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A number of factors affect house prices, including the age, condition, location and size of your home. Also, broader factors like the economy and current interest rates can play a role.

If you’re considering putting your house on the market, it’s important to know what determines property value so you can ensure you get the most out of what’s likely your largest asset.

Read on to learn more about the main factors that make property value increase and how you can figure out how much your home is worth.

Factors that Affect Home and Real Estate Value

Factor #1: Location

There’s a reason everyone will tell you that real estate is about location, location, location — it’s true. When it comes to factors that affect property value, location is one of the biggest determinants.

Keep in mind that while your home’s location works for you, others will have their own criteria. For example, how good are the schools in the area? Is shopping and entertainment accessible? What are property taxes like in the neighborhood? Is it a long commute to downtown or wherever many jobs may be?

Factor #2: Size

Size often isn’t the be-all-and-end-all, but it’s nearly so when it comes to what determines property value. Square footage plays a big role when it comes to house prices. For example, if the median price per square foot in the U.S. is $231 (the March 2025 figure from the Federal Reserve Bank of St. Louis), you’ll be getting more for a house that’s 4,000 square feet than one that’s 2,000 square feet.

It also matters how much of the space in your house is actually usable. Spaces like unfinished garages and basements as well as attics typically won’t boost your home’s value even if they do tack a lot onto the total square footage. What will matter in terms of square footage are areas like bedrooms and bathrooms.

Recommended: Should I Sell My House Now or Wait?

Factor #3: Real Estate Comparables

You’re supposed to love thy neighbor, but you might give them the side-eye if their home is not well-maintained and becomes a drag on the desirability of your street as well as on home prices. When it comes to home values, your neighbors are critical. If their homes are being highly sought by buyers, you’ll likely benefit from the popularity of the area.

The word to know here is comps, or comparable homes in your area that have sold in the last 12 months. These are part of what realtors and home appraisers rely on when estimating how much your home is worth.

Factor #4: Age

While it may be frowned upon to ask someone their age, it’s an essential detail when it comes to home buying. If you’re dealing with a home that has a few decades in the rear-view mirror, you’ll have to do some math. How soon might the roof and other major systems need to be replaced or upgraded? That can affect the price someone is willing to pay, as they might want to pay less if they’re anticipating needing to shell out money for those repairs.

A house that is less than 10 years old — and even better if it’s less than five — can command more money because the buyer has a certain amount of confidence that repair bills shouldn’t be on the immediate horizon. They expect they’ll have time to save money for when that day eventually arrives.

Factor #5: Condition

If your home isn’t in tiptop shape, don’t expect to bring in the big bucks. In fact, if you have the luxury of time, it might behoove you to make any necessary repairs and do any upgrades and updates before you put your house on the market so you can maximize the chances it will get set at a higher price. Consider the cost of home improvements an investment.

At the same time, you don’t want to get too carried away here, as it is possible that you won’t be able to recoup all that you spent. Do just enough so that you might be able to squeak out some profit when you sell. While it varies by region of the country and other factors,projects that can pay off include a garage and/or front door replacement, adding manufactured stone veneer and a minor kitchen remodel. Some of the less profitable projects included an upscale bathroom addition and an upscale master suite addition.

Recommended: Does Net Worth Include Home Equity?

Factor #6: The Economy

You could have crossed all your t’s and dotted all your i’s — your home is attractive inside and out and you’re in a great location. Trouble is, if the economy is less than stellar, you could be stuck until it swings back into positive territory. If people are uncertain and feeling insecure due to the economy, they may decide to delay major life changes, such as buying a home. Or, if they do move forward, they may be looking for bargains, which is a downer for you.

Your local economy and market also figure into the equation. It’s about supply and demand. If there is a shortage of available housing in your area and tons of potential buyers on the hunt, you could capitalize big time on a hot market — think bidding wars and selling your home faster than you could have imagined.

Factor #7: Interest Rates

When interest rates are low, it’s an incentive to buy. This is because doing so can be dramatically less expensive. On the flipside, when interest rates tick upward, fewer people may be able to home shop because it’s more costly. If demand slows, the price you can command may dip as well.

