InvestLL Archives

Mar

2025

What is Delta in Options Trading?

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.

In options trading, delta measures the sensitivity of an option’s price relative to changes in the price of its underlying asset. Delta is a risk metric that compares changes in a derivative’s underlying asset price to the change in the price of the derivative itself.

In short, delta measures the sensitivity of a derivative’s price to a change in the underlying asset. Using delta as part of an option’s assessment may help investors make better trades.

Key Points

• Delta measures how option prices change in response to the underlying asset’s price.

• Call options have a delta between 0 and 1; put options have a delta between 0 and -1.

• Higher absolute delta values indicate greater price sensitivity.

• Delta-neutral strategies balance portfolios by offsetting price movements.

• Delta offers a probabilistic estimate of price movement, not a guaranteed outcome.

What Is Delta?

Delta is one of “the Greeks,” a set of trading tools denoted by Greek letters. Some in options trading refer to the Greeks as risk sensitivities, risk measures, or hedge parameters. The delta metric is a commonly used Greek for measuring risk; the other four are gamma, theta, vega, and rho.

Delta Example

For each $1 that an underlying stock moves, the derivative’s price changes by the delta amount. Investors typically express delta as a decimal value or percentage. For example, let’s say there is a long call option with a delta of 0.40. If the option’s underlying asset increased in price by $1.00, the option price would increase by $0.40.

Because delta changes alongside underlying asset changes, the option’s price sensitivity also shifts over time. Various factors impact delta, including asset volatility, asset price, and time until expiration.

For call options, delta increases toward 1.0 as the underlying asset price rises. For put options, delta moves toward -1.0 as the underlying asset’s price falls.

Recommended: A Beginner’s Guide to Options Trading

How Is Delta Calculated?

Analysts calculate delta using the following formula with theoretical pricing models:

Δ = ∂V / ∂S

Where:

• ∂ = the first derivative

• V = the option’s price (theoretical value)

• S = the underlying asset’s price

The formula Δ = ∂V / ∂S represents how small changes in the underlying price (S) affects the option’s value (V).

Some analysts may calculate delta with the more complex Black-Scholes model that incorporates additional factors. This model is a widely used theoretical pricing model that factors in volatility, time decay, and interest rates to estimate an investment’s delta. Traders generally don’t calculate the formula themselves, as trading software and exchanges do it automatically.

How to Interpret Delta

Delta is a ratio that compares changes in the price of derivatives and their underlying assets. The direction of price movements will determine whether the ratio is positive or negative.

Bullish options strategies have a positive delta, and bearish strategies have a negative delta. It’s important to remember that unlike stocks, buying or selling options does not necessarily indicate a bullish or bearish strategy.

Traders use delta to gain an understanding of whether an option will expire in the money or not. The more an option is in the money, the further the delta value will deviate from 0, towards either 1 or -1.

The more an option goes out of the money, the closer the delta value gets to 0. Higher delta means higher sensitivity. An option with a 0.9 delta, for example, will change more if the underlying asset price changes than an option with a 0.10 delta. If an option is at the money, the underlying asset price is the same as the strike price, so there is a 50% chance that the option will expire in the money or out of the money.

Recommended: Differences Between Options and Stocks

Calls: Long and Short

For call options, delta is positive, indicating that the option’s price will increase as the underlying asset increases. Delta’s value for calls range from 0 to 1. When a call option is at the money (i.e. the asset price equals the strike price), the delta is near 0.50, meaning it has an equal probability of being out-of-money or in-the-money. As the underlying asset’s price increases, delta moves closer to 1. This signals that the option has demonstrated a high price sensitivity.

• For long call positions, delta increases toward 1 as the underlying asset’s price rises, signaling greater price sensitivity.

• For short call positions, delta is negative, meaning the position loses value as the asset price increases

Puts: Long and Short

For put options, delta is negative, indicating that the option’s price will increase when the underlying asset’s price decreases. Delta’s value for puts ranges from 0 to -1. As with call options, when a put option is at the money, the delta is near -0.50, representing an equal probability that the put could expire in or out of the money. If an underlying asset’s price decreases, the delta would move closer to -1, which would indicate an option has high price sensitivity to price changes in its underlying asset.

• For long put positions, delta moves closer to -1 as the underlying asset’s price decreases, indicating greater price sensitivity.

• For short put positions, delta is positive, meaning the position loses value as the asset price declines.

How Traders Use Delta

In addition to assessing option sensitivity, traders look to delta as a probability that an option will end up in or out of the money.

Every investor has their own risk tolerance, so some might be more willing to take on a risky investment if it has a greater potential reward. When considering Delta, traders recognize that the closer it is to 1 or -1, the greater the option’s sensitivity is to movements in the underlying asset.

If a long call has a Delta of 0.40, traders often interpret this as a 40% chance of expiring in the money. So if a long call option has a strike price of $30, the owner has the right to buy the stock for $30 before the expiration date. There is believed to be a 40% chance that the stock’s price will increase to at least $30 before the option contract expires. These outcomes are not guaranteed, however.

Traders also use Delta to put together options spread strategies.

Delta Neutral

Traders may also use Delta to hedge against risk. One common options trading strategy, known as Delta neutral, is to hold several options with a collective Delta near 0.

The strategy reduces the risk of the overall portfolio of options. If the underlying asset price moves, it will have a smaller impact on the total portfolio of options than if a trader only held one or two options.

One example of this is a calendar spread strategy, in which traders use options with various expiration dates in order to get to Delta neutral.

Delta Spread

With a delta spread strategy, traders buy and sell various options to create a portfolio that offsets so the overall delta is near zero. With this strategy the trader hopes to make a small profit off of some of the options in the portfolio.

Using Delta Along With Other Greeks

Delta measures an option’s directional exposure. It is just one of the Greek measurement tools that traders use to assess options. There are five Greeks that work together to give traders a comprehensive understanding of an option. The Greeks are:

• Delta (Δ): Measures the sensitivity between an option price and the price of the underlying security.

• Gamma (Γ): Measures the rate at which delta is changing.

• Theta (θ): Measures the time decay of an option. Options become less valuable as the expiration date gets closer.

• Vega (υ): Measures how much implied volatility affects an option’s value. Higher implied volatility generally leads to higher option premiums.

• Rho (ρ): Measures an option’s sensitivity to changing interest rates. Rho is most suited for long-dated options because changes in interest rates have a larger effect on their value.

The Takeaway

Delta provides an estimate of how much the price of an option may change relative to a $1 change in the price of its underlying security. Delta is a useful metric for traders evaluating options and can help investors determine their options strategy. Traders often combine it with other tools and ratios during technical analysis.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

What does a 10 delta option mean? Or a 30 delta option?

A 10 delta option means the option’s price is expected to change by $0.10 for every $1.00 change in the underlying asset’s price. A 30 delta option would change by $0.30 for the same price movement.

What is the ideal delta for a covered call?

The ideal delta for a covered call is typically between 0.30 and 0.40. This range balances earning a decent premium while minimizing the risk of the call being exercised too quickly.

Do you want high or low delta options?

It depends on your strategy. High delta options are more sensitive to price changes in the underlying asset and are closer to being in the money. Low delta options are less sensitive but cost less and are generally further out of the money.

How accurate is delta in options trading?

Delta is an estimate, not a guarantee. It’s generally accurate for small price changes in the underlying asset, but may become less reliable for larger movements since delta itself changes over time (as it’s influenced by gamma).

Why is delta negative for put options?

Delta is negative for put options because their value increases as the underlying asset’s price decreases. The negative delta reflects this inverse relationship.

Does delta increase with volatility?

Not directly. Delta measures price sensitivity, while volatility impacts vega (which reflects changes in option prices due to implied volatility). Higher volatility can push options further in or out of the money, however, indirectly influencing delta.

Photo credit: iStock/PeopleImages

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

SOIN-Q125-106

Mar

2025

man shopping bags with bread and umbrella

Navigating Needs vs Wants: Your Guide to Smart Budgeting

By Julia Califano | Budgeting & Goals | No Comments

Budgets typically require you to categorize your expenses by “needs” versus “wants.” While that sounds straightforward enough, it’s not always easy to do. There may be times when you want something so badly (say, a leather jacket or trendy sneakers), it feels like a need. Or, you might dismiss a real need, like taking a week off work, as a want by not fully grasping its importance to your mental health.

Distinguishing between wants and needs, however, is key to your financial well-being — it provides the framework for a budget, allows you to make the most of the money you have, and can help you reach your future goals.

Read on to learn the real difference between needs versus wants, and how to fit both into your budget.

Key Points

• Differentiating between needs and wants is essential for effective budgeting, as it helps manage essential living expenses while allowing for enjoyable purchases.

• Needs typically include essential items for survival and functionality, such as food, housing, transportation, and healthcare, while wants enhance quality of life.

• The distinction between needs and wants can be subjective, as individual circumstances may influence whether an expense is categorized as essential or indulgent.

• Implementing a budgeting method like the 50/30/20 rule helps allocate finances into needs, wants, and savings, promoting better financial management.

• Regularly reviewing and adjusting budgets ensures they remain relevant to changing financial situations and goals, fostering long-term financial health.

What Is a Need vs a Want?

Both wants and needs are factors that drive your spending behavior. Understanding the difference between wants and needs is key for setting up a budget that allows you to meet your basic needs, enjoy your life, and still work towards your future goals.

• Needs are usually defined for budgeting purposes as your essential living expenses, things necessary for your health, and expenses that are required for you to do your job.

• Wants, on the other hand, are generally defined as desires for things that go beyond the basic necessities. They can range from small indulgences like a fancy coffee or a new hardcover book to luxurious items like a premium car or designer clothes.

To stay on top of your budget and avoid overspending, it’s important to distinguish between needs and wants. However, you may find that these terms are more fluid than they appear at first. While working through your list of expenses, it may seem like items can fit into both categories, making the process somewhat confusing. It can help to dive deeper into what exactly constitutes a need versus a want.

Identifying Your Needs

Strictly defined, money management guides will tell you that a need is something that is necessary to live and function. By this definition, a need includes food, clothing, shelter, and medical care.

In budgeting, however, the category gets broader. There are things that you could technically survive without, but which you need in order to operate as a functional, productive member of society — and to keep that job that’s getting you the paycheck you need to buy food and keep a roof over your head.

For example, if you work in a position that requires you to show up at a specific time and place, transportation is going to be a need, not a want. Since insurance offers financial protection, and in some cases is legally required, you can count insurance as a need.

Needs tend to be recurring expenses that, generally, eat up a large chunk of your paycheck.

Examples of Needs

Here are some common budget items that typically count as needs:

• Rent or mortgage payment

• Utilities (e.g., gas, electricity, water, wifi connection)

• Food

• Transportation

• Insurance

• Necessary clothing

• Health care

Recognizing Your Wants

Wants are basically everything that’s not a need. They are expenses that help you live more comfortably and enhance your quality of life.

Wants are the things you buy for fun or leisure. You could live without them, but you enjoy your life more when you have them. For instance, food is a need, but daily lunches out (vs. bringing a turkey on rye sandwich) are likely to be more of a want. Outerwear is definitely essential to protect you from the elements, but if you have two other coats in your closet, that jacket you’re eyeing is probably a want.

Wants are not inherently bad or a poor use of your money. Often, they can help you accomplish important goals like meeting people and socializing with friends, having fun, or staying healthy. Along with needs, they deserve an important place in your budget.

Examples of Wants

Here are some examples of expenses you might classify as wants in your budget:

• Entertainment

• Dining out

• Travel

• High-end clothing

• Luxury cars

• Fitness classes/gym memberships

• Streaming accounts

• The latest smartphone

• Fancy coffees

• Hobby-related expenses

Where the Line Between Needs vs Wants Gets Blurry

Sussing out your financial needs versus your wants might sound like a simple task. But this seemingly black-or-white issue can actually get surprisingly gray, depending on your situation.

