propensity to save (MPS) is an important concept in economics that describes how much of each additional dollar of income a person (or economy) chooses to save rather than spend. It plays a central role in Keynesian economic theory and helps economists understand how changes in income affect savings, spending, and overall economic activity.

But beyond theory — does MPS matter to you as an individual saver? Absolutely. Understanding MPS can help you become more mindful of how you handle income increases, whether from a raise, bonus, or side gig. What follows is a more in-depth look at marginal propensity to save, including what it means, why it matters, and how it applies to your personal financial life.

The Keynesian Economic Theory, Explained

British economist John Maynard Keynes revolutionized economic thinking with his 1936 book, The General Theory of Employment, Interest, and Money. His core idea was that economic downturns result from insufficient demand for goods and services, and that government spending can help stabilize the economy.

Keynes advocated for an increase in government spending during recessions and depressions, which would boost the production of goods and services to minimize unemployment rates and enhance economic activity. This theory went against the prevailing and long-held view that markets are self-regulating and any interference by the government could be harmful.

There are three main elements of this theory:

•   Aggregate demand: This is the total demand for goods and services in an economy. If demand drops too low (in other words, there is a lull in spending), a recession may follow.

•   Sticky prices and wages: Prices and wages are often slow to respond to changes in supply and demand, which can prolong unemployment or inflation.

•   Government intervention: Keynes advocated for government interventions like increased spending and lowering taxes to stimulate demand and pull the economy out of a downturn.

The Keynesian Multiplier describes the effect of increased government spending/investment as an economic stimulus. According to the multiplier, an increase in government spending leads to a greater-than-proportional increase in total economic output. In other words, the overall gain of government intervention is greater than the dollar amount spent.

The multiplier effect is directly influenced by the marginal propensity to save (MPS) and its counterpart, the marginal propensity to consume (MPC).

💡 Quick Tip: Tired of paying pointless bank fees? When you open a bank account online you often avoid excess charges.

Calculating Marginal Propensity to Save

MPS measures how savings behavior changes in response to a change in disposable income. The lower the MPS, the higher the multiplier effect of government spending or investment on total output, or gross domestic product (GDP). A low MPS supports Keynes’s premise that government spending can have a powerful effect on increasing aggregate demand and reducing unemployment during recessions.

Knowing the MPS helps policymakers estimate how effective spending or tax changes will be in stimulating the economy. A lower MPS (meaning people spend more and save less of their additional income) amplifies the effects of fiscal policy, which is central to Keynes’s approach to managing economic downturns.

Recommended: 7 Tips to Managing Your Money Better

Marginal Propensity to Save Formula

MPS is calculated with a specific formula:

MPS = Change in Savings / Change in Income.

Marginal Propensity to Save Example

Let’s say you receive a $1,000 bonus at the end of the year. Of that $1,000 increase in income, you decide to spend $300 on new clothes, $200 on a fancy dinner out, and save the remaining $500.

•   Change in income = $1,000

•   Change in savings = $500

•   MPS = $500 ÷ $1,000 = 0.5

This means you saved 50% of your additional income.

Marginal Propensity to Consume

Conversely, the marginal propensity to consume (MPC) is the change in the spending, or consuming amount. If someone’s income increases, the MPC measures the amount of income they choose to spend on goods and services instead of putting into different forms of savings.

The MPC formula is:

MPC = Change in Consumption / Change in Income.

By using the example above, the MPC would be 500 ÷1000 = 0.5.

Since income must be either saved or spent, the following must always be true:

MPS + MPC = 1

What MPS Means for You as a Consumer

While MPS is a tool economists use to measure national saving behavior, it also has implications on your personal finances. Understanding your own MPS can help you evaluate your spending vs. savings habits and take better control of your finances.

For example, if you find that you increase spending in line with any increases in income (meaning your MPS is at or near zero), it’s a sign you may be succumbing to lifestyle inflation, also known as lifestyle creep, which is the tendency to increase spending as income increases. It also indicates that you may want to consider increasing your savings rate — especially for emergencies, retirement, or other financial goals.

💡 Quick Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

Other Factors That Influence Saving

While MPS looks at changes in savings that result from changes in income, consumer savings behavior is influenced by other factors. Here’s a look at some other things that can affect saving and spending that are unrelated to income.

1. Wealth

Wealth (assets and investments) is separate from income. If your wealth increases — say through an inheritance, stock gains, or home appreciation — you may feel more comfortable saving less and spending more, even if your income hasn’t changed.