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How to Check What Your Home Is Worth

Get an appraiser: One way to check how much your home is worth is to get an appraiser, someone who is licensed or certified by the state, to conduct a home appraisal. The appraiser will review your home from top to bottom and compare it to other homes in the area and beyond to determine its fair market value.

Make a list of comparables: You could also go dig up property comparables on your own. For example, you can call real estate agents with homes in escrow to learn the sales prices. There are also several websites that could give you valuable insight on your home’s value, including Zillow, Trulia, Redfin, Realtor.com and Eppraisal, among others. You might also use other property tracking apps as well; see if your financial institution offers one.

Use an HPI calculator: Another option is to use a house price index (HPI) calculator , which uses data from mortgage transactions over time to estimate a home’s value. The calculator makes projections based on the purchase price of the home and the changing value of other homes nearby. This tool is ideal for seeing how much a house has appreciated over time and any estimated future changes in mortgage rates.

Recommended: Net Worth by Age Calculator With Examples

The Takeaway

Knowing what factors impact your home’s value is like knowing how much money you have in the bank. Determine where you may have weaknesses so you can make the necessary adjustments to get the maximum value for your home when you go to sell.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

What factors affect the value of a property?

Comparable home values, the age, size, and condition of a property, neighborhood appeal, and the health of the overall housing market can affect home prices.

What decreases property value the most?

Among the key factors lowering property value can be delayed maintenance, sloppily executed home improvements, out-of-date bathrooms, and kitchens, roof damage, and mold.

Can I sue my neighbor for lowering my property value?

Technically speaking, you can, but it may be an uphill battle to prove that your messy or otherwise less-than-desirable neighbor’s property had a negative impact on your financial standing. If you file a lawsuit, you may need to hire a real estate professional to prove that your value dropped due to the neighbor as well as an attorney.

Photo credit: iStock/terng99

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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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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

This article is not intended to be legal advice. Please consult an attorney for advice.

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SORL-Q225-008

The main factors that can hurt a home appraisal include undone but needed updates and repairs, the price of comparable properties, market conditions, your home’s location, and whether you hired an inspector to flag issues or necessary repairs. By getting ahead of the factors within your control before an appraisal, you may get a more favorable answer to the all-important question of what your house is really worth.

The more you know and understand about the home appraisal process, the better. Here’s a crash course of sorts on the process and what negatively affects home appraisal.

A Primer on Home Appraisals

A home appraisal reveals the fair market value of a home, which is important whether you’re buying, selling or refinancing a mortgage. An appraisal can also be used to determine property taxes. Lenders require appraisals because they ensure that the lender won’t offer you a loan that’s more than what the home is appraised value is worth.

So, what do appraisers look for when they do a home appraisal? A real estate appraiser, who is a third party licensed or certified by the state, will review a home inside and out, looking at a home’s age, size, foundation, appliances and neighborhood, among other things. They will then compare the house to similar homes in the area to assess its value.

An appraisal is usually required by a lender when a buyer is getting a mortgage or when someone is refinancing their mortgage. If an appraisal is for a home sale, neither the buyer nor the homeowner can be present.

When someone is refinancing a mortgage, on the other hand, the homeowner is permitted to attend. That no doubt is a plus as it’s an opportunity for the homeowner to ensure the appraiser takes note of any upgrades and new features that could increase their home’s worth.

Things That Can Hurt Your Home Appraisal

Much hinges on the home’s appraisal itself, so you’ll want it to go as smoothly as possible. Start by knowing what hurts a home appraisal so you can avoid any hiccups that could prevent you from getting the highest value for your home.

1. Much-Needed Updates That Never Happened

If you’ve been putting off any needed upgrades, this is when it could come back to bite you. Say you’ve been meaning to renovate your kitchen and somehow just didn’t get around to it. A kitchen that looks pretty much like it did 30 years ago isn’t going to wow anybody, least of all an appraiser who will wonder what else is in decline.

While it can be helpful to take care of some common home upgrades that can net you a return on your investment, you don’t necessarily want to go crazy updating either. Not only could it be tougher to recoup all the money you put into home improvements, you may find that while you love the changes you’ve made, your taste may not have universal appeal. It’s a delicate balance to make upgrades that will get two thumbs up from the appraiser and the potential buyers.

2. Comparable Properties

When it comes to housing, you do kind of have to keep up with the Joneses. With appraisals, it’s all about sales of comparable homes over the last 12 months. What are homes similar to yours on your street or a few blocks over selling for? If they are getting top dollar that will push up the price of your home. On the flip side, if those homes are hanging around on the market for months and selling at prices below expected, that could put a drag on what you can get for yours.

Comparable sales help determine the market, which is why both your real estate and your appraiser will look at them. Ideally, the appraiser, as much as possible, is comparing apples to apples so you get a fair appraisal. The other properties should be similar in size, age and amenities, among other factors. It’s a losing proposition for you if the appraiser goes for the extreme, say a house that sold at a bargain because someone was in a hurry to bail for whatever reason.

Recommended: Should I Sell My House Now or Wait?

3. Skipping a Home Inspection

When it comes to your house, ignorance is not bliss. While you may know when you need to make a repair to a leaky roof, for instance, there can be plenty wrong that’s not obvious to you. That’s why it’s a good idea to have a home inspection before you put your house on the market.

A home inspector can suss out all manner of malfunctions that could be plaguing your house, particularly things you may be clueless about. If you get bad news, think of it as good news since you’ll now have the opportunity to make necessary home repairs before you put your house on the market and an appraiser comes with a magnifying glass of sorts looking for signs of trouble.

4. An Undesirable Location

Few things matter more in the real estate market than location. If you’re in a neighborhood that’s seen as flawed or your house is on a busy or noisy street, that could all come into play when it comes to the value of your property.

Location also counts within your home. If your layout is dated — say it’s old-fashioned and highly compartmentalized instead of today’s more in-demand open layout concepts — that could be less attractive to buyers. Or, they might only be interested in knocking down walls and reconfiguring the space, which likely means they’ll want to pay less for the house if they are going to have put money into it to bring it in line with what they’re looking for.

Recommended: Biweekly Money Saving Challenge

4 Ways to Prevent Low Home Appraisals

Just like there are some things you can get out ahead of before they hurt your home appraisal, there are also some moves you can make to prevent your home appraisal coming in lower than you’d like.

1.   Hire your own appraiser: Typically, the lender hires the appraiser. However, there’s no reason you can’t hire your own appraiser before the sale. Your realtor should have a handle on someone who is experienced and has a reputation for giving fair estimates. You then can ask the buyer or lender’s appraiser to review what your appraiser produced.

2.   Provide records: If you have records of repairs and upgrades that’s the kind of proof that works in your favor. It also doesn’t hurt to have documentation like photos — before and afters aren’t just for an Instagram post of your new haircut.

3.   Prepare for the appraiser’s visit: Don’t dismiss the importance of maintaining curb appeal. Your home should be clean inside and outside before the appraiser comes over. Strive to get as close to an interior design catalog as you can.

4.   Dig up property comparables on your own: You don’t have to leave it to the appraiser and real estate agents to do all the homework. Go the extra mile and consider calling real estate agents with homes in escrow to get the sales prices. Create a list that you can pass along to the appraiser.

Checking Your Home Value Without an Appraisal

You can get a sense of what your home is worth even if you don’t get an appraisal. There are several websites that can give you valuable insight into your home’s potential value, including Zillow, Trulia, Redfin, Realtor.com and Eppraisal, among others.

Another option is to use a house price index (HPI) calculator, which relies on data from mortgage transactions over time to estimate a home’s value. Projections are based on both the purchase price of the home and the changing value of other homes nearby. This tool can help you see how much a house has appreciated over time. You’ll also get a glimpse of estimated future changes in mortgage rates.

You might also try a property tracking app (your financial institution may offer one) to keep tabs on pricing.

Recommended: Does Net Worth Include Home Equity?

The Takeaway

Because the appraisal value of your home is likely your biggest asset, it’s worth putting the time and effort into the appraisal process. The payoff could be huge if you tend to the major factors that hurt an appraisal or get proactive about preventing a low appraisal. Managing your real estate investment is a key component of monitoring and even growing your wealth over time.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

What should you not tell an appraiser?

When talking with an appraiser, it can be wise to avoid expressing personal opinions about the property’s value, pushing them to reach a specific valuation, or suggesting that they are wrong. Rather, focus on providing factual information.

What hurts a home appraisal most?

There’s no one factor that is most damaging to a home appraisal. It could be the location (say, next to the town recycling center or in a less well-regarded school district), or it might be deferred maintenance, a dated kitchen, or an issue like mold or termites. The issue can be as unique as the house. While you can’t change your property’s location, you can keep on top of maintenance and design problems.

What will fail a home inspection?

Typically, problems that cause a bad inspection are structural issues: a foundation in poor repair, roof damage, improper plumbing or electrical work, or the presence of mold, asbestos, radon, or termites.

Photo credit: iStock/ucpage

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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

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.

SORL-Q225-005

A 401(k) loan allows you to borrow money from your retirement savings and pay it back to yourself over time, with interest. While this type of loan can provide quick access to cash at a relatively low cost, it comes with some downsides.

Read on to learn about borrowing against a 401(k), how 401(k) loans work, when it may be appropriate to borrow from your 401(k) — and when you might want to consider an alternative source of funding.

Can I Borrow From My 401(k)?

Borrowing from a 401(k) is possible under many 401(k) plans. In general, it’s wise to let your retirement savings stay invested so you’ll have that money for the future, but in some circumstances, borrowing against a 401(k) could make sense. For instance, if you find yourself in a situation where you need money immediately and have no other options, you may want to consider a 401(k) loan.

A 401(k) loan lets you borrow money from your retirement savings account and pay it back over time with interest. You’re essentially paying back yourself — the money you borrow against your 401(k) goes back into your 401(k) account with interest.

Not all 401(k) plans offer loans, so check with your plan administrator to find out if yours does.

What Is a 401(k) Loan & How Does It Work?

A 401(k) loan is a provision that allows participants in a 401(k) plan to borrow money from their own retirement savings. Here are some key points to understand about 401(k) loans.

Limits on How Much You Can Borrow

The Internal Revenue Service (IRS) sets limits on the maximum amount that can be borrowed from a 401(k) plan. Typically, you can borrow up to 50% of your account balance or $50,000, whichever is less, within a 12-month period.

Spousal Permission

Some plans may require borrowers to get the signed consent of their spouse before a 401(k) loan can be approved.

You Repay the Loan With Interest

Unlike a withdrawal, a 401(k) loan requires repayment. You typically repay the loan (plus interest) via regular payroll deductions, over a specified period, usually five years. These payments go into your own 401(k) account.

401(k) Loans vs. Early Withdrawals

When you withdraw money from your 401(k), these distributions generally count as taxable income. And, if you’re under the age of 59½, you typically also have to pay a 10% penalty on the amount withdrawn.

You may be able to avoid a withdrawal penalty, if you have a heavy and immediate financial need, such as:

•  Medical care expenses for you, your spouse, or children

•  Costs directly related to the purchase of your principal residence (excluding mortgage payments).

•  College tuition and related educational fees for the next 12 months for you, your spouse, or children.

•  Payments necessary to prevent eviction from your home or foreclosure

•  Funeral expenses

•  Certain expenses to repair damage to your principal residence

While the above scenarios can help you avoid a penalty, income taxes will still be due on the withdrawal. Also keep in mind that an early withdrawal involves permanently taking funds out of your retirement account, depleting your nest egg.

With a 401(k) loan, on the other hand, you borrow money from your retirement account and are obligated to repay it over a specified period. The loan, plus interest, is returned to your 401(k) account. But during the term of the loan the money you borrow won’t enjoy any potential growth.

Recommended: Can I Use My 401(k) to Buy a House?

Should You Borrow from Your 401(k)?

It depends. In some cases, borrowing against a 401(k) can make sense, while in others, it may not. Here’s a closer look.

When to Consider a 401(k) Loan

•   You’re in an emergency situation. If you’re facing a genuine financial emergency, such as medical expenses or imminent foreclosure, a 401(k) loan may provide a timely solution. It can help you address immediate needs without relying on more expensive forms of borrowing.

•   You have expensive debt. If you have high-interest credit card debt, borrowing from your 401(k) at a lower interest rate can potentially save you money and help you pay off your debt more efficiently.

When to Avoid a 401(k) Loan

•   You want to preserve your long-term financial health. Depending on the plan, you may not be able to contribute to your 401(k) for the duration of your loan. This can take away from your future financial security (you may also miss out on employer matches). In addition, money removed from your 401(k) will not be able to potentially grow or benefit from the effects of compound returns.

•   You may change jobs in the next several years. If you anticipate leaving your current employer in the near future, taking a 401(k) loan can have adverse consequences. Unpaid loan balances may become due upon separation, leading to potential tax implications and penalties.

Pros and Cons of Borrowing From Your 401(k)

Given the potential long-term cost of borrowing money from a bank — or taking out a high-interest payday loan or credit card advance — borrowing from your 401(k) can offer some real advantages. Just be sure to weigh the pros against the cons.

Pros

•   Efficiency: You can often obtain the funds you need more quickly when you borrow from your 401(k) versus other types of loans.

•   No credit check: There is no credit check or other underwriting process to qualify you as a borrower because you’re withdrawing your own money. Also, the loan is not listed on your credit report, so your credit won’t take a hit if you default.

•   Low fees: Typically, the cost to borrow money from your 401(k) is limited to a small loan origination fee. There are no early repayment penalties if you pay off the loan early.

•   You pay interest to yourself: With a 401(k) loan, you repay yourself, so interest is not lost to a lender.

Cons

•   Borrowing limits: Generally, you are only able to borrow up to 50% of your vested account balance or $50,000 — whichever is less.

•   Loss of potential growth: When you borrow from your 401(k), you specify the investment account(s) from which you want to borrow money, and those investments are liquidated for the duration of the loan. Therefore, you lose any positive earnings that would have been produced by those investments for the duration of the loan.

•   Default penalties: If you don’t or can’t repay the money you borrowed on time, the remaining balance would be treated as a 401(k) disbursement under IRS rules. This means you’ll owe taxes on the balance. And if you’re younger than 59 ½, you will likely also have to pay a 10% penalty.

•   Leaving your job: If you leave your current job, you may have to repay your loan in full in a very short time frame. If you’re unable to do that, you will face the default penalties outlined above.

Alternatives to Borrowing From Your 401(k)

Because borrowing from your 401(k) comes with some drawbacks, here’s a look at some other ways to access cash for a large or emergency expense.

Emergency fund: Establishing and maintaining an emergency fund (ideally, with at least three to six months’ worth of living expenses) can provide a financial safety net for unexpected expenses. Having a dedicated fund can reduce the need to tap into your retirement savings.

Home equity loans or lines of credit: If you own a home, leveraging the equity through a home equity loan or line of credit can provide a cost-effective method of accessing extra cash. Just keep in mind that these loans are secured by your home — should you run into trouble repaying the loan, you could potentially lose your house.

Negotiating with creditors: In cases of financial hardship, it can be worth reaching out to your creditors and explaining your situation. They might be willing to reduce your interest rates, offer a payment plan, or find another way to make your debt more manageable.

Personal Loans: Personal loans are available from online lenders, local banks, and credit unions and can be used for virtually any purpose. These loans are typically unsecured (meaning no collateral is required) and come with fixed interest rates and set terms. Depending on your lender, you may be able to get funding within a day or so.

The Takeaway

Borrowing against your 401(k) can provide short-term financial relief but there are some downsides to consider, such as borrowing limits, potential loss of growth, and penalties for defaulting.

It’s a good idea to carefully weigh the pros and cons before you take out a 401(k) loan. You may also want to consider alternatives, such as using non-retirement savings like an emergency fund or taking out a personal loan or a home equity loan or line of credit.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is a 401(k) loan?

A 401(k) loan allows you to borrow money up to a certain amount from your retirement savings account and pay it back over time with interest. The money you repay goes back into your 401(k) account.

How do 401(k) loans work?

A 401(k) loan allows you to borrow money from your 401(k) account. Not every plan allows 401(k) loans, but many do. There are limits on how much you can borrow — generally up to 50% of your account balance or $50,000, whichever is less, within a 12-month period. In addition, you may have to get your spouse’s permission to take out a 401(k) loan, and you need to repay the amount you borrowed with interest typically within five years.

When should I consider taking a 401(k) loan?

It’s generally best not to touch money in a retirement savings account if possible so it can potentially keep growing for your future. However, in some situations it may make sense to take out a 401(k) loan — for instance, if you’re facing an immediate medical emergency or you’re trying to pay off extensive high-interest debt, such as credit card debt. If you have no other financial options, a 401(k) loan might be something to consider.

How do 401(k) loans differ from early 401(k) withdrawals?

With a 401(k) loan, you borrow money from your retirement account and must repay it over a specified period, typically within five years. The loan, plus interest, is repaid to your 401(k) account. An early 401(k) withdrawal, on the other hand, is when you withdraw money from your 401(k) before age 59½. These distributions generally count as taxable income. And because you’re under the age the IRS specifies for qualified retirement withdrawals, you typically will also have to pay a 10% penalty on the amount you took out.

There are some possible exceptions to the early withdrawal penalty. If you have a heavy and immediate financial need, such as medical expenses, for example, you may be able to avoid the 10% penalty on an early 401(k) withdrawal.

What are some alternatives to borrowing from my 401(k)?

Alternatives to borrowing from your 401(k) include taking the money from an emergency savings fund, taking out a home equity loan if you have equity in your house, taking out a personal loan, or negotiating with your creditors to see if they might be willing to put you on a payment plan.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q225-001

Although options investing involves significant risk and may not be suitable for all investors, those who understand how to trade derivatives contracts can use them to make a speculative bet or offset risk in another position.

Options trading involves buying and selling options contracts. These contracts give investors the right — but not always the obligation — to buy or sell securities at a specified price before a certain date. Options contracts are commonly used for speculation (investors who want to turn a profit on a presumption about the market) or as a way to hedge other investments (as an attempt to offset potential losses).

Trading options can offer profit opportunities but also carries substantial risk, and requires a clear understanding of the strategies involved.

10 Important Options Trading Strategies for Every Investor

In options trading, 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.

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

1. Long Calls

Level of Expertise: Beginner

A long call is an options strategy where an investor buys a call option (also known as “going long”), anticipating that the price of the underlying asset will rise before the contract expires. 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 considered a bullish trading strategy.

For example, an investor believes that a stock will climb in one month. The investor could buy an option with a strike price that’s higher than the current share price, with an expiration date at least one month from now. If the stock’s price rises to $12 within a month, the premium on the option will likely rise as well, which can generate a profit for the investor (minus fees).

If the stock does not rise to the strike price, the contract expires worthless, costing the investor the premium.

2. Long Puts

Level of Expertise: Beginner

Put options can be used to take a bearish position, similar to shorting a stock. They can also function as a hedge, which is a strategy traders use to offset potential losses in other positions. Here are examples of both uses.

Let’s say an options trader believes that a firm will have disappointing quarterly results and wants to take a position that could benefit from a decrease in its share value. The options trader doesn’t want to buy the company’s shares outright, so instead they purchase put options tied to the company.

If the company’s stock falls before the expiration date of the puts, the value of those options will likely rise. The options trader can sell them in the market, realizing a gain. If the stock price stays above the strike price, the puts expire worthless, and the trader loses the premium they paid.
An example of a hedge might be a trader who buys shares of a company that is trading at a level they are satisfied with. The investor might also be concerned about the stock falling, however, so they buy puts with a strike price that’s lower than the current stock price, and with an expiration date that is two months from now.

The potential losses on the trader’s position are capped at the strike price of the puts, minus the premium paid. If the stock falls below the strike price of the contracts, they can sell at the strike price instead, capping their losses. Alternatively, if the stock price stays the same or goes higher, the contracts expire worthless and the trader loses the premium.

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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.

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 forfeited. This strategy is considered relatively conservative because it can generate income from the premium while capping potential upside. Risks still exist if the stock price declines significantly.

If the price of a stock 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 the shares rise 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 sell those shares.

Here’s an example of a short put: shares of a stock are trading higher than usual, and an investor wants to buy the shares at a slightly lower price. Instead of buying shares however, the investor sells put options with a strike price that reflects the price they are willing to pay for the stock. If the shares never hit strike price, the seller of the options contracts gets to keep the premium they made from the sale of the puts to the investor.

However, if the options buyer exercises those puts, the seller would be obligated to purