InvestGen Archives | Page 3 of 62

Apr

2025

Vega Options, Explained

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

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 investors rely on a set of risk metrics known as the Greeks to evaluate how different factors influence the price of an options contract. One of these metrics, vega, measures how sensitive an option’s price is to changes in implied volatility.

Understanding vega can help investors anticipate price fluctuations, develop hedging strategies, and assess risk when trading options.

Key Points

• Vega measures the sensitivity of an option’s price to changes in implied volatility.

• Higher vega values occur with more time to expiration, leading to greater price sensitivity.

• Vega is highest for at-the-money options and decreases as options move in- or out-of-the-money,

• Vega-neutral strategies balance portfolio risk by offsetting long and short positions.

• Vega helps investors anticipate options price movements, informing their trading decisions.

What Is Vega in Options Trading?

Vega is one of the Greeks more commonly used in options trading — along with delta, theta, and gamma. The Greeks are a set of indicators that quantitative analysts and investors use to measure the effect of various factors on the prices of options contracts. Investors can use the Greeks to hedge against risks involved in options trading. Each indicator in the Greeks helps analysts to understand the level of risk, volatility, price direction, value over time, or interest rate of a particular options contract.

As a unit of measure, vega tries to assess, theoretically, the amount that an option’s price will change with every percentage point change in the implied volatility of the underlying asset. So, vega reflects how sensitive a contract is to changes in the implied volatility of its underlying security. When an underlying asset of an options contract has significant and frequent price changes, then it has high volatility, which also makes the contract more expensive.

How Vega Works

Vega, as noted above, measures the sensitivity of an option’s price to changes in the implied volatility of its underlying asset. Vega changes over time as the price of the underlying asset changes and the contract moves closer to its expiration date. Because vega is always changing, investors tend to track it on an ongoing basis while they are invested in an options contract.

When options still have time remaining before expiration, the vega is said to be positive. Vega decreases when an options contract nears its expiration date. This is because longer-dated options have more time for the underlying asset to move, which increases the likelihood of volatility. This also creates more potential for profit or loss. That added uncertainty makes these options more expensive, resulting in higher premiums. When an option’s vega is higher than the amount of the bid-ask spread, it often indicates a more liquid option with a tighter spread. If vega is lower than the bid-ask spread, it may indicate wider spreads and lower liquidity.

Implied Volatility

Implied volatility is an estimate of how much the price of an underlying security may fluctuate in the future. In pricing options, implied volatility is mostly used to predict future price fluctuations. Traders sometimes use a sigma symbol (𝞂) to represent implied volatility.

Traders use options pricing models to calculate implied volatility. These models try to estimate the speed and amount that an underlying security’s price changes — known as its volatility. As the volatility of the underlying asset shifts, its vega also changes. Pricing models can estimate volatility for present, past, and future market conditions. But, as the calculation is just a theoretical prediction, the actual future volatility of the security may differ.

Characteristics of Vega

Vega measures how sensitive an option’s price is to changes in implied volatility and indicates how much the price could theoretically move for every percentage point shift in the underlying asset’s volatility. The effect of vega on options trading depends on various factors, including time to expiration and the moneyness of an option.

• Vega relates to the extrinsic value of an option, not its intrinsic value.

• Vega is positive when an investor purchases calls or puts. It is negative when writing options.

• An investor’s exposure to vega depends on their position. Long positions have positive exposure, while short positions have negative exposure.

• Vega is higher when there is more time until the option expires, and it’s lower when the option is close to expiring.

• When the option is at the money, vega is highest.

• When the option is in- or out-of-the-money, vega decreases. In other words, Payvega is lower when the market price of the underlying security is farther from the option strike price.

• When implied volatility increases, the option premium increases.

• When implied volatility decreases, the option premium decreases.

• When gamma is high, vega is generally also high. Gamma measures the rate of change in an option’s delta (its price sensitivity to changes in the underlying asset), indicating how much delta will shift as the underlying asset’s price moves.

• Vega can also be calculated for an entire portfolio of options to understand how it is influenced by implied volatility.

What Does Vega Show?

Vega, again, represents the estimated amount that an option’s price could change with every 1% change in the implied volatility of the underlying asset. It can also be used to show the amount that an option’s price might change based on the expected volatility of the underlying security — that is, how often and how much the security’s price could change.

Investors generally omit the percentage symbol when referring to vega, or volatility. And some analysts, too, display it without a percentage symbol or decimal point. In that case, a volatility of 16% would be displayed as “vol at 16.”

Vega Options Example

Let’s say stock XYZ has a market price of $50 per share in February. There is a call option with a March expiration date with a strike price of $52.50. The option has a bid price of $1.50 and an ask price of $1.55.

The option’s vega is 0.25, meaning that the option’s price is expected to change by $0.25 for each 1% increase in implied volatility. In this example, we assume an initial implied volatility of 30%, which is a typical level for moderately volatile stocks.

Since the option has an implied volatility of 30%, it is moderately sensitive to changes in market expectations. A higher implied volatility often corresponds with a wider bid-ask spread, while lower volatility can result in a tighter spread. A tighter spread does not mean the trade will be profitable or that it is automatically a good trade to enter into, but it is a positive sign. Traders monitor vega closely around earnings announcements and major economic events, as these often cause shifts in implied volatility, impacting option premiums.

Assume the implied volatility of the underlying security increases to 31%. This changes the option’s bid price to $1.75 and changes the ask price to $1.80. This is calculated as follows, with 0.01 representing the 1% increase in implied volatility:

(0.01 x 0.25) = $0.25 increase → New bid price ($1.75)

Conversely, if the implied volatility decreases by 5%, the bid price would decrease to $0.25, and the ask price would decrease to $0.30. Lower implied volatility reduces the likelihood of large price swings, decreasing the value of options as traders anticipate less movement in the underlying stock.

The following shows how the increase in vega impacts the prices in the bid ask spread:

• Original bid price: $1.50

• Vega impact: $0.25 (0.01 x 0.25)

• New bid price: $1.75

• Original ask price: $1.55

• New ask price $1.80

How Can Traders Use Vega in Real-Life?