Alternatively, a decline in wealth might lead to reduced consumption and increased saving as a precaution.

2. Expectations

Future income expectations are also known to influence consumer spending and saving habits. For example, if you expect to get a raise or bonus, you may spend more now. If you fear a job loss or recession is looming, you might decide to tighten your budget. These shifts affect your saving behavior even without actual changes in income.

Debt

People also tend to adjust their consumption and savings if they’re in debt. For example, if you’re carrying high levels of credit card debt, you might be inclined to cut spending and increase savings to pay it down, even if your income hasn’t changed. Conversely, when debt levels are low and borrowing is easy, you may feel more free to spend.

Recommended: What is the Average Savings by Age?

Why Marginal Propensity to Save Matters

Using the data from MPS and MPC helps businesses and governments determine how funds are allocated. For example, economists can assess this data to determine whether increases in government spending, or investment spending, is having an influence on consumer saving and spending.

But understanding MPS isn’t just for economists and policymakers. Here’s why it may matter to you:

•   It helps you analyze how you use extra income.

•   It shows if your current spending habits align with your savings goals.

•   It can help you adjust behavior to avoid lifestyle inflation.

If you receive a raise or a financial windfall (like a bonus, inheritance, or cash gift), recognizing your personal MPS can help you make more strategic decisions, rather than impulsively spending the entire amount.

How to Start Saving Money

Whether you’ve recently experienced a boost in income, expect a raise or bonus in the future, or simply want to amp up your savings rate, these strategies can help.

Identifying Your Savings Goals

Consider what you’re saving for in the near-, mid- and long-term. For example:

•   Short-term goals: These might include building an emergency fund or saving for a small vacation.

•   Medium-term goals: This could include buying a car, a home improvement project, or a wedding.

•   Long-term: These are goals that are many years, even decades, away, such as retirement, sending a child to college, or achieving financial independence.

Once you’ve set some goals and timelines, you’ll want to figure out how much you need to set aside each month to reach those goals. If your goal is short-term, you might consider keeping your funds in a high-yield savings account. Online banks and credit unions tend to offer the highest rates.

“For money you’ll use in three to seven years, you may be prepared to take slightly more risk than a savings account,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “You might choose to use a brokerage account where you can invest that money in stocks, bonds, cash, or other asset classes. Just be sure to keep your comfort with risk in mind.”

For retirement saving, you’ll want to utilize retirement accounts, such as an employer-sponsored 401(k) or an individual retirement account (IRA).

Recommended: Emergency Fund Calculator

Creating a Budget

To free up funds for saving, it’s important to make a basic budget. You can do this by gathering up the last several months of financial statements and using them to determine your average monthly income and average monthly spending.

If you find that your average monthly cash outflow is the same or close to your average monthly cash inflow (meaning you’re not saving much or anything each month), you’ll want to comb through your expenses and look for places where you can cut back. Any money you free up can be siphoned into savings.

Alternatively, you might look for ways to increase your income, such as asking for a raise, freelancing, or starting a side hustle, then funnel those extra earnings right into savings.

The Takeaway

The marginal propensity to save, or MPS, is more than just an economic formula — it’s a practical tool that can help you reflect on how you manage your money. Whether you’re building an emergency fund, saving for home, or hope to retire some day, consider increasing your savings rate any time you get a raise, bonus, or any other increase in income.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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.

FAQ

Can MPS be greater than 1?

No, the marginal propensity to save (MPS) cannot be greater than one. This is because MPS represents the proportion of an additional dollar of income that is saved, and it’s impossible to save more than the total amount of additional income received. MPS always ranges between 0 and 1.

How do you calculate the marginal propensity to save?

The marginal propensity to save (MPS) shows how much of an increase in income is saved rather than spent. You calculate it by dividing the change in savings by the change in income. The formula is: MPS = Change in Savings / Change in Income.

What is the difference between average and marginal propensity to save?

The average propensity to save (APS) is the proportion of total income that is saved. It’s calculated by dividing total savings by total income. The marginal propensity to save (MPS), on the other hand, indicates how much of an increase in income is saved. It’s calculated by dividing the change in savings by the change in disposable income.

Photo credit: iStock/MarsBars
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

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 every 31 calendar days.

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 the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, 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 the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit 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, Wise, 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 Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://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.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOBNK-Q325-057

Options trading can appeal to traders who are interested in more advanced investment strategies and who wish to hedge against risk in their existing portfolios or attempt to benefit from different price movements and strategies. It’s important to know, however, that options trading is, in some ways, its own world, with its own jargon.