One source of confusion is that wants and needs won’t be the same for everyone. For example, two people may both need a car for work. However, one might need a luxury car to drive around important clients, while the other just needs a car that will get them to and from work. In the second case, a basic car will suffice. Recognizing that you don’t need to go for the top-of-the-line car can help free up funds and give you automatic savings on your spending.

Another complicating factor is that some expenses contain both wants and needs. Your grocery bill, for example, is a need because you need to eat. However, some items on the list, like expensive cheeses, soda, and ice cream represent wants rather than needs. You could survive without them.

The Needs vs Wants Test

To determine if something you want to purchase is a want vs. a need, consider:

• Does this fulfill a basic need? (Basic needs typically include shelter, food, water, security, health care, and necessary clothing.)

• Is this essential to living a healthy life?

• Will not having this in your life cause you any sort of harm?

• Will this make you happier or healthier in the long term?

• Is it necessary for you to do your job?

Another good way to differentiate wants vs. needs is to let some time pass before you make a decision about a purchase. Generally, the desire to purchase a need will grow stronger over time, while the desire for a want will wane with passing time.

Another distinguishing characteristic between needs and wants is that needs rarely change over time, whereas wants are often trends that will fade. If you’re trying to rein in unnecessary spending, it pays to consider whether a purchase will make you happy, healthy, or otherwise fulfilled for a long time or if it’s just something you want because it’s currently popular.

While there’s something to be said for retail therapy, you don’t want to fall into the trap of buying things because they make you feel better in the moment (especially if it means running up credit card debt). These purchases tend to get forgotten relatively quickly, sometimes in a just a few days or weeks. If on the other hand, a purchase will likely serve its purpose for at least two years, you can feel better about spending the money.

Practical Strategies for Budgeting

To account for both needs and wants in your budget, you might consider the 50/30/20 budget method.

This approach divides your net income (whether received via direct deposit, mobile deposit, or another way) into three basic categories, spending 50% on needs, 30% on wants, and 20% on savings and paying off debt (beyond the minimum payment). Just keep in mind that those percentages may not be realistic for everyone. If you live in an area with steep housing costs, for example, you may need to spend more than 50% on needs and take some away from the wants and/or savings categories.

• To see how your spending currently measures up, go through your monthly expenses (including online bill pay), create a master list of things you spend your money on, and then create a list of needs and wants.

• The next step is to tally up what you’re spending in each category and see how the totals compare to your monthly take-home income. If you find your current spending is out of line with your chosen breakdown (such as 50/30/20), you’ll want to make some adjustments.

• Next, you’ll want to look for places to cut back. While you may think your needs’ costs are fixed, it may be possible to shop around for a better price on certain monthly essentials, like insurance or a phone plan. Or, maybe you don’t need to drive to work but could spend less by taking public transportation or carpooling with a coworker.

Typically, however, it’s easiest to find places to cut back in the wants category. For example, you might decide to get take-out less often and cook more nights a week, brown bag your lunch, get rid of streaming services you rarely watch, and/or jog outside instead of going to a gym.

• Any savings you uncover can then go towards your savings and debt repayment category. This can help you to get out from under high-interest debt faster (which will free up even more money for saving) and allow you to work towards goals like building an emergency fund, going on a vacation, buying a home, and funding your retirement.

You can use a 50/30/20 rule calculator to take a closer look at using this budgeting method.

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Reviewing and Adjusting Your Budget

Once you’ve rejiggered your spending and created a basic 50/30/20 (or similar) budget, it’s important to track your spending to make sure you’re sticking to your budget and spending an appropriate amount on needs versus wants.

• One easy way to do this is to put a budgeting app on your phone (many are free for the basic service). Budgeting apps typically connect with your financial accounts (including bank accounts and credit cards), track spending, and categorize expenses so you can see exactly where your money is going each month.

• Once you start tracking your spending, you may find that your original budget breakdown isn’t realistic and you’ll need to make some adjustments to your budget. For example, maybe it isn’t feasible to save 20% of your take-home pay right now. You might start with 5% or 10% and increase the percentage as your income grows.

• It’s also a good idea to check in on your budget every six to 12 months. Your needs, wants, and goals will change over time. The key to creating a sustainable budget is to treat it as a living document and periodically evaluate it and adjust it as necessary to ensure that it meets your current financial goals.

The Takeaway

Some things you need — a place to live, electricity in your home, gas in your car to get to work — and some things you just want, like tickets to a concert or a membership to a gym. The key to smart budgeting is making room for both needs and wants, as well as saving. There are several techniques, from budgeting apps to various popular methods, that can help provide guardrails for your spending. A balanced budget can help you live well right now while also getting you closer to your short- and long-term financial goals.

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FAQ

How do I determine if something is a true need?

To determine if something is a true need, ask yourself if it is essential to your survival, your wellbeing, and doing your job. If the answer is yes, it’s a true need. Sometimes, however, the line is blurry. For instance, you may need a smartphone in order to do your job, but that doesn’t necessarily mean you need the latest pricey model.

What percentage of my budget should go to wants?

If you follow the popular 50/30/20 budget rule, 30% of your take-home pay can go toward wants, such as dining out, travel, and other non-essential spending. In some cases, that amount may vary. If you, say, live in an area with a very high cost of living or you have significant debt (mortgage, student loans, and a car loan), you may reduce that allocation to, say, 20% or less.

How can I reduce spending on wants without feeling deprived?

There are various ways to reduce spending on wants without feeling deprived. A couple of ideas: Instead of paying for a pricey gym membership, you might try different free workouts on YouTube. When you go out to eat with a friend, share a main course or a few appetizers. Or skip the expensive cocktails and after-dinner coffee. You also might create a small bucket in your budget for fun spending: If you know you have $20 a week, it can be a treat to decide whether to go out to lunch or, say, get a manicure with that money.

