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HODL is slang in the cryptocurrency community for holding onto a crypto for dear life, rather than selling it when the market is volatile.

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A health savings account (HSA) and a flexible savings account (FSA) both serve to set aside funds for qualified medical expenses and help you save money on taxes.

The main difference between an HSA vs FSA? Anyone can have an HSA as long as they are enrolled in a high-deductible health plan (HDHP). An FSA can only be offered by an employer to employees.

There are additional benefits and limitations to consider when comparing an FSA vs. HSA. Here, you’ll learn:

•   What is a health savings account (HSA)?

•   What are the pros and cons of an HSA?

•   What is a flexible spending account (FSA)?

•   What are the pros and cons of an FSA?

•   What are the differences between an HSA vs. an FSA?

•   How to choose between an HSA and an FSA?

What Is a Health Savings Account (HSA)?

There are several types of savings accounts designed to help people put away pre-tax dollars for medical expenses. But they all sound so similar, including:

•   HSAs, or health savings accounts

•   FSAs, or flexible savings accounts

•   HRAs, or health reimbursement arrangements

•   MSAs, or medical savings accounts

It’s easy to get confused.

An HSA (health savings account) enables employees and freelancers to accumulate tax-free funds to be used for current and future medical purposes, including copays, glasses, teeth cleanings, and more.

To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP). While an HDHP often has the benefit of lower monthly premiums, you could end up paying a lot of dough out-of-pocket before meeting its high deductible. An HSA can help bridge the gap between your high deductible and out-of-pocket medical expenses.

What’s more, the funds in an HSA belong to you, travel with you when you change jobs, and can roll over year after year. They are not “use it or lose it” accounts. They may also earn interest or other earnings, which are not considered taxable interest. Another point to note: After age 65, you may use the funds for non-medical expenses, though the money withdrawn will be taxable in that situation.

Recommended: How Does a Medical Savings Account Work?

2022 HSA Contribution Limits

As of 2022, the maximum contribution limits for a health savings plan (HSA) is $3,650 for individuals and $7,300 for families with high-deductible health plans.

Advantages of an HSA

HSAs definitely have their upside. Saving tax-free dollars for unexpected medical costs can provide peace of mind. But there are many other benefits of using an HSA, including:

•   Covering out-of-pocket medical expenses. You can use your HSA funds for a myriad of healthcare costs, as long as they are qualified expenses approved by the IRS.

•   Family healthcare expenses. Your HSA cash can be spent on any family member’s medical cost as long as they’re on your HDHP.

•   Rollover contributions. Unused contributions don’t disappear at the end of the year. They stay in your HSA, growing and accumulating tax-free interest.

•   It’s portable. You can change jobs or careers and keep your HSA. The funds stay with you, not your employer.

•   Investments. You can choose to have your HSA money invested in specific mutual funds once you reach a minimum requirement balance.

•   Retirement funds. After the age of 65, you can use HSA funds for retirement without penalty as you please—be that medical expenses or a trip to Tahiti.
Lower your taxable income. Since HSA contributions go into your account pre-taxes, you could end up owing less to Uncle Sam.

Disadvantages of an HSA

Fair is fair: Now you should know the potential downsides of having an HSA. The cons include:

•   Penalties for non-qualified expenses. Before the age of 65, any money spent on unapproved purchases will be viewed as taxable income. The IRS can impose a hefty 20% penalty on any unqualified expenditures.

•   Account fees. HSAs may charge a low monthly service fee, typically no more than $5 per month. If your HSA participates in mutual fund investments, there may be an annual management fee.

•   Monetary fluctuations. If you choose to invest your HSA money in mutual funds, your balance can rise and fall with the market.

•   Record-keeping for your taxes. HSA contributions and expenses must be reported to the IRS. Keeping tabs on those transactions can be a pain.

Recommended: Tips for Paying Off Outstanding Debt

What Is a Flexible Savings Account (FSA)?

A flexible savings account, or FSA, is a tax-free account used to help cover out-of-pocket medical expenses. There are two big differences between a flexible spending account vs. a health savings account:

•   An FSA is available to all, not only those enrolled in an HDHP

•   FSAs are only offered through an employer’s benefit package.

Maximum contribution limits to a flexible savings account for 2022 are $2,850 per individual.

Advantages of an FSA

Like an HSA, having a flexible savings account or FSA offers many advantages, including:

•   Covering medical expenses. You can use your pre-tax funds on copays, prescriptions, over-the-counter meds, essential dental care, contact lenses, and more.

•   Contributions can come right from your paycheck. You can choose to have pre-tax contributions taken out of your earnings and deposited into your FSA account.

•   Funds are available immediately. If you enroll in an FSA on January 1st, and pledge to contribute $2,400 over the year, paying $200 a month, the $2,400 becomes available for you to use right away.

Disadvantages of an FSA

There are some cons of having an FSA vs. HSA. Ironically, a flexible spending account can be rather inflexible when it comes to certain situations.

The drawbacks of a flexible spending account can include:

•   Use it or lose it. In many cases, if you don’t use your FSA funds by the end of the year, you will forfeit the remaining balance. Some employers may allow certain amounts to be rolled over or a grace period to spend the money.

•   You leave, it stays. Typically, if you quit or change jobs, the money in your FSA stays with your employer.

Key Differences Between HSAs and FSAs

While both HSAs and FSAs offer tax-advantaged ways to pay for medical expenses, they do vary considerably. Here’s a breakdown of the primary differences in an HSA vs. FSA:

Health Savings Account (HSA)	Flexible Spending Account (FSA)
HSAs are created and controlled by the employee or self-employed worker.	FSAs can only be obtained through an employer’s benefits package.
Contributions go where you go, travel with you from job to job or even during times of unemployment.	Contributions can only be used while a person is employed at a company.
To qualify for an HSA, you must be enrolled in a HDHP.	To qualify for an FSA, the health plan provided by the employer does not have to be an HDHP.
Contribution limits are higher for an individual and family. Employers can also contribute.	Lower contribution limits, but a spouse can also contribute to their own FSA if their employer offers one.
Contributions rollover over year-to-year.	Some employers may allow a rollover of some unused funds, but most expire at the end of the year.
HSA funds can be used, tax-free, on qualified expenses after the age of 65. They can be used on non-qualified expenses but are then subject to income tax.	FSA is a salaried benefit. After you retire, you are likely to forfeit any unused account funds.
HSA contributions can be invested into mutual funds.	Money in an FSA cannot be put toward an employee’s personal investments.

How to Choose Between an FSA and HSA

The choice between an FSA and HSA may not be up to you. Many employers offer only one or the other. If you’re a freelance gig worker or make money from home and have a high-deductible health plan, you can qualify for an HSA, but not a flexible spending account.

If you were to find yourself in a position to debate an FSA vs. HSA (say, you were deciding whether to stay self-employed with an HSA or take a full-time job which offered an FSA), ask yourself:

•   Do I want an account that stays with me as I change jobs and into retirement?

•   Is enrolling in a high-deductible health plan worth it in order to have an HSA?

•   Do I want my contributions to be invested?

•   How much do I estimate spending on out-of-pocket medical expenses for myself or my family?

Recommended: Beginner’s Guide to Health Insurance

Can You Have Both an HSA and an FSA?

It is unlikely that you can contribute to both an HSA and an FSA at the same time, unless you have an HSA that is traveling with you from a past job, or your employer offers a limited-purpose FSA to cover specific costs for vision and dental. You can ask your HR representative if such an option exists.

Using HSA and FSA Funds

Typically, setting up an HSA is simple, as is activating and using an FSA. The accounts can come with a debit card and online features, so you can spend money on qualified purchases, check your balance, and contribute and transfer funds just like you’d do with a traditional checking account.

The Takeaway

FSAs and HSAs are very different vehicles, though both of them can help you use pre-tax earnings on out-of-pocket medical costs. Health savings accounts, or HSAs, are only available to those enrolled in high deductible health plans, while FSAs are only possible if your employer offers them. Whichever plan you might be eligible for, it can be wise to look into these accounts since they do offer avenues to make one’s healthcare costs more affordable and optimize your budget.

Another way to enhance your money is with smarter banking. SoFi can help with that. Open a bank account with direct deposit, and you’ll earn a competitive APY, and pay no account fees, so your money can grow faster.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQs

Is HSA or FSA better?

An FSA and HSA both offer ways to set aside tax-free funds to use on qualified medical expenses. However, you usually don’t have the choice of picking one: Only people enrolled in a high-deductible health plan can open an HSA, and only people whose employers offer an FSA can start one.

Can I have both an FSA and HSA?

You can have an FSA and HSA, but you typically can’t contribute to both at the same time unless you have a limited-purpose FSA that covers specific vision and dental costs.

Can you use an HSA for dental?

You can use HSA funds for qualified dental and orthodontic expenses, including cleanings, sealants, and braces.

What can you spend FSA money on?

Qualifying FSA expenses typically include copays, deductibles, prescriptions, over-the-counter drugs, acne treatments, eye and vision care, alternative medicines, and more.

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Photo credit: iStock/zimmytws

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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

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Plastic credit cards are easily destroyed by simply cutting them up with a household pair of scissors. But in recent years, some credit card issuers have started issuing metal credit cards. While these have become somewhat of a status symbol, the problem comes in trying to figure out how to dispose of metal credit cards.

It’s good practice to destroy a metal credit card once you’re done using it so that nobody can access your personal information. However, disposing of a metal credit card is not as easy as using a pair of regular household scissors. Thankfully, there are a few options to consider if you want to know how to destroy a metal credit card.

Why Should You Destroy a Metal Credit Card?

The biggest reason to destroy a metal credit card is to make sure that nobody uses your credit card information.

Even though most credit card companies have a $0 fraud liability policy, you don’t want to deal with the hassle of unauthorized purchases. And even if you’ve canceled your credit card or it’s expired, you’ll still want to destroy it, since it has personal information that might be used in different types of identity theft.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Factors to Consider Before Destroying a Credit Card

Before destroying a metal credit card, you’ll want to make sure that it makes sense to cancel your account.

If you’re still using a credit card through automatic payments or recurring purchases, make sure to cancel those or move them to other cards. Once you close your account and dispose of your metal credit card, any such purchases will be declined.

Also take into account any potential impacts on your credit score that closing your account may have. Closing an account could increase your credit utilization ratio since you’ll have less available overall credit, and it could also lower the age of your accounts, depending on how long you’ve had your account. Both factors could lead to a dip in your credit score.

Before moving forward with closing your account, you’ll also want to take a look at your rewards to ensure you wouldn’t lose what you’ve already earned. Also remember that you’ll still need to pay off your card’s balance in full. Keep an eye out for any final payments that might roll in after your account is closed.

Recommended: When Are Credit Card Payments Due

Ways to Get Rid of a Metal Credit Card

If you’re confident you want to move forward, here are some options for how to dispose of a metal credit card.

Sending It Back to Your Credit Card Issuer

One of the best ways to dispose of a metal credit card is to return it directly to your credit card issuer. Most credit card issuers will provide you with a postage-paid envelope to return your metal credit card, if you ask. This can be a great (and relatively secure) way to dispose of your metal credit card.

Returning It to a Physical Bank Branch

Another option for returning your metal credit card to your credit card issuer is by bringing it to a physical bank branch. Of course, this is only a viable option if your issuer has physical branches near you. If your card has reached its credit card expiration date and you want to get rid of it, this can be a reasonable option.

Stowing It Away

Another option for disposing of a metal credit card is to simply stow it away somewhere safe in your house. This could be a filing cabinet, sock drawer, or anywhere else in your home. While this isn’t a great long-term solution, since there is some risk, it may work in the short-term.

Destroying It on Your Own

The final option for disposing of a metal credit card that you’re no longer using is destroying it on your own. After all, this is the preferred solution for most non-metal credit cards. And it is still possible with a metal credit card, though it is a bit trickier, as you’ll see in the next section.

Guide to Disposing a Metal Credit Card on Your Own

For those who want to DIY the destruction of their metal card, here’s how you destroy metal credit cards.

Using Tin Snips

If you have a pair of tin snips, that’s probably the easiest way to destroy a metal credit card on your own. Tin snips should make quick work of most metal credit cards. If you don’t have a pair of tin snips yourself, check with friends and family to see if you can borrow a pair.

Using Heavy-Duty Scissors

While most traditional or kitchen scissors will not do much to a metal credit card, if you have a heavy-duty pair of scissors, you may be in luck. Heavy-duty scissors made of stainless steel or titanium may be able to help you destroy and dispose of a metal credit card.

Mangling It With Pliers

If you don’t have heavy-duty scissors or tin snips, another option is to use a regular pair of pliers. While this may not be the most practical way to dispose of a metal credit card, it could be worth a try.

Drilling Holes Into It

If you have a power drill with metal-cutting bits, you might be able to dispose of your metal credit card by drilling holes into it. You’d just need to drill enough holes in your card to remove any of your personal information as well as the EMV chip. Keep in mind that you’ll need a powerful drill with special bits — it’s unlikely that a regular drill will do the job.

Using a Blow Torch

If you have access to a blow torch, and are knowledgeable enough about it to be able to use it safely, you may have luck using it to destroy your metal credit card. Of course, if you have a big enough shop to have a blow torch, you probably also have a pair of tin snips. That will be much easier, but maybe not as fun!

Throwing It in Your Fire Pit

While you may be able to destroy your metal credit card by simply throwing it in your fire pit, this may not be the most environmentally-conscious way to dispose of your metal credit card. Many metal credit cards have different kinds of metals in them that may not be safe to burn.

Avoid These Methods for Discarding a Metal Credit Card

Out of the many ways you can dispose of your metal credit card, here are the methods to steer clear of.

Giving It to Third-Party Services

One of the top credit card rules is that you should not give your personal information out to anyone. This still holds true, even if your credit card account is closed. Your personal information can still be used for identity theft or other nefarious purposes. Either destroy your metal credit card yourself, or deal directly with your credit card issuer.

Throwing It Away or Recycling It

You’ll also want to avoid simply throwing your metal credit card away or recycling it. You may be trying to take advantage of “security by obscurity,” hoping that nobody will find it. But because of how a credit card works, it’s easy for anybody that has your card to access your account and your personal information. Don’t take that risk — make sure to destroy your card responsibly.

Recommended: Tips for Using a Credit Card Responsibly

Using a Paper Shredder

While most paper shredders do have the capacity to shred a non-metal credit card, it is unlikely that your typical paper shredder can handle a metal credit card. You are more likely to damage your paper shredder and still have an intact metal credit card.

Using Traditional Scissors

Traditional kitchen scissors will not be able to destroy most metal credit cards. While you’re unlikely to damage your scissors, you’re also quite unlikely to make any progress trying to destroy your metal card with a traditional pair of scissors.

Recommended: Can You Buy Crypto With a Credit Card

The Takeaway

While it may be trickier to destroy a metal credit card than it is to get rid of a plastic credit card, it’s still important to do. You don’t want your personal information floating around for anyone to possibly use. Even if your credit card account is closed, you still run the risk of someone using the card to steal your identity. The easiest way to destroy a metal credit card is securely sending it back to your credit card issuer.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

What is the safest way to destroy a credit card?

The safest way to destroy a metal credit card is to securely send it back to your credit card issuer. Most credit card issuers will send you a postage-paid envelope that will allow you to send the metal card back to them. Alternatively, you can return it directly back to a physical branch location.

How do I get rid of a metal credit card at home?

One of the easiest ways to get rid of a metal credit card at home is using tin snips. If you have a pair of tin snips, they will make quick work of a metal credit card. Just make sure to be careful with the rough metal edges once you cut it up.

Can you burn a metal credit card?

It is possible to burn a metal credit card, though it may not be the most environmentally-conscious thing to do. Burning a metal credit card may release toxic gasses into the air.