When an investor trades options, they aren’t trading individual shares of stock. Instead, they’re trading contracts to buy or sell stocks and other securities under specific conditions. Beyond this, there are a number of important options trading strategies that investors commonly use. In order to effectively deal in options, an investor should familiarize themselves with certain lingo and understand the potential risks involved in these strategies.

First, Understand What You Are Trading

Before learning the trading terms, it helps to have a firm grasp of what options trading is and what it involves. In layman’s terms, when you’re trading options, you’re investing in an option to buy or sell a stock, rather than the stock itself.

Options are a form of derivative trading, and there are many options trading strategies that traders can use, too. It’s not exactly the same as trading stocks, and is often more complicated. For that reason, investors should have a strong grasp of the various elements of options trading as well as the potential risks before they start trading options.

Options Trading Terms to Know

When beginning to learn about options trading, these are some of the most important trading terms to know.

Call Option

A call option is an options contract that gives the purchaser of the option the right, though not the obligation, to buy shares of a stock or another security at a fixed price. This price is called the “strike price.”

When an investor buys a call option, the option is open for a set time period. While the option buyer may choose whether or not to buy the underlying asset in that time period, the seller is obligated to fulfill the terms of the contract if the buyer chooses to exercise the option.

The expiration date is the date when the call option is voided — though some options positions are automatically exercised if they are in the money. Standard options contracts often expire within a few months, though durations can vary.

Put Option

A put option gives a purchaser the right to sell shares of a stock at the strike price by a specified day. When getting to know puts and calls definitions, it’s important to remember that each one has:

•   A strike price

•   An expiration date,

•   And a premium.

Strike Price

With a call option or put option, the strike price is one of the most important trading terms to know.

In a call option, the strike price is the price at which an investor may buy the underlying stock associated with the contract. In a put option, the strike price is the price at which they may sell the underlying stock.

The gap between the strike price and the market price of a stock determines whether an option is “in the money” (ITM) or “out of the money” (OTM). More on this below.

Expiration

Every option contract comes with an expiration date, which is the last day that the contract is in effect. American options may be exercised up to and on the expiration date of an option. In contrast, European-style options can only be exercised on the expiration date.

Premium

The option premium is the current price of the option, and thus the amount that the buyer pays to the option seller for the contract. The premium is determined by intrinsic factors, including whether an option is currently in-the-money and how far, as well as extrinsic factors, including the time remaining until expiration and implied volatility.

Exercise

Exercising an option is when the buyer chooses to utilize their right to buy or sell the underlying security, depending on whether they hold a call or a put.

In the Money

When discussing stock movements, it’s typical to think in terms of whether a stock’s price is up, down, or flat. With options, on the other hand, there’s different language used to describe whether an investment may pay off or not, and it’s often described as “in the money” versus “out of the money.”

An option is in the money when the relationship between the strike price and the stock’s market price would make exercising the option financially beneficial to the buyer. Which way this movement needs to go depends on whether they have a call option or put option.

With a call option, a buyer is in the money if the strike price is below the stock’s actual price. Say, for example, you place a call option to purchase a stock at $50 per share (the strike price), but its market price is $60 per share. In this case, the option would be in the money by $10 per share.

Put options are the opposite. An option buyer is in the money with a put option if the strike price is higher than the actual stock price.

Out of the Money

Being out of the money with call or put options means the option buyer doesn’t stand to see any financial gain from exercising the option, based on the current market price. Whether a call or put option is out of the money depends on the relationship between the strike price and the actual stock price.

A call option is out of the money when the strike price is above the actual stock price. A put option is out of the money when the strike price is below the actual stock price.

At the Money

Being “at the money” is another scenario an options buyer could run into with options trading.

In an at-the-money situation, the strike price and the stock’s actual price are the same (or very nearly the same). If the buyer of the option sells the option, they could potentially make or lose money. If they exercise the option, they may lose money, since the strike price offers no financial advantage over the current market price, and they have already paid the premium.

Implied Volatility

When trading options, it’s important to understand stock volatility and how it can impact trading outcomes.

Volatility is the degree and frequency of fluctuations in an asset’s price over a given time period. In options, higher volatility typically increases the option’s premium since increased volatility may raise the likelihood that the contract becomes profitable before expiration.