Traders often analyze vega alongside the other Greeks (delta, theta, and gamma) to assess an option’s sensitivity to market factors. Delta measures price movement, and Theta tracks time decay. Vega helps traders understand how changes in implied volatility can impact options pricing. Vega has a significant effect on options prices, so it is a very useful analytic tool.

Benefits of Vega

If investors take the time to understand implied volatility and its effect on options prices, they’ll find that vega can be a useful tool for making predictions about future options price movements. It can also help them understand the risks of trading different types of options contracts. Analyzing an option’s implied volatility can guide investors as they select which options to buy and sell.

Some traders even utilize changes in implied volatility as part of their investing plan, such as with strategies like the long straddle and short straddle. Vega plays a key role in using these types of options trading strategies.

Vega Neutral: Another Strategy

For investors who want to limit their risk in options trading, the vega neutral strategy can help them hedge against the implied volatility in the market of the underlying security. Investors use the vega neutral strategy by taking both long and short option positions on different contracts within a portfolio, aiming to offset the volatility changes. By doing this, they create a balanced portfolio that has an average vega of around zero. A vega-neutral portfolio is structured to minimize the impact of changes in implied volatility, potentially reducing the portfolio’s level of risk.

The Takeaway

Vega, one of the Greeks, along with the concept of implied volatility, relates to advanced options trading techniques, appropriate for experienced investors.

Understanding vega can help investors navigate changing market conditions and make more informed decisions about options pricing. Whether using vega to gauge volatility risk, develop hedging strategies, or refine an options trading approach, incorporating this Greek into an overall strategy can be a valuable tool for managing risk and weighing potential returns.

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

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

Explore SoFi’s user-friendly options trading platform.

Photo credit: iStock/gorodenkoff

SoFi Invest®

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

SOIN-Q125-061

Apr

2025

How to Short a Stock: Defined and Explained

By Brian Nibley | Investing | Comments Off

Shorting a stock, also known as short selling, is one way to potentially profit from a stock’s price decline.

When investors think a stock’s price will fall, they can sell borrowed shares, repurchase them at a lower price, and potentially pocket the difference as profit. This strategy is popular among experienced and risk-tolerant investors who conduct thorough market analysis before taking a short position.

For new investors, the idea of making trades that can be profitable even when the price falls may sound strange. After all, the traditional way to profit in financial markets is a buy-and-hold strategy: purchasing a security, holding it, and selling it later for a higher price.

However, by understanding how short selling works, investors can utilize new strategies to potentially bolster their financial portfolios.

Key Points

• Shorting a stock involves borrowing shares to sell at a high price, with the expectation of repurchasing them later at a lower price, and pocketing the difference.

• A short squeeze occurs when a sudden price increase forces short sellers to buy shares back quickly, further driving up the stock price.

• The strategy can be risky, as potential losses are unlimited if the stock price rises instead of falling.

• Alternatives to short selling include purchasing put options, which allow investors to profit from stock price declines without borrowing shares.

• Short selling may serve as a hedge against other investments, but it requires careful consideration due to its high risk and potential costs.

What Is Shorting a Stock?

A trader shorts a stock when they think its price will fall. Shorting involves borrowing the stock from a brokerage, selling it, and then buying it when the price is lower than when they sold. The trader then returns the shares to the brokerage and may realize a profit, provided the shares sold for more than they were bought back for.

Shorting a stock allows investors to take a position that anticipates a stock’s future share price will be lower than its current price. It’s the opposite of going “long” on a stock, where an investor buys shares with the expectation that the stock price will increase.

Short selling can be risky because if the stock price goes up instead of down, the investor will have to buy the shares at a higher price and may lose money.

Example of Shorting a Stock

Suppose an investor identifies a company they think is overvalued, and believes its share price will decline. The trader borrows 100 shares of stock in the company from their brokerage, and sells the shares for $10 per share. This amounts to $1,000 (plus any applicable brokerage fees).

In this scenario, the investor’s short strategy works, and the price falls to $9 per share. The investor can then buy back 100 shares for $9 per share ($900), return the borrowed shares, and pocket the $100 as profit ($1,000 – $900 = $100), less any additional fees.

Alternatively, if the price rises to $11 per share, the investor has to buy back 100 shares for $11 per share. This totals $1,100, for a loss of $100 ($1,000 – $1,100 = -$100), on top of any additional fees.

Why Short a Stock?

There are several motivations for shorting a stock. In general, traders might short a stock when they believe that the security’s price will fall in the future. This might be due to several factors, such as an overall bearish outlook on the market, or specific concerns about a company’s financial health or prospects.

Some traders might also short a stock to hedge their portfolios by reducing exposure to potential losses in long positions. For example, if a trader is long a stock that they think will fall in value, they might short a similar stock to offset potential losses.

Shorting a stock can be a risky proposition regardless of strategy. If the stock price does not fall as expected, the trader will be forced to cover their position at a loss. As such, traders must be cautious when considering whether or not to short a stock.

How to Short a Stock

There are several steps involved in shorting a stock.

1. Set Up a Margin Account

First, you’ll need to set up a margin account with your brokerage. Margin accounts allow traders to borrow shares from a brokerage to sell them. They also enable traders to borrow the funds needed to take on larger positions in a short than they could with their own account balance.

2. Identify a Stock to Short

With a margin trading account funded and ready to go, investors typically target stocks they believe are overvalued or have weak fundamentals. These tend to be more likely to experience price declines. Some common indicators are declining earnings, negative media attention, or a downward trend in the stock’s price.

3. Place a Short Sell Order

After identifying a stock to short, it’s on to the execution phase. To do this, a trader places a short sell order through their brokerage account. The order instructs the broker to borrow shares from an investor or institution and sell them on the open market at the current price, on your behalf.

Traders can choose between a market order (sells the shares at the best available price) or a limit order (specifies the price at which you’re willing to sell).

4. Monitor Your Position

Short sales carry higher risks than other trades, which makes it vital to monitor the position closely and adjust their strategy as market conditions change. Potential gains and losses are amplified when margin is involved. Gains are limited by the difference between the strike and short sale price, and your risk of loss is unlimited.

Stop-loss orders and other stock orders can help manage risk by automatically closing a position if the stock moves against your position for a certain amount of time.

5. Close the Short Position

To close a short position, the trader must repurchase the same number of shares they borrowed. Ideally, they would buy the shares at a lower price than the original sale price. This is known as “buy to cover,” and it allows the trader to return the shares to the brokerage. The trader then realizes any profit or losses based on the price difference.

In rare cases, the lender may request that the trader return the shares they borrowed, but it’s far more likely for the trader to close their position at that point since the short would likely be losing money in this scenario. A short seller can hang onto their short position for as long as they can pay the required interest fees for borrowing stock and maintaining the margin amounts required by the brokerage firm.

What Are The Risks and Rewards of Short Selling?

As noted, there can be some significant risks associated with short selling. But there can be potential rewards, too.

Risks of Short Selling

Selling a stock short involves significant risk — far surpassing the risk of “going long” on an investment. When holding a stock, there’s a limit to how low a stock can go, and investors can only lose as much as their initial investment.

If someone buys 10 shares of XYZ company at $10 per share, for example, and the share price goes to zero, they will lose $100. The price can’t go lower than zero, so someone can never lose more than what they had first invested.

However, when someone shorts a stock, they risk potential losses that are unlimited, as there is the potential for a stock’s price to rise indefinitely. If the price keeps going up, they will keep losing money.

Additionally, there are significant costs associated with shorting a stock. For one, the margin interest in a required margin account can add up over time if an investor keeps the position open for a while. Brokerage firms will charge interest on the borrowed shares, ranging from a few basis points to more than 100%, depending on how difficult the shares are to borrow. These costs can make shorting a stock prohibitively expensive.

Potential Benefits of Short Selling

While risky, shorting a stock could be profitable. Short selling may result in substantial gains during rapid price declines, though it also carries risk.

When investing during a recession, for example, sudden drops in the share prices of many stocks across many different industries can occur. While this might cause many investors’ portfolios to decline, others may be profiting because of their short positions.

Investors might choose to short a stock to hedge against their long positions. The term “hedge” is used to refer to an investment that protects against losses in another asset. So, in this case, an investor may put on a short position to hedge or offset a potential loss in a long position.

Short Selling Techniques and Best Practices

There are numerous short-selling strategies that investors might employ, and several of them are relatively straightforward, but require careful risk assessment.

For example, one technique that investors can use is to short sell a stock that is in a longer-term downtrend, but that has seen a short-term bounceback in value — it may continue that downtrend after a short time. Additionally, investors might enter a position (with proper risk management in place) when price trends are ambiguous. Investors can even try short selling while a stock is seeing an active decline. If that decline continues, investors could potentially capitalize on it, though other short-sellers could catch on, too.

What Happens in a Short Squeeze?

A short squeeze refers to the rapid flight of short sellers from a stock in order to limit losses — a situation that leads in a dramatic surge in the stock’s price.

Here’s how they typically occur: a sudden increase in the stock price causes investors to scramble to close their short positions by purchasing shares. This results in further gains in the stock, which in turn causes massive “covering” by other short sellers, bringing about a “squeeze.”

Famous cases include Volkswagen in 2008, which involved unusual circumstances related to Porsche’s increased stake in the German automaker, causing a short squeeze that briefly made Volkswagen the world’s most valuable stock by market cap.

In January 2021, the gains in GameStop (GME), a brick-and-mortar video-game retailer, were due to a massive short squeeze after retail investors piled into the stock, which hedge funds heavily shorted. Shares of movie-theater operator AMC Entertainment Holdings (AMC) and retailer Bed Bath & Beyond underwent similar experiences.

Is Shorting a Stock Wrong?

Short selling often raises ethical and moral concerns, particularly because it profits from the decline of a company’s share price. From a regulatory standpoint, short selling is legal and is recognized as a legitimate trading strategy. The practice can also aid with price discovery, which is how the market determines the fair value of a financial asset.

Concerns arise when short selling is associated with market manipulation, or when it is used to target companies for reasons outside of share valuation.

Legal and Ethical Considerations

Some investors have attempted to manipulate stock prices by spreading false bullish. Such tactics are considered market manipulation, and are illegal. Anyone caught attempting to manipulate markets might be subject to regulatory punishment by the Securities and Exchange Commission (SEC).

The ethical considerations about short selling focus on its potential to harm markets and the companies that list shares on them. Some critics argue that it can be used to spread false information about a company’s performance or long-term sustainability, especially during a short squeeze. Proponents suggest that short selling helps identify overvalued stocks, which can help make markets more efficient.

Alternatives to Shorting a Stock

Investors that want to capitalize on potential stock price declines, but without directly shorting them, can consider alternative strategies.

The first alternative to consider are put options. A put option is an options contract that gives the buyer the right to sell shares of an underlying asset at its strike price up until the option’s expiration date. The put option buyer pays a premium for the contract.

For example, imagine that an investor wants to short a stock whose shares are currently selling for $10. The investor believes the company is overvalued and the stock will soon head to $8 or lower.

The investor would buy a put option for the stock with a strike price of $10 and an expiration date of three months in the future. The investor pays a $1 premium for the put. If the stock falls under $10 during that time, the investor could exercise the contract to make money on the put option.

Suppose the stock falls below $8, as the put option investor forecasted. They could sell it for an increased premium to someone else. If an investor were to exercise the option, they’d profit from being able to sell shares for $10 that are worth $8, pocketing the $2 difference, minus the $1 premium, leaving them with $1. Since each option contract is usually worth 100 shares, the total profit would be $100.

Inverse ETFs

Inverse ETFs, or short ETFs, are another way to make a bearish trade. These investment vehicles use futures contracts to provide returns that are opposite the performance of an underlying index. Inverse ETFs assume either the broader markets, a particular asset class, or a market sector will go down in the short term.

For example: investors who believe a stock price will drop can buy a futures contract at a higher price, and if the share price does go down, the trader can buy the cheaper shares and then sell them at the higher price specified in the futures contract, thus realizing a profit.

An inverse ETF aims to provide opposite returns of a benchmark index uding derivatives such as futures or swaps, rather than directly shorting stocks. The biggest such ETFs are designed to provide the inverse returns of indexes like the Russell 2000 or the S&P 500. For example, if the S&P 500 goes down 1% on a given day, then a corresponding inverse ETF could be designed to go up 1% that day.