Can I destroy my metal credit card with tin snips?

Yes, destroying a metal credit card with tin snips is one of the easiest ways to dispose of a metal credit card. Of all the different options for destroying a metal credit card at home, tin snips are the tool that is most likely to be found in the homes of most credit card consumers.

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Photo credit: iStock/Katya_Havok

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

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New and existing Checking and Savings members who have not previously enrolled in direct deposit with SoFi are eligible to earn a cash bonus when they set up direct deposits of at least $1,000 over a consecutive 25-day period. Cash bonus will be based on the total amount of direct deposit. The Program will be available through 12/31/23. Full terms at sofi.com/banking. SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC.

SoFi members with direct deposit can earn up to 4.00% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 3/17/2023. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet
¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

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Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

While the options market is risky and not suitable for everyone, these contracts can be a tool to make a speculative bet or offset risk in another position.

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

Here’s a guide that covers 10 important options trading strategies–from the most basic to the more complex and advanced.

10 Important Options Trading Strategies for Beginners

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

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

1. Long Calls

Level of Expertise: Beginner

Being long a call option means an investor has purchased a call option. “Going long” calls are a very traditional way of using options. This strategy is often used when an investor has expectations that the share price of a stock will rise but may not want to outright own the stock. It’s therefore a bullish trading strategy.

Let’s say an investor believes that Retail Stock will climb in one month. Retail Stock is currently trading at $10 a share and the investor believes it will rise above $12. The investor could buy an option with a $12 strike price and with an expiration date at least one month from now. If Retail Stock’s price rises to hit $12 within a month, the value or “premium” of the option would likely rise.

2. Long Puts

Level of Expertise: Beginner

Put options can be used to make a bearish speculative bet, similar to shorting a stock, or they can also function as a hedge. A hedge is something an investor uses to make up for potential losses somewhere else. Here are examples of both uses.

Let’s say Options Trader wants to wager shares of Finance Firm will fall. Options Trader doesn’t want to buy the shares outright so instead purchases puts tied to Finance Firm. If Finance Firm stock falls before the expiration date of the puts, the value of those options will likely rise. And Options Trader can sell them in the market for a profit.

An example of a hedge might be an investor who buys shares of Tech Stock C that are currently trading at $20. But the investor is also nervous about the stock falling, so they buy puts with a strike price of $18 and an expiration two months from now.

One month later, Tech Stock C stock tumbles to $15, and the investor needs to sell their shares for extra cash. But the investor capped their losses because they were able to sell the shares at $18 by exercising their puts.

3. Covered Calls

Level of Expertise: Beginner

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

The tradeoff is that if the stock rises above the strike price of the contract, the stock shares will be called away from them, and the shares (along with any future price rises) will be forfeit. So, this strategy works best when a stock is expected to stay flat or go down slightly.

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

4. Short Puts

Level of Expertise: Beginner

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

Here’s an example of a short put: Shares of Transportation Stock are trading at $40 a share. An investor wants to buy the shares at $35. Instead of buying shares however, the investor sells put options with a strike price of $35. If the shares never hit $35, the investor gets to keep the premium they made from the sale of the puts.

Should the options buyer exercise those puts when it hits $35, the investor would have to buy those shares. But remember the investor wanted to buy at that level anyways. Plus by going short put options, they’ve also already collected a nice premium.

5. Short Calls or Naked Calls

Level of Expertise: Intermediate

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

Short calls are like covered calls, but the investor selling the options don’t already own the underlying shares, hence the phrase “naked calls”. Hence they’re riskier and not for beginner investors.

Here’s a hypothetical case: Investor A sells a call option with a strike price of $100 to Trader B, while the underlying stock of Energy Stock is trading at $90. This means that if Energy Stock never rises to $100 a share, Investor A pockets the premium they earned from selling the call option.

However, if shares of Energy Stock rise above $100 to $115, and Trader B exercises the call option, Investor A is obligated to sell the underlying shares to Trader B. That means Investor A has to buy the shares for $115 each and deliver them to Trader B, who only has to pay $100 per share.