Is a smartphone a need or a want?

A smartphone is one of those “gray area” items. It’s probably vital for you to have a smartphone and stay connected for work and wellness purposes, meaning it’s a need. However, upgrading to the latest expensive model not because your current phone is broken but because the new version has cool features could be an expense that qualifies as a want.

About the author

Julia Califano

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

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SOBNK-Q125-075

Mar

2025

Credit Spread vs Debit Spread

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

An options spread involves buying and selling different options contracts for the same underlying asset, at the same time. In the world of vertical spreads, there are credit spreads and debit spreads. What is the difference between a credit vs. a debit spread, and what are the potential ways investors may use these strategies?

When an investor chooses a credit spread, or net credit spread, they simultaneously sell a higher premium option and buy a lower premium option, typically of the same security but at a different strike price. This results in a credit to their account.

A debit spread differs from a credit spread in that the investor purchases a higher premium option while selling a lower premium option of the same underlying security, resulting in a net payment or debit from their account.

Keep reading to learn more about the differences between credit spreads and debit spreads, and how volatility may impact each.

Key Points

• Credit spreads result in a net credit to the investor’s account by selling a higher premium option and buying a lower premium one.

• Debit spreads result in a net debit from the investor’s account by buying a higher premium option and selling a lower premium one.

• Credit spreads benefit from time decay and require margin, while debit spreads do not require margin but face time decay as a disadvantage.

• Both strategies allow for flexible risk management without owning the underlying asset.

• The maximum potential gain or loss is determined by the strike prices’ difference and the net premium paid or received.

Why Use a Spread Strategy When Trading Options?

Options contracts give their holder (or buyer) the right, but not the obligation, to buy or sell an underlying asset, often a security like a stock. Having different strategies to trade options gives investors exposure to price movement in an underlying asset, allowing them to take a bullish or bearish position without having to own the security itself. Beyond the market price of the underlying asset, a number of factors — including the level of volatility, time to expiration, and market interest rates — impact the value of the options contract.

With so many factors to consider, investors have developed a host of strategies for how to trade options. A vertical spread comes in two flavors — a credit or a debit spread — which can involve buying (or selling) a call (or put), and simultaneously selling (or buying) another call (or put) at a different strike price, but with the same expiration. Let’s look at these two strategies for trading options.

How a Credit Spread Works

In a credit spread, the investor sells a high-premium option at one strike price and buys a low-premium option at a different strike price, both for the same underlying security and expiration date. Those trades result in a credit to the trader’s account, because the option they sell is worth more than the one they buy. In this scenario, the investor hopes that both options will be out-of-the-money on the expiration date and expire worthless, allowing the investor to keep the original net premium collected.

How a Debit Spread Works

In a debit spread, the investor buys a high-premium option and sells a low-premium option of the same security. Those trades result in a debit from the trader’s account. But they make the trade in the expectation that the price movement during the life of the options contract will result in a profit. The best case scenario is that both options are in-the-money on the day of expiration, allowing the investor to close out both contracts for their maximum potential gain.

Credit Spreads

To help with understanding how credit spreads works: An investor simultaneously buys and sells options on the same underlying security with the same expiration, but at different strike prices. The premium that the investor receives on the option they sell is higher than the premium they pay on the option they buy, which leads to a net return or credit for the investor.

Credit spreads often require traders to have a margin account, as the short leg (or short position) may create a financial obligation if exercised. Before a trader can engage in a credit spread, they’ll need to make sure their brokerage account is appropriately set up.

The strategy takes two forms. The first credit spread strategy is the bull put credit spread, in which the investor buys a put option at one strike price and sells a put option at a higher strike price. Put options tend to increase in value as the underlying asset price goes down, and they decrease in value as the underlying price goes up.

Thus, this is a bullish strategy, because the investor hopes for a price increase in the underlying such that both options expire worthless. If the price of the underlying asset is above the higher strike price put on expiration day, the investor achieves the maximum potential profit. On the flip side, if the underlying security falls below the long-put strike price, then the investor would suffer the maximum potential loss on the strategy. The maximum potential loss is equal to the difference between the two strike prices, minus the net premium received.

Another factor that can work in favor of the investor in credit spread is time decay. This is the phenomenon whereby options tend to lose value as they approach their expiration date. Holding the price of the underlying asset constant, the difference in value between the two options in a credit spread will naturally evaporate, meaning that the investor can either close out both contracts for a gain or let them expire worthless.

The other credit-spread trading strategy is called the bear call credit spread, or a bear call spread. In a way, it’s the opposite of the bull put spread. The investor buys a call option at one strike price and sells a call option at a lower strike price, hoping for a decrease in the price of the underlying asset.

A bull put spread can be profitable if the price of the security remains under a certain level throughout the duration of the options contracts. If the security is below the lower call’s strike price at expiration, then the spread seller gets to keep the entire premium on the options they sell in the strategy. But there’s a risk, too. If the stock falls below the lower strike price at expiration, the investor will face the maximum loss, which is the difference between the strike prices minus the net premium received.

Debit Spreads

A debit spread is the inverse of a credit spread. Like a credit spread, a debit spread involves buying two sets of options, in equal amounts, of the same underlying security with the same expiration date. But in a debit spread, the investor buys one set of options with a higher premium, while selling a set of options with a lower premium.

While the credit spread strategy results in a net credit to the trader’s account when they make the trade, a debit spread strategy results in an immediate net debit in their account, hence the name. The debit occurs because the premium paid on the options the investor purchases is higher than the premium the investor receives for the options they buy.

Investors typically use debit spread strategies to offset the cost of buying an option outright, or to speculate on moderate price movements in the underlying asset. They may choose a debit spread over purchasing a lone option if they expect moderate price movement in the underlying asset.

Like credit spreads, debit spreads can reflect bullish or bearish outlooks. For instance, a bull debit spread involves call options, where the investor purchases a call option at a lower strike price and sells a call option at a higher strike price. A bear debit spread involves puts, where the investor purchases and sells a put option at a lower strike price, aiming to profit from a decline in the underlying asset’s price.