The Takeaway

Shorting a stock occurs when investors bet that the price of a specific stock or ETF will fall. Sophisticated investors with a bearish view of the market will often go short to profit from falling share prices. Short positions also help investors mitigate losses during widespread market downturns or hedge losses from another holding.

While shorting can be a useful investment tool, it’s also very risky. There is no limit to how high a stock can go, meaning there’s also no limit to the losses a short seller can potentially book. Trading on margin can multiply losses as well if the short sale does not go as the trader anticipates. In some cases, using an options trading strategy may accomplish similar results to going short.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is a margin account and why do I need one for short selling?

A margin account is a type of brokerage account that allows investors to borrow money from their brokers to increase their purchasing power. A margin account is required in order to borrow the shares necessary to take a short position.

How can I manage the risks of short selling?

Thorough research and a robust strategy can help manage some of the risk involved in short selling. Traders may want to consider setting up and using stop-loss orders, which can exit a trader from their position if the stock gains value during a certain period of time. Lastly, it’s crucial to only invest as much as you are willing to lose. This can help right-size the role short selling has in your portfolio.

Can I short sell any stock?

No, there are restrictions on which stocks can be shorted, and they typically depend on the specific brokerage’s rules. For example, investors may not be able to short penny stocks, or short during specific market periods. There are also regulations about shorting that traders need to be aware of as well.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

*Borrow at 11%. 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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

SOIN-Q125-115

Apr

2025

Understanding the Put/Call Ratio in Market Analysis

By Brian Nibley | Growing Wealth, invest, Investing, Terminology | Comments Off

The put to call ratio (PCR) is a mathematical indicator that investors use to determine market sentiment. The ratio reflects the volume of put options and call options placed on a particular security or market index. Analysts interpret this information into either a bullish (positive) or bearish (negative) near-term market outlook.

The idea is simple: The ratio of how many people are betting against the market, versus how many people are betting in favor of the market, should provide a gauge of the general mood investors are in.

A high put/call ratio is thought to be bearish because more investors are taking short positions, while a low put/call ratio is thought to be bullish as more investors are taking long positions. Investor Martin Zweig invented the put/call ratio and used it to forecast the 1987 stock market crash.

Key Points

• The put/call ratio measures market sentiment by comparing the volume of put options to call options traded.

• A ratio below typical averages (often around 0.7) indicates bullish sentiment, while a higher may suggest bearish sentiment.

• Traders use the put/call ratio alongside other indicators to inform trading strategies.

• Extreme values in the put/call ratio can signal potential market reversals.

• Historical benchmarks and current market conditions are essential for interpreting the put/call ratio.

What Is Put Call Ratio?

The put/call ratio is a measurement of the number of puts versus the number of calls traded during a certain timeframe. It can apply to a specific security, a market index, or the broader market. The options trading ratio is expressed as a simple numerical value.

Definition and Significance

The higher the number, the more puts there are, which shows that investors are betting in favor of future price declines. The lower the number, the more calls there are on a security, indicating that investors are betting in favor of future price increases.

Analysts most often apply this metric to broad market indexes to get a feel for overall market sentiment in conjunction with other data points. For example, the Chicago Board Options Exchange (CBOE) put-to-call ratio is one of seven factors used to calculate the Fear & Greed Index by CNN Business.

Key Takeaways

The put/call ratio can also be applied to individual stocks by looking at the volume of puts and calls on a stock over a certain period.

Calculating the Put-Call Ratio

The put/call ratio equals the total volume of puts for a given time period on a certain market index or security divided by the total volume of calls for the same time period on that same index or security. The CBOE put/call ratio is this calculation for all options traded on that exchange.

There can also be variations of this. For example, total put open interest could be divided by total call open interest. This would provide a ratio for the number of outstanding puts versus the number of outstanding calls. Another variation is a weighted put/call ratio, which calculates the dollar value of puts versus calls, rather than the number.

Looking at a put/call ratio chart can show you how that ratio, and thus the market sentiment, has changed over time.

Formula and Calculation Methods

The formula for the put/call ratio (PCR) is straightforward:

Put-Call Ratio = Volume of Put Options/Volume of Call Options

The ratio can also be calculated using open interest instead of volume. Open interest represents the total number of outstanding options contracts. For example, dividing the open interest for puts by the open interest for calls gives the PCR based on total market activity.

Suppose an investor is trying to assess the overall sentiment for a stock. The stock showed the following volume of puts and calls on a recent trading day:

Number of puts = 1,400
Number of calls = 1,800
The put/call ratio for this stock would be 1,400 / 1,800 = 0.77.

Index, Equity, or Total — What the Numbers Indicate

The put/call ratio can apply to different segments of the market, including individual equities, broad market indexes, or the total market.

• Equity PCR focuses on the sentiment surrounding a specific stock. A higher equity PCR for a stock signals bearish sentiment, while a lower ratio indicates bullish sentiment.

• Index PCR examines options activity on market-wide indexes, such as the S&P 500, providing insight into overall market sentiment.

• Total PCR aggregates all options activity across equities and indexes, offering a broad perspective on market dynamics.

Each PCR value must be interpreted in the context of historical benchmarks and market conditions to provide actionable insights.

Interpreting the Put-Call Ratio

The PCR offers valuable insights into market sentiment, but its interpretation requires context and nuance. By analyzing the PCR alongside historical benchmarks and current market conditions, traders can gauge whether sentiment is overly optimistic, overly pessimistic, or balanced. This can help traders guide their strategies effectively.

How to Read the Ratio

A specific PCR value can broadly be defined as follows:

• A PCR below 0.7 implies that investors are expecting upward price movement, as they’re buying more call options than put options.

• A PCR of more than 0.7 implies that investors are expecting downward price movement, as they’re buying more put options than call options.

• A PCR equal to 0.7 indicates investors expect a neutral trend, as purchases of both types of options are at the same level.

Contrarian Indicator — What the Numbers Mean

Although PCR has a specific, mathematical root, it is still open to interpretation, depending on your options trading strategy. Different investors might take the same value to mean different things.