6. Straddles and Strangles

Level of Expertise: Intermediate

With straddles in options trading, investors can profit regardless of the direction the underlying stock or asset makes. In a long straddle, an investor is anticipating higher volatility, so they buy both a call option and a put option at the same time. Short straddles are the opposite–investors sell a call and put at the same time.

Straddles and strangles are used when movement in the underlying asset is expected to be small or neutral.

Let’s look at a hypothetical long straddle. An investor pays $1 for a call contract and $1 for a put contract. Both have strikes of $10. In order for the investor to break even, the stock will have to rise above $12 or fall below $8. This is because we’re taking into account the $2 they spent on the premiums.

In a long strangle, the investor buys a call and put but with different strike prices. This is likely because they believe the stock is more likely to move up than down, or vice versa. In a short strangle, the investor sells a call and put with different strikes.

Here’s an example of a short strangle. An investor sells a call and put on an exchange-traded fund (ETF) for $3 each. The maximum profit the investor can make is $6 — the total from the sales of the call and the put options. The maximum loss the investor can incur is unlimited since the underlying ETF can potentially climb higher forever. Meanwhile, losses would stop when the price hit $0 but still be significant.

7. Cash-Secured Puts

Level of Expertise: Intermediate

The cash-secured put strategy is one that can both provide income and let investors purchase a stock at a lower price than they might have been able to if using a simple market buy order.

Here’s how it works: an investor writes a put option for Miner CC they do not own with a strike price lower than shares are currently trading at. The investor needs to have enough cash in their account to cover the cost of buying 100 shares per contract written, in case the stock trades below the strike price upon expiration (in which case they would be obligated to buy).

This strategy is typically used when the investor has a bullish to neutral outlook on the underlying asset. The option writer receives cheap shares while also holding onto the premium. Alternatively, if the stock trades sideways, the writer will still receive the premium, but no shares.

8. Bull Put Spreads

Level of Expertise: Advanced

A bull put spread involves one long put with a lower strike price and one short put with a higher strike price. Both contracts have the same expiration date and underlying security. This strategy is intended to benefit from a rising stock price. But unlike a regular call option, a bull put spread limits losses and can also profit from time decay.

Let’s say a stock is trading at $150. Trader B buys one put option with a strike of $140 for $3, while selling another put option with a strike of $160 for $4. The maximum profit is $1, or the net earnings from the two options premiums. So $4 minus $3 = $1. The maximum profit can be achieved when the stock price goes above the higher strike, so $160 in this case.

Meanwhile, the maximum loss equals the difference between the two strikes minus the difference of the premiums. So ($160 minus $140 = $20) minus ($4 minus $3 = $1) so $20 minus $1, which equals $19. The maximum loss is achieved if the share price falls below the strike of the put option the investor bought, so $140 in this example.

Recommended: A Guide to Options Spreads

9. Iron Condors

Level of Expertise: Advanced

The iron condor consists of four option legs (two calls and two puts) and is designed to earn a small profit in a low-risk fashion when a stock is thought to have little volatility. Here are the four legs. All four contracts have the same expiration:

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

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

3.   Write an call with a higher strike

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

If an individual makes an iron condor on shares of Widget Maker Inc., the best case scenario for them would be if all the options expire worthless. In that case, the individual would collect the net premium from creating the trade.

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

10. Butterfly Spreads

Level of Expertise: Advanced

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

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

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

2.   Writes two at-the-money calls

3.   Buys another higher striking out-of-the-money call.

The Takeaway

Options trading strategies offer a way to potentially profit in almost any market situation—whether prices are going up, down, or sideways. The market is complex and highly risky, making it not suitable for everyone, but the guide above lays out different trading strategies based on the level of expertise of the investor.

Investors who are ready to dip their toe into options trading might consider SoFi’s options trading platform, where they’ll have access to a library of educational content about options. Plus, the platform has a user-friendly design.

Pay low fees when you start options trading with SoFi.

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Photo credit: iStock/Rockaa
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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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