The maximum potential gain is equal to the difference in strike prices minus the net premium paid up front, and is achieved if the underlying asset goes above the higher strike price call on expiration day. Similarly, one can construct a bear-debit spread using put options.

With debit spread strategies, the investor faces an initial outlay on their trade, which also represents their maximum potential loss. Unlike with credit spreads, time decay is typically working against the investor in a debit spread, since they are hoping for both options to expire in-the-money so that they can close out both contracts and pocket the difference.

Pros and Cons of Credit and Debit Spreads, Depending on Volatility

When comparing a credit spread vs. debit spread, here are a few key details to keep in mind.

Credit Spreads	Debit Spreads
Investor receives a net premium when the trade is initiated.	Investor pays a net premium when the trade is initiated.
Maximum potential loss may be greater than the initial premium collected upfront.	Maximum potential loss is limited to the net premium paid.
Requires the use of margin.	Does not require the use of margin.
Time decay works in favor of the investor.	Time decay is working against the investor.

The Takeaway

Spreads are commonly used options trading strategies, whether it’s a credit spread or a debit spread. The spread in these strategies refers to a practice of buying and selling of different options with the same underlying security and expiration date, but with different strike prices.

Key to the strategy is the fact that spreads create upper and lower bounds on potential gains and losses. It’s at the discretion of the investor to choose the strike prices of the options they buy and sell when creating the spread. This gives the investor a degree of flexibility with respect to how much risk they take on.

Explore SoFi’s user-friendly options trading platform.

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

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

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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.

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.

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

SOIN-Q125-102

Mar

2025

Guide to Risk Reversal

By Dan Miller | Growing Wealth, invest, Investing | Comments Off

Risk reversal refers to two distinct concepts: an options hedging strategy in stock trading, or a measure of volatility in forex trading.

From a stock market perspective, you can use a risk reversal option strategy by buying and selling options to protect either a long or short position from risk, though it also limits potential profits.

Risk reversal is also used in foreign exchange trading (forex, or FX) with a slightly different definition. There, risk reversal refers to the difference in implied volatility between call and put options. This can give forex traders an idea of the overall market conditions.

Key Points

• A risk reversal strategy uses options to hedge against potential losses in stock trading.

• For long stock positions, this often means selling a call and buying a put typically out of the money.

• For short stock positions, this often means selling a put and buying a call, typically out of the money.

• In stock trading, a risk-reversal strategy reduces but does not eliminate all risks, including market volatility and premium erosion.

• In forex trading, risk reversal measures the difference in implied volatility between call and put options.

What Is a Risk Reversal Option Trade?

Risk reversal is an options strategy that allows you to protect either a long or short position in a stock by buying put or call options to hedge your position. If you are long a stock, you can buy an out-of-the-money put and sell an out-of-the-money call option to help offset potential losses from adverse movements in the stock. If you are short a stock, you can use a risk reversal trade by selling an out-of-the-money put and buying an out-of-the-money call option contract.

How Does Risk Reversal Work?

Here is how options traders use risk reversal options, and how you might use them to hedge a position that you hold. It’s important to note that while risk reversal can hedge a position, it does not eliminate all risk and may result in losses should the price move unfavorably.

Setup

How you set up a risk reversal depends on whether you are long or short the underlying stock. You’ll want to use both a call and put option contract in each case, but which one you sell and which you buy depends on if you are long or short.

If you are long a stock, you will hedge by writing (or selling) a call option and purchasing a put option. If you are short a stock, you will do the opposite — selling a put option and buying a call option that expires at the same time.

Profit/Loss

Let’s examine a scenario where you are long a stock and want to use risk reversal to hedge some of the risk in your position. So you sell an out-of-the-money call option and buy an out-of-the-money put option, usually at a net credit to yourself.

If the stock’s price goes up past the strike price of your call, you will profit based on the increased value of your stock holding. Your maximum loss occurs if the stock price declines below the strike price of the put option, reduced by the net premium you receive from executing the strategy.

Breakeven

Because you generally hold the underlying stock as well as the option when using risk reversal, there is not a specific breakeven price.

Exit Strategy

Often when using a risk reversal strategy, you will keep repeating the process each month as new options expire. That way you can continue to hold the underlying stock and collect the net premium from your options each month. One of your options may expire in the money, depending on stock price movements. At that point, you’ll need to decide whether to adjust or close your position.

Maintaining a Risk Reversal

Maintaining your risk reversal will depend on the movement of the underlying stock. In an ideal situation, the stock will not make any drastic movements. If the stock’s price closes between the strike price of your call and put options, both will typically expire worthless. That will allow you to continue to use the risk reversal strategy and collect an additional premium.

Risk Reversal Example

Let’s say you are slightly bullish on a stock that is trading at $80 per share. You own 100 shares of that stock and want to protect against risk. You can use the risk reversal strategy by buying a $75 put and selling an $85 call through your brokerage. Prices will vary depending on the delta or theta of the options, but you may receive a slight credit.

If the options expire with the stock in between $75 and $85, both financial instruments will expire worthless. Then you can continue the strategy by buying another put and selling another call. If the stock price rises above $85, your call option will be exercised, and you will close your stock position with a slight profit. This strategy reduces your exposure to downward price movements of the stock below $75, but does not fully eliminate risk. Additionally, put premium could cut into returns as the value of the put option declines over time, potentially offsetting gains from the hedge.

Forex Risk Reversal

Risk reversal has a slightly different meaning in the world of forex trading, having to do with the volatility of out-of-the-money call or put options. In forex trading, positive and negative risk reversal figures reflect the sentiment of traders and their expectations for future price direction.

A positive risk reversal is when the volatility of call options is higher than that of the corresponding put options. A negative risk reversal is when the volatility of put options is higher than that of call options. This information can help traders decide on which strategies might be more effective.