Contrarian investors, for example, may believe that the market sentiment is wrong or unfounded. Their move is to act contrary to what others are doing. A contrarian investor might therefore perceive a high put/call ratio to be bullish because it suggests that most people believe prices will be heading downward soon.

Momentum investors believe in trying to capitalize on prevailing market trends. If the price of something is going up, it could be best to capitalize on that momentum by buying, based on these investors’ perspectives. A momentum investor could also believe the opposite, however, and that a high PCR should be seen as bearish because prices could be trending downward soon.

To take things a step further, a momentum investor might short a security with a high put/call ratio, hoping that since most investors appear to already be short, this will be the right move. On the other hand, a contrarian investor could do the opposite and establish a long position, based on the idea that what most people expect to happen is the opposite of what’s actually coming.

Using the Put/Call Ratio in Trading

The put/call ratio is a versatile tool in trading, offering insights into potential market reversals or confirming existing trends. Investors often use PCR values in conjunction with other technical indicators like moving averages, Bollinger Bands, and momentum oscillators.

One approach is to monitor extreme PCR values. A significantly high PCR might indicate oversold conditions, suggesting a potential reversal upward, while an extremely low PCR could suggest overbought conditions, pointing to a possible downward correction.

Trading Strategies Based on the Ratio

Traders can employ various strategies using the put/call ratio:

• Trend Confirmation: Uses the PCR to confirm existing trends. For instance, if the ratio is low during a market uptrend, it may reinforce bullish sentiment.

• Contrarian Trading: Identifies overbought or oversold market conditions by observing PCR extremes. Contrarians might go against prevailing sentiment by taking long positions when the PCR is unusually high.

Options Spread Strategies: Combines the PCR with spread strategies, such as straddles or strangles, to capitalize on expected volatility.

💡 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.

Put/Call Ratio as a Market Sentiment Tool

The PCR provides a snapshot of market sentiment, serving as a barometer for investor confidence. A low PCR often signals optimism, as more investors are betting on upward movement, while a high PCR reflects pessimism or risk aversion.

Traders frequently use the PCR in tandem with news events, economic data, or earnings reports to gauge the prevailing mood and position their portfolios accordingly.

Advanced Analysis of the Put/Call Ratio

In more sophisticated market analysis, the put/call ratio can provide deeper insights beyond simple bullish or bearish signals. By examining extremes, smoothing techniques, and adjustments based on varying market conditions, traders can refine their understanding of market sentiment and make more informed decisions. Consider these advanced methods for analyzing the PCR to enhance trading strategies.

Analyzing Put/Call Ratio Extremes

Extreme PCR values — either very high or very low — can signal turning points in the market. For example, a PCR above 1.5 might suggest panic selling, a potential precursor to a rebound. Conversely, a PCR below 0.5 might signal overconfidence, increasing the likelihood of a pullback.

Smoothing and Adjusting the Put/Call Ratio

Traders can use moving averages of the PCR to mitigate noise and short-term fluctuations. A 10-day moving average smooths out daily variations, making it easier to identify trends. Additionally, weighting the PCR based on the value of options contracts provides a more balanced view of sentiment.

The Put/Call Ratio in Different Market Contexts

The PCR takes on different implications depending on the broader market context:

• Bull Markets: In a sustained uptrend, a low PCR reinforces optimism, while a high PCR may signal caution.

• Bear Markets: During downturns, a high PCR aligns with prevailing sentiment, while a low PCR could indicate that short-covering is driving temporary rallies.

Market cycles and external influences like monetary policy changes or geopolitical events should be factored in when analyzing PCR values.

CBOE Equity Put/Call Ratio Analysis

The CBOE Equity Put/Call Ratio measures sentiment in equities traded on the exchange. A high ratio signals bearish sentiment as investors hedge against declines, while a low ratio reflects bullishness, with more bets on price increases. Comparing current values to historical benchmarks helps identify potentially overbought or oversold conditions.

Put/Call Ratio in ETFs and Other Instruments

The Put/Call Ratio in ETFs gauges market sentiment around broader sectors or themes. For example, a high PCR in a sector-based ETF may indicate pessimism, whereas a low ratio suggests optimism. The ratio can also be applied to non-equity instruments, such as commodities or volatility indexes, offering insights tailored to each market’s unique drivers.

Practical Applications of the Put/Call Ratio

Traders use the Put/Call Ratio to spot extremes in market sentiment, with high values signaling potential buying opportunities and low values suggesting caution. Long-term investors incorporate it alongside other metrics to assess trends and manage risk, making it a key tool for sentiment-driven decision making. These are just two practical uses for the put/call ratio.

Historical Data

Analyzing historical PCR data helps traders understand typical ratio ranges for specific securities or market indexes. This historical context provides a benchmark for evaluating current readings.

For example, if the S&P 500’s PCR historically oscillates between 0.7 and 1.2, any values outside this range could signal a significant shift in sentiment.

Real-World Examples of Put/Call Ratio Usage

A trader might observe a spike in the PCR for a major index ahead of a Federal Reserve announcement. This could indicate that investors are hedging against potential market volatility. If the announcement turns out to be market-neutral, the PCR may normalize, allowing traders to capitalize on the unwinding of positions.

The Takeaway

The put/call ratio is a simple metric used to gauge market sentiment. While often used on broad market indexes, investors may also apply the PCR to specific securities. Calculating it only involves dividing the volume of puts by the volume of calls on the market for a security.

The put/call ratio is one factor you might consider as you start trading options.

Explore SoFi’s user-friendly options trading platform.

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SoFi Invest®

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

SOIN-Q125-120

Apr

2025

How Are Leverage and Margin Similar and Different?

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

The terms margin and leverage are often used interchangeably in the world of finance. While both terms refer to strategies that can be used to amplify an investor’s buying power when trading stocks and other securities, they have some key differences.

Margin trading, or “buying stocks on margin,” means borrowing money from your brokerage to purchase more stock than you could with your own funds. Your existing securities serve as collateral.

You will also pay interest on the amount borrowed from the broker.

Leverage is a broader financial concept, referring to the use of debt to take a larger position (whether in securities trading or business acquisitions) to potentially amplify returns. In the context of trading, leverage means using borrowing funds in order to increase trading positions — taking on more risk with the hope of more gains.