Implied volatility is a way of measuring or estimating the future volatility of an option’s underlying asset. Higher implied volatility suggests that the underlying asset may see bigger price swings in the future, which in turn influences the option’s premium.

Implied Volatility Crush

An implied volatility crush, also known as an IV crush, happens when there’s a sharp decline in a stock’s implied volatility that affects an option’s value. Specifically, this means a downward trend that can reduce a call or put option’s value.

Volatility crushes tend to occur after a major announcement that affects or could affect the implied volatility of a stock’s price. For example, investors might see a volatility crush after a company releases its latest earnings report or announces a merger with a competitor. The release may reduce uncertainty surrounding the company prior to the announcement, thereby lowering both the stock’s expected volatility and the option’s premium.

Time Decay

Time decay, also known as theta in the options Greeks, is the decrease in an option contract’s value as its expiration date approaches. The rate of time decay tends to increase when an option is close to expiration since there is little time left for an option to potentially move into the money.

Bid/Ask Price

When trading options, it’s helpful to know how bid and ask prices work.

The bid price is the highest price a buyer is willing to pay for an option. The ask price is the lowest price a seller is willing to accept for an option. The difference between the bid price and ask price is known as the spread.

Holder and Writer

Other trading terms investors may hear associated with options are “holder” and “writer.” The person or entity buying an options contract may be referred to as the holder. The seller of an options contract can also be referred to as the writer of that contract.

It’s crucial to know when trading options that the buyer (or holder) has the right, but not the obligation, to exercise the option contract they purchased. The seller (or writer), on the other hand, is obligated to fulfill the terms of the contract, whether that involves buying or selling the underlying asset, depending on whether the option is a call or a put.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Pros and Cons of Options Trading

Options trading can offer both advantages and disadvantages for investors.

Pros of Options Trading

•   Lower entry point. Unless an investor is able to purchase fractional shares, purchasing individual stock shares with higher price points can get expensive. Investing in certain options trades, on the other hand, may be more accessible for investors with a limited amount of money to put into the market. However, while option trading may amplify gains, it can also amplify losses, making them high risk.

•   Downside protection for buyers. If the stock’s price isn’t moving in the direction a buyer anticipated, they don’t have to exercise their option to buy, in which case their maximum loss is the premium they paid. Note that this is not the case for option sellers, who must fulfill the terms of the contract if exercised.

•   Greater flexibility. Options trading can offer an investor flexibility. A buyer may choose to exercise an option to buy or sell shares, or may be able to sell the option contract, depending on the market conditions and strategy. Advanced traders may implement different options trading strategies, such as spreads, to express a view on a stock’s potential movement or to manage risk.

Cons of Options Trading

Options trading can be high risk. Trading options offers leverage, or the ability to gain exposure to stocks’ price movements through relatively small premiums, but that also means options trading may amplify losses.

Options are particularly risky for sellers. While the maximum loss for an option buyer is the premium paid, the option seller could face substantial losses if the price of the underlying asset moves in an adverse direction and their trade is not protected, or covered, by owning sufficient shares of the underlying stock.

The Takeaway

Trading options may be attractive to investors who anticipate meaningful movement in an asset, or who want to offset risk from other holdings. But before an investor engages in options trading, it’s important to get familiar with put and call definitions and other options trading terms.

Knowing the specific jargon and terminology used by options traders can help investors cut through the noise and make better decisions. Of course, if you’re uneasy or unfamiliar with options terminology, you’d probably be better off learning more before starting to make trades. Options trading is typically best for experienced investors with a higher tolerance for 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.

FAQ

What are the most common options trading terms?

Some of the most common options terms include call option and put option, which are the two main types of contracts, as well as strike price (the price at which an option buyer may buy or sell an option’s underlying shares), expiration date (when the option contract expires), and premium (the price a buyer pays a seller for the option). Other common terms include exercise, in-the-money, out-of-the-money, at-the-money, time decay, and implied volatility.

What are the basics of options trading?

Options trading is a form of trading that can provide investors with leverage, meaning they can gain exposure to the price movements of the number of shares covered by the contract (typically 100) without having to buy those shares outright. While their gains may therefore be magnified, so too may their potential losses. Options traders may employ several different strategies to try to profit from stock movements and manage risk.

What’s the easiest option trade to make?

The most straightforward options trade would typically be buying a call or put option. A buyer of a call or a put may profit if the price of the underlying asset moves in their favor (above the strike price with a call or below the strike price with a put) and if gains exceed the premium paid. The most they would stand to lose is the premium they pay when they enter the trade.