The Takeaway

The risk reversal options strategy is a way to mitigate potential losses from market volatility when trading options to hedge a position in the stock market. In forex trading, risk reversal refers to differences in implied volatility between call and put options. Understanding how different options strategies work can help you better understand the stock market.

Explore SoFi’s user-friendly options trading platform.

🛈 SoFi does not offer forex options trading at this time.

FAQ

Why is it called risk reversal?

The risk reversal strategy gets its name because it allows investors to mitigate or reverse the risk you have from a long or short stock position. If you’re slightly bullish on a stock, you can use risk reversal to protect you against downward movement on the stock.

How are long and short risk reversal different?

With a long risk reversal, you are hedging against a short position in the underlying stock. You can do this by purchasing a call option and funding that call purchase by selling a put option. In a short risk reversal, you are mitigating the risk of a long position by selling a call and buying a put option.

How can you calculate risk reversal?

In forex trading, you can calculate the risk reversal by looking at the implied volatility of out-of-the-money call and put options. If the volatility of calls is greater than the volatility of the corresponding put option contracts, there is positive risk reversal, and vice versa.

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

SOIN-Q125-103

Mar

2025

Financial Windfall: Definition and Ideas on Use

By Kylie Ora Lobell | Budgeting & Goals, Growing Wealth, money | Comments Off

You just came into a cash windfall. You’re happy about this, but you aren’t exactly sure about what to do with it. Should you spend it? Save it? Invest it?

The answer will depend on the size of the windfall and your current financial situation and goals. Here are some ideas for things you can do with a financial windfall to ensure that you are handling it in the smartest way possible.

Key Points

• A good way to use a windfall is to pay down high-interest debts, such as credit card balances.

• It’s also wise to build an emergency fund with at least three to six months of living expenses.

• Consider putting the funds in a high-yield savings account or investing in stocks or bonds for future growth.

• You might allocate funds to personal goals like professional development, starting a side business, or home improvements.

• Another good use for a windfall is donating to a charity for a potential tax deduction and to support causes you care about.

What Is a Financial Windfall

While there’s no one specific definition for a financial windfall, it typically means that you’ve received some unexpected money of a significant amount. For some people, a windfall could be a few hundred dollars; for others, it could be millions.

The key component of a windfall is the element of surprise — you may be surprised by receiving any money at all, the amount of the money, or both. Generally, a windfall isn’t money you’ve factored into your regular income and budget. This can make it a major plus, but it can also lead to some financial challenges, along with some major decisions to make.

Examples of Financial Windfalls

Financial windfalls can come from a variety of sources. Here are some common examples of windfalls:

• Lottery or prize winnings

• Employee bonus

• Tax refund

• Inheritance or life insurance payout

• Major successes in investing

• Profit from selling a property or business

• Injury or lawsuit settlement

3 Tips to Help You Make the Most of Your Money Windfall

If you are fortunate enough to have a windfall land in your lap, you’ll need to decide if you’re going to spend, save, invest, donate the money, or some combination of the above. The following steps can help you come up with a plan that makes the most of your newfound cash.

• Get professional advice: Depending on the size and source of your windfall, you might owe taxes on it and it might push you into a different tax bracket. Consulting with an accountant or financial planner can help you identify the implications.

• Take it slow: While it’s exciting to have cash coming your way, it’s wise to take some time and reflect on how the money would be best spent versus deciding “Dinner’s on me!” for you and your 10 best pals to celebrate. For instance, could your windfall lower or wipe out some debt? Could it be invested? Don’t let the adrenaline rush drive you to make too quick a decision. Take some time to clarify your goals.

• Think long-term: If you’ve received a sizable sum, it may be tempting to quit your day job to travel or take on a passion project. Again, it could be wise to seek financial counseling before you make that type of leap. What sounds like a major sum may not actually be enough to fully finance your dreams. It’s important to look at the financial implications of a major life change carefully.

Remember That Taxes May Be Due on Your Windfall

Depending on the source of your windfall, it may be subject to income taxes. Tax law regarding windfalls is complicated, however, so it’s a good idea to consult an accountant or other tax professional to make sure you understand how much your windfall is actually yours to keep.

Understanding Tax Implications Based on the Source of the Windfall

Whether or not you owe taxes on a windfall will depend on where your windfall is coming from. Here’s a look at some examples:

• Inheritance: In general, any inheritance you receive does not need to be reported to the IRS. However, you may owe state taxes if the amount exceeds a certain threshold.

• Life insurance payout: Proceeds you receive as a beneficiary of a life insurance policy typically aren’t taxable, but if the proceeds have accumulated interest, taxes may be due on that interest.

• Lottery/prize winnings or large bonus: If your windfall is from a lottery, other prize, or large bonus, you are typically taxed at your ordinary income tax rate. This means you will pay taxes on your windfall based upon your tax bracket.

• Sale of property or a business: Profits from selling real estate or a business are generally taxed at the long-term capital gains rate, depending how long you owned the asset.

• A large cash gift: You typically do not have to pay taxes on a windfall that was given to you as a gift; the giver is responsible for paying any gift taxes.

What to Do With a $500 Windfall

Let’s say the amount of money you received was $500. While it isn’t a ton of money, it’s still significant enough that you should figure out what to do with it. Here are a few ideas for what to do with a small windfall.

1. Investing in Real Estate

Did you know that you can become a real estate investor with just $500? Real estate investment trusts (REITs) allow you to invest in real estate on a small scale. Similar to mutual funds, REITs are companies that own a mix of properties and typically pay dividends to investors. Although there is risk involved in investing in REITs, it might be a good way to get your feet wet if you’re interested in real estate investing.

2. Meeting With a Financial Advisor

Hiring a financial advisor to help you learn how to plan for your financial future might be a good use of this money. Financial advisor fees vary: Some charge a flat fee, some charge hourly, some are commission-based. If this professional will be managing a portfolio for you, they may charge 1% to 2% of the portfolio’s value.

3. Buying a New Wardrobe

You could refresh your wardrobe with your new supply of cash. Upgrading your clothes could give you the confidence to go after your professional goals. Or you might splurge on some clothes you’ve been eyeing that give you a self-esteem boost.

4. Traveling Somewhere Cheap

You might plan a weekend getaway or road trip for only $500. Throw in your credit card points or rewards you’ve accumulated to bump up your budget.

5. Investing in a Certificate of Deposit

Another thing you can do with a $500 financial windfall is put it into a certificate of deposit (CD). This is a type of savings account that holds a fixed amount of money for a set period of time and generally pays more than a regular savings account.

6. Getting Your Car Fixed

Have you been putting off car repairs because they’re too expensive? Now that you have $500, it might be time to invest in your vehicle so it’s less likely to break down when you’re on the road.

7. Buying Renter’s Insurance

If you’re a renter, your personal property is not covered under your landlord’s homeowners insurance policy. If you don’t have renter’s insurance, you might use your windfall to buy yourself some peace of mind. The average renter’s insurance cost in the U.S. is $148 per year, which means your windfall could insure your possessions for at least the next three years.

8. Purchasing a Life Insurance Policy

If your family depends on your income, life insurance helps protect them in the event that you pass away. The average cost of a life insurance policy is $26 per month. That means you could pay for the whole year up front with your $500 windfall. Typically, life insurance rates increase as you age and your risk of dying increases. So it’s likely to be less expensive to purchase life insurance while you’re young, rather than waiting until you feel like you can afford it.

9. Taking a Professional Development Class

While private colleges and universities might be too pricey, you may be able to find a class online or at your local community college for less than $500. Finding something that is relevant to your career may even help you move up the ladder at your job.

What to Do With a $1,000 Windfall

Did you receive a $1,000 financial windfall? Here are some ideas for how you might use this sudden influx of cash.

10. Getting Started on Your Emergency Fund

An emergency fund is a separate savings account that you can tap to cover or offset the expense of an unexpected expense or loss of income. If you haven’t started building your emergency fund, or it’s not as robust as it should be, your $1,000 windful could boost your safety net.

11. Hiring an Estate Planning Lawyer

Another important thing you could do with a $1,000 cash windfall is meet with an estate planning lawyer to write your will, establish a trust, and determine your power of attorney. You may feel some peace knowing your family will be protected and your assets will be distributed according to your wishes.

12. Opening a 529 Plan

A 529 plan offers a way to save for your child’s college education. With $1,000, you can get a nice head start on college savings. Your money will grow tax-free and if you withdraw the money for qualified educational expenses, you won’t pay any taxes on those withdrawals.

13. Doing Home Improvements

With $1,000, you could do a small home improvement project like replacing your curtains, painting a room or two, putting down a new kitchen floor, or sprucing up your backyard. If you do the work yourself, you may be able to stretch your financial windfall money even further.

14. Donating It

If there’s a nonprofit you’ve always wanted to support, you might consider using your $1,000 windfall to make a donation. Your money could make a big difference. Plus, you may also be able to deduct the contribution on your taxes (if you itemize).

15. Opening a High-Yield Savings Account

Savings accounts rates are averaging 0.42% APY as of December 16, 2024, according to the FDIC. A high-yield savings account, however, may pay 3.00% APY or higher. Plus, savings accounts are typically insured by the FDIC up to $250,000 per depositor, per insured bank, for each account ownership category, in the event of bank failure.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

16. Saving for Retirement

If you have a 401(k) but haven’t contributed much so far, your windfall could help you increase your savings rate. Or, if you’re eligible to contribute to a traditional or Roth individual retirement account (IRA), you might open one with your $1,000 windfall to boost your retirement savings.

17. Investing in Your Side Hustle

To make money on your $1,000 financial windfall, you might use it to start a low-cost side hustle. Maybe you’re a freelance graphic designer but you need to buy some software to be able to do more detailed work. Or, perhaps you need to purchase a domain name and hire a developer to create a business website. With this initial investment, you may be able to bring in much more money and improve your finances.

What to Do With a $5,000 Windfall

You just got a cash windfall of $5,000. Now what? Here are some ideas.

18. Saving Up for a Down Payment

In some cases, you only need to put 3% to 5% down on a home. That means you could conceivably buy a $150,000 home using your $5,000 financial windfall money as your down payment. More realistically, you could use your windfall to add to money you’ve already saved for your down payment.

19. Paying Off Credit Card Debt

The average consumer credit card debt balance is $6,730. A $5,000 windfall could pay most of that bill off in one fell swoop and could save you a significant amount of money in interest.

20. Investing Via Robo-Advisors

Do you want to invest your $5,000 cash windfall, but you don’t know where to start? Robo advisors create a diversified investment portfolio based on your investment goals and the level of risk you’re willing to take.

21. Investing in Blue-Chip Stocks

You might also consider using your windfall to invest in blue-chip stocks. These stocks are from well-established and financially stable companies that typically pay dividends to investors.

22. Investing in Bonds

Though they carry some risks, bonds are considered relatively safe and stable investments. When you purchase a bond, you’re lending money to an entity like a government or corporation. In return, you receive the interest payments at regular intervals. At the end of the repayment period, you get your original investment amount back.

23. Taking a Vacation

With $5,000, you and your family could potentially take a great vacation within the U.S. For example, your windfall might be enough to fund an RV excursion, urban getaway, visit to a theme park, or a beach retreat. Check out sites like Expedia, Costco Travel, and Booking.com for deals.

What to Do With a $10,000+ Windfall

If you received a cash windfall of $10,000 or more (lucky you!), here are some things you could do with it.

24. Opening a Money Market Account

You could use your $10,000 to open a money market account, which typically earns a higher interest rate than a regular savings account.

25. Paying Off Student Loan Debt

The average federal student loan debt in the U.S. is $37,853 per borrower. If you have a $10,000 financial windfall, you could put a nice dent in your student loan balance.

26. Trying Peer-to-Peer Lending

Using a peer-to-peer lending platform, you could lend your financial windfall money to someone who is looking for a loan and potentially earn a good return. Just keep in mind that this type of lending involves risks.

27. Making Mortgage Payments

You could make a large principal-only payment toward your mortgage loan with a $10,000 cash windfall. This can help you pay off your loan off sooner and save a significant amount of interest. First, verify that there are no prepayment penalties tied to your loan.

28. Going to College

While $10,000 won’t cover a bachelor’s degree unless you also get grants or scholarships, you may be able to earn your associate’s degree at your local community college with your financial windfall money. Or it might cover several classes at a public university that could lead to career advancement.

29. Starting Your Business

Let’s say you want to do more than start a side hustle, and you’re ready to open a small business. A $10,000 windfall could help you get the ball rolling on your business without needing to borrow money. You might consult with a successful business owner in your industry for guidance on how best to allocate your money.

30. Increase Contributions to Your Retirement Account

This can help you build your nest egg, while also reducing your taxable income, which could help offset taxes owed on your windfall (if applicable).

31. Make a Move

If you’re looking to be closer to work or simply want to live in a quieter — or busier — location, a $10,000 financial windfall could be enough to cover the cost of hiring movers.

The Takeaway

Receiving a financial windfall opens up all kinds of possibilities. You might pay down debt, take a vacation, invest the funds, pursue higher education…or even do a little of each. Though it’s tempting to spend your windfall right away, it’s a good idea to step back and think through the wisest way to use your newfound cash. In the meantime, you might park the money in a high-yield savings account. This allows you to earn an above-average interest on your windfall but still keeps the money accessible.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

What amount of money is considered a windfall?

The amount that’s considered a windfall can vary from person to person. For some, it could be a few hundred dollars. For others, a windfall might be thousands or even millions of dollars.

What to do with a $50,000 windfall?

There are many ways to use a $50,000 windfall. You could pay down debt, put a down payment on a home, pump up your retirement account, start or add to a college savings account, do a home renovation, or use it as seed money to start a business.

What can you do with a $100K windfall?

With a $100,000 windfall, you might pay off your mortgage, put a down payment on a home, build your retirement or college savings fund, invest the money for long-term growth, or a combination of the above.

Should you save or invest a windfall?

It depends on your financial situation and goals. If you have high-interest debt, a good use of a windfall is to pay it off. Next, you might start or top off your emergency fund. Whether to save or invest the rest will depend on your goals. For short-term goals, like saving for a vacation, wedding, or new car, consider putting the funds in a high-yield savings account. For goals that are at least five years off (like retirement, buying a house, or a child’s college education) investing may be a better choice.

How can you avoid common mistakes with a windfall?

To avoid common mistakes with a windfall, it’s important to pause and make a plan for how to use the money, rather than spend impulsively. Smart ways to use a windfall include paying off high-interest debt, building an emergency fund, and investing for long-term goals like retirement or a child’s college education.

About the author

Kylie Ora Lobell

Kylie Ora Lobell is a personal finance writer who covers topics such as credit cards, loans, investing, and budgeting. She has worked for major brands such as Mastercard and Visa, and her work has been featured by MoneyGeek, Slickdeals, TaxAct, and LegalZoom. Read full bio.

Photo credit: iStock/TARIK KIZILKAYA

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SOBNK-Q125-090

What is Delta in Options Trading?

What Is Delta?

Delta Example

How Is Delta Calculated?

How to Interpret Delta

Calls: Long and Short

Puts: Long and Short

How Traders Use Delta

Delta Neutral

Delta Spread

Using Delta Along With Other Greeks

The Takeaway

FAQ

What does a 10 delta option mean? Or a 30 delta option?

What is the ideal delta for a covered call?

Do you want high or low delta options?

How accurate is delta in options trading?

Why is delta negative for put options?

Does delta increase with volatility?

Navigating Needs vs Wants: Your Guide to Smart Budgeting

What Is a Need vs a Want?

Increase your savings with a limited-time APY boost.*

Identifying Your Needs

Examples of Needs

Recognizing Your Wants

Examples of Wants

Where the Line Between Needs vs Wants Gets Blurry

The Needs vs Wants Test

Practical Strategies for Budgeting

Reviewing and Adjusting Your Budget

The Takeaway

FAQ

How do I determine if something is a true need?

What percentage of my budget should go to wants?

How can I reduce spending on wants without feeling deprived?

Is a smartphone a need or a want?

Credit Spread vs Debit Spread

Why Use a Spread Strategy When Trading Options?

How a Credit Spread Works

How a Debit Spread Works

Credit Spreads

Debit Spreads

Pros and Cons of Credit and Debit Spreads, Depending on Volatility

The Takeaway

Guide to Risk Reversal

What Is a Risk Reversal Option Trade?

How Does Risk Reversal Work?

Setup

Profit/Loss

Breakeven

Exit Strategy

Maintaining a Risk Reversal

Risk Reversal Example

Forex Risk Reversal

The Takeaway

FAQ

Why is it called risk reversal?

How are long and short risk reversal different?

How can you calculate risk reversal?

Financial Windfall: Definition and Ideas on Use

What Is a Financial Windfall

Examples of Financial Windfalls

3 Tips to Help You Make the Most of Your Money Windfall

Remember That Taxes May Be Due on Your Windfall

Understanding Tax Implications Based on the Source of the Windfall

What to Do With a $500 Windfall

1. Investing in Real Estate

2. Meeting With a Financial Advisor

3. Buying a New Wardrobe

4. Traveling Somewhere Cheap

5. Investing in a Certificate of Deposit

6. Getting Your Car Fixed

7. Buying Renter’s Insurance

8. Purchasing a Life Insurance Policy

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9. Taking a Professional Development Class

What to Do With a $1,000 Windfall

10. Getting Started on Your Emergency Fund

11. Hiring an Estate Planning Lawyer

12. Opening a 529 Plan

Increase your savings
with a limited-time APY boost.*

Increase your savings
with a limited-time APY boost.*

Student Loan
Refinancing

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