The use of leverage also means the possibility of losing more than you have. In addition to the risk of a trade going south, the borrowed funds must be repaid with interest. It’s important to understand how leverage works in terms of margin trading so that you know the amount of risk exposure you have.

Key Points

• Margin trading and leverage use debt to increase buying power and potential returns.

• Both methods significantly increase the risk of substantial financial losses.

• Leverage can be applied through various financial instruments, not just margin accounts.

• Margin trading involves borrowing funds from a broker, increasing exposure.

• With a margin account, the borrowed funds must be repaid with interest, regardless of the outcome of the trade.

Leverage vs Margin

The reliance on borrowed funds, or debt, to enable bigger trades or purchases is commonly known as leverage. Margin trades are a type of leveraged trade.

What Is Leverage?

The use of leverage refers to investors who use debt to finance bigger positions.

The same is true in business: a highly leveraged company is one that has taken on large amounts of debt to fund an expansion or acquisition; in other words, a company with a high debt ratio.

What Is Margin?

Again, margin is a type of leverage. Investors use margin, i.e., borrowed funds, to place bigger trades than they could afford with cash. The securities in their brokerage account are used as collateral for the margin loan.

Margin, or margin accounts, can be set up through a traditional brokerage account or when investing online. Access to margin is highly regulated in terms of how much investors can borrow, and how much collateral is required to place a margin trade.

Investors can use leverage via other means (e.g., leveraged ETFs, which do not require margin accounts).

A Closer Look at Margin

Margin trading is a sophisticated, higher-risk strategy that enables experienced investors to trade securities using money that they’ve borrowed from their broker. As noted, margin can allow bigger trades, with the potential for bigger gains — as well as the potential for steep losses.

For investors who qualify, a margin loan generally allows them to borrow up to 50% of the cost of a trade. Like any other loan, margin funds require collateral from the existing cash and securities in the account; in addition, the loan accrues interest. Margin interest rates fluctuate and are generally decided by the broker.

Traders must also maintain a minimum balance in their margin accounts called maintenance margin. Along with collateral, this can cover potential losses.

The Margin Call

If the account falls below that threshold, the broker can require a deposit to bring the balance up to the minimum amount. This is known as a margin call. If the investor fails to cover the shortfall, the broker can sell securities in the account to restore the necessary balance.

How Margin Trading Works

When using a cash account vs. a margin account to execute trades, every cash trade is secured by moneyfo in the investor’s account, entailing no risk to the broker.

With margin, though, a portion of each trade is secured by the initial margin (or cash), while the rest of the trade is covered by borrowed funds. If the margin requirement is 50%, and you want to place a $10,000 trade, you would need $5,000 in cash.

So while margin trading affords more buying power than investors could achieve with cash alone, the additional risk exposure means that investors always need to maintain a minimum level of collateral to meet margin requirements, or they may face a margin call.

Though margin requirements vary by broker, following are minimums currently required by financial regulators.

Term	Amount	Definition
Minimum margin	$2,000	Deposit amount needed to open a margin account
Initial margin	50%	Percentage of a trade that must be funded by cash
Maintenance margin	25%	Minimum amount of equity in the margin account
Margin call	Any	If a margin account falls below the maintenance margin, the broker will require a deposit to cover the shortfall, or will sell securities in the account to do so.

As noted above, margin trading offers experienced investors some potential upsides as well as risks.

thumb_up

Pros:

• Increases buying power

• Potential for returns

• Can provide an opportunity for diversification

thumb_down

Cons:

• Must meet and maintain margin requirements

• Potential for steep losses

• Investors owe interest on borrowed funds

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 11%* and start margin trading.

*For full margin details, see terms.

A Closer Look at Leverage

Leverage in finance is a word used to describe borrowing money to increase returns. Investors might borrow capital from a broker or bank in order to make trades that are larger than their account’s equity, increasing their trading power.

Companies might use leverage to invest in parts of their business that they hope will ultimately raise the value of the company.

How Leverage Works

Leverage in a stock account is the result of borrowing money to trade securities, using an account’s margin feature. Leverage can work to the benefit or detriment of an investor depending on the movements of an account’s holdings.

Companies often use leverage to amplify returns on their investment projects, and the same logic applies to trading equities. You may see the potential for significant returns on the upside — or you may see your account value drop rapidly if the market moves against you.

Trading with leverage is riskier than strictly using your own cash, because there is the possibility of total loss.

Futures and forex trading often use higher leverage versus a margin account. Forex trading may allow a 1% initial margin. So a $1000 deposit would enable an investor to trade $100,000.

The initial margin amount required for a futures contract can range from 2% to 12%, depending on the commodity.

The Takeaway

Margin trading and leverage can be used to boost returns, but there are substantial risks to consider.
A margin account with stocks allows you to borrow against cash and securities when trading stocks online. Leverage measures the increase in trading power because of using margin.

It’s important to understand your personal risk tolerance before trading on margin and using leverage

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

Get one of the most competitive margin loan rates with SoFi, 11%*

FAQ

Is leverage the same as margin?

Leverage is different from margin. You use a margin account to increase your leverage ratio when trading stocks. Futures and forex trading requires a trader to post margin to use leverage.

Can you trade without leverage?

You can trade without leverage, using securities with cash in your account instead. This method also avoids paying interest on margin balances. The downside is you will not be able to amplify returns as you would when trading on margin or with leverage. You can also trade leveraged ETFs without a margin trading account.

What is margin in stock trading?

Margin in stock trading happens when an investor takes out a loan on an investment with the goal of seeing that asset’s price rise. When the investment is sold, the borrowed funds are returned to the lender, but you as the investor keep the profits. The downside is if the security’s price drops, you will see enhanced losses. In either event, you owe the lender interest on borrowed funds.

Photo credit: iStock/DuxX

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

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For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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 email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q125-113

Apr

2025

Are 401(k) Contributions Tax Deductible? Limits Explained

By Jacqueline DeMarco | Growing Wealth, invest, Investing | Comments Off

Table of Contents

How Do 401(k) Contributions Affect Your Taxable Income?
Do You Need to Report 401(k) Contributions on Your Tax Return?
How Do 401(k) Withdrawals Affect Taxes?
How Do Distributions From a 401(k) Work?
What Are Tax Saver’s Credits?
Alternatives for Reducing Taxable Income

As you’ve been planning and saving for retirement, you may have heard that there’s a “401(k) tax deduction.” And while there are definitely tax benefits associated with contributing to a 401(k) account, the term 401(k) tax deduction isn’t accurate.

You cannot deduct your 401(k) contributions on your income tax return, per se — but the money you save in your 401(k) is deducted from your gross income, which can potentially lower how much tax you owe.

This is not the case for a Roth 401(k), a relative newcomer in terms of retirement accounts. These accounts are funded with after-tax contributions, and so tax deductions don’t enter the picture.

Key Points

• 401(k) contributions are not tax deductible, but they lower your taxable income.

• Roth 401(k) contributions are made with after-tax money and do not provide tax deductions.

• Contributions to employer-sponsored plans like 401(k) or 403(b) are taken out of your salary and reduce your taxable income.

• 401(k) withdrawals are taxed as income, and early withdrawals may incur additional penalties.

• Making eligible contributions to a 401(k) or IRA can potentially qualify you for a Retirement Savings Contributions Credit.

How Do 401(k) Contributions Affect Your Taxable Income?

The benefits of putting pre-tax dollars toward your 401(k) plan are similar to a tax deduction, but are technically different.

• An actual tax deduction (similar to a tax credit) is something you document on your actual tax return, where it reduces your gross income.

• Contributions to an employer-sponsored plan like a 401(k) or 403(b) are actually taken out of your salary, so that money is not taxed, and thus your taxable income is effectively reduced. But this isn’t technically a tax deduction.

People will often say your 401(k) contributions are tax deductible, or you get a tax deduction for saving in a 401(k), but it’s really that your 401(k) savings are deducted from your salary, and not taxed.

The money in the account also grows tax free over time, and you would pay taxes when you withdraw the money.

Example of a 401(k) Contribution

Let’s say you earn $75,000 per year. And let’s imagine you’re contributing 10% of your salary to your 401(k), or $7,500 per year.

Your salary is then reduced by $7,500, an amount that is noted on your W2. As a result, your taxable income would drop to $67,500.

Would that alone put you in a lower tax bracket? It’s possible, but your marginal tax rate is determined by several things, including deductions for Social Security and Medicare taxes, so it’s a good idea to take the full picture into account or consult with a professional.

Recommended: IRA vs 401(k): What’s the Difference?

Do You Need to Report 401(k) Contributions on Your Tax Return?

The short answer is no. Because 401(k) contributions are taken out of your paycheck before being taxed, they are not included in taxable income and they don’t need to be reported on a tax return (e.g. Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors).

Your employer does include the full amount of your annual contributions on your W2 form, which is reported to the government. So Uncle Sam does know how much you’ve contributed that year.

You won’t need to report any 401(k) income until you start taking distributions from your 401(k) account — typically after retiring. At that time, you’ll be required to report the withdrawals as income on your tax return, and pay the correct amount of taxes.

When you’re retired and withdrawing funds (aka taking distributions), the hope is that you’ll be in a lower tax bracket than while you were working. In turn, the amount you’re taxed will be relatively low.

How the Employer Match Works

When an individual receives a matching contribution to their 401(k) from their employer, this amount is also not taxed. A typical matching contribution might be 3% for every 6% the employee sets aside in their 401(k). In this case, the matching money would be added to the employee’s account, and the employee would not owe tax on that money until they withdrew funds in retirement.

How Do 401(k) Withdrawals Affect Taxes?

The tax rules for withdrawing funds from a 401(k) account differ depending on how old you are when you withdraw the money.

Generally, all traditional 401(k) retirement plan distributions are eligible for income tax upon withdrawal of the funds (note: that rule does not apply to Roth 401(k)s, since contributions to those plans are made with after-tax dollars, and withdrawals are generally tax free).

If you withdraw money before the age of 59 ½ it’s known as an “early” or “premature” distribution. For these early withdrawals, individuals have to pay an additional 10% tax as a part of an early withdrawal penalty, with some exceptions, including withdrawals that occur:

• After the death of the plan participant

• After the total and permanent disability of the plan participant

• When distributed to an alternate payee under a Qualified Domestic Relations Order

• During a series of substantially equal payments

• Due to an IRS levy of the plan

• For qualified medical expenses

• Certain distributions for qualified military reservists called to active duty

For individuals looking to withdraw from their 401(k) plan before age 59 ½, a 401(k) loan may be a better option that will not result in withdrawal penalties, but these loans with their own potential consequences.

How Do Distributions From a 401(k) Work?

Once you turn 59 ½, you can withdraw 401(k) funds at any time, and you will owe income tax on the money you withdraw each year. That said, you cannot keep your retirement funds in the account for as long as you wish.

When you turn 73, the IRS requires you to start withdrawing money from your 401(k) each year. These withdrawals are called required minimum distributions (or RMDs), and it’s important to understand how they work because if you don’t withdraw the correct amount by Dec. 31 of each year, you could get hit with a big penalty.

Prior to 2019, the age at which 401(k) participants had to start taking RMDs was 70 ½. The rule changed in 2019 and the required age became 72. In 2023 the rule changed again and you currently need to start taking RMDs at age 73 (as long as you turn 72 after December 31, 2022). Now, when you turn 73 the IRS requires you to start taking withdrawals from your 401(k), or other tax-deferred accounts (like a traditional IRA or SEP IRA).

If you don’t take the required minimum amount each year, you could face another requirement: to pay a penalty of 25% of the withdrawal you didn’t take — or 10% if the mistake is corrected within two years.

All RMDs from tax-deferred accounts like 401(k) plans are taxed as ordinary income. If you withdraw more than the required minimum, no penalty applies.

What Are Tax Saver’s Credits?

Making eligible contributions to an employer-sponsored retirement plan such as a 401(k) or an IRA can potentially lead to a tax credit known as a Retirement Savings Contributions Credit, or a Saver’s credit. There are three requirements that must be met to qualify for this credit.

1. Individual must be age 18 or older.

2. They cannot be claimed as a dependent on someone else’s return.

3. They can not be a student (certain exclusions apply).

The amount of the credit received depends on the individual’s adjusted gross income.

The credit amount is typically 50%, 20%, or 10% of contributions made to qualified retirement accounts such as a 401(k), 4013(b), 457(b), traditional or Roth IRAs.

The maximum contribution amount that qualifies for this credit is $2,000 for individuals, and $4,000 for married couples filing jointly, bringing the maximum credit to $1,000 for individuals and $2,000 for those filing jointly. Rollover contributions don’t qualify for this credit.

Alternatives for Reducing Taxable Income

Aside from contributing to a traditional 401(k) account, there are other ways to reduce taxable income while putting money away for the future.

Traditional IRA: Traditional IRAs are one type of retirement plan that can lower taxable income. Individuals may be able to deduct their traditional IRA contributions on their federal income tax returns. The deduction is typically available in full if an individual (and their spouse, if married) doesn’t have retirement plan coverage offered by their work. Their deduction may be limited if they or their spouse are offered a retirement plan at work, and their income exceeds certain levels.

SEP IRA: SEP IRAs are a possible alternative investment account for individuals who are self-employed and don’t have access to an employee sponsored 401(k). Taxpayers who are self-employed and contribute to an SEP IRA can qualify for tax deductions.

403(b) Plans: A 403(b) plan applies to employees of public schools and tax-exempt organizations, and certain ministers. Employees with 403(b) plans can contribute some of their salary to the plan, as can their employer. As with a traditional 401(k) plan, the participant doesn’t need to pay income tax on any allowable contributions, earnings, or gains until they begin to withdraw from the plan.

Charitable donations: It’s possible to claim a deduction on federal taxes after donating to charities and non-profit organizations with 501(c)(3) status. To deduct charitable donations, an individual has to file a Schedule A with their tax form and provide proper documentation regarding cash or vehicle donations.

To deduct non-cash donations, they have to complete a Form 8283. For donated non-cash items, individuals can claim the fair market value of the items on their taxes. from the IRS explains how to determine vehicle deductions. For donations that involve receiving a gift or a ticket to an event, the donor can only deduct the amount of the donation that exceeds the worth of the gift or ticket received. Individuals are generally required to include receipts when they submit their return.

Earned Income Tax Credit: Individuals and married couples with low to moderate incomes may qualify for the Earned Income Tax Credit (EITC). This particular tax credit can help lower the amount of taxes owed if the individual meets certain requirements and files a tax return — whether or not the individual owes money. Filing a return in this case can be beneficial, because if EITC reduces the amount of taxes owed to less than $0, then the filer may actually get a refund.

The Takeaway

Individuals who expect a 401(k) deduction come tax time may be disappointed to learn that there is no such thing as a 401(k) tax deduction. But they may be pleased to learn the other tax benefits of contributing to a 401(k) retirement account.

Contributions are made with pre-tax dollars, which effectively lowers one’s amount of taxable income for the year — and that may in turn lower the amount of income taxes owed.

Once an individual reaches retirement age and starts withdrawing funds from their 401(k) account, that money will be considered income, and will be taxed accordingly.

Another way to maximize your retirement savings: Consider rolling over your old 401(k) accounts so you can manage your money in one place with a rollover IRA. SoFi makes the rollover process seamless and simple. There are no rollover fees. The process is automated so you’ll avoid the risk of a penalty, and you can complete your 401(k) rollover quickly and easily.

Help grow your nest egg with a SoFi IRA.

You may also be interested in:

What Is a 401(k)? A Beginner’s Guide

When Can You Withdraw From Your 401(k)?

How to Save for Retirement

About the author

Jacqueline DeMarco

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

SoFi Invest®

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

What Is Vega in Options Trading?

How Vega Works

Implied Volatility

Characteristics of Vega

What Does Vega Show?

Vega Options Example

How Can Traders Use Vega in Real-Life?

Benefits of Vega

Vega Neutral: Another Strategy

The Takeaway

What Is Shorting a Stock?

Example of Shorting a Stock

Why Short a Stock?

How to Short a Stock

1. Set Up a Margin Account

2. Identify a Stock to Short

3. Place a Short Sell Order

4. Monitor Your Position

5. Close the Short Position

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

What Are The Risks and Rewards of Short Selling?

Risks of Short Selling

Potential Benefits of Short Selling

Short Selling Techniques and Best Practices

What Happens in a Short Squeeze?

Is Shorting a Stock Wrong?

Legal and Ethical Considerations

Alternatives to Shorting a Stock

Inverse ETFs

The Takeaway

FAQ

What is a margin account and why do I need one for short selling?

How can I manage the risks of short selling?

Can I short sell any stock?

What Is Put Call Ratio?

Definition and Significance

Key Takeaways

Calculating the Put-Call Ratio

Formula and Calculation Methods

Index, Equity, or Total — What the Numbers Indicate

Interpreting the Put-Call Ratio

How to Read the Ratio

Contrarian Indicator — What the Numbers Mean

Using the Put/Call Ratio in Trading

Trading Strategies Based on the Ratio

Put/Call Ratio as a Market Sentiment Tool

Advanced Analysis of the Put/Call Ratio

Analyzing Put/Call Ratio Extremes

Smoothing and Adjusting the Put/Call Ratio

The Put/Call Ratio in Different Market Contexts

CBOE Equity Put/Call Ratio Analysis

Put/Call Ratio in ETFs and Other Instruments

Practical Applications of the Put/Call Ratio

Historical Data

Real-World Examples of Put/Call Ratio Usage

The Takeaway

Leverage vs Margin

What Is Leverage?

What Is Margin?

A Closer Look at Margin

The Margin Call

How Margin Trading Works

Pros:

Cons:

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 11%* and start margin trading.

A Closer Look at Leverage

How Leverage Works

The Takeaway

FAQ

Is leverage the same as margin?

Can you trade without leverage?

What is margin in stock trading?

How Do 401(k) Contributions Affect Your Taxable Income?

Example of a 401(k) Contribution

Do You Need to Report 401(k) Contributions on Your Tax Return?

How the Employer Match Works

How Do 401(k) Withdrawals Affect Taxes?

How Do Distributions From a 401(k) Work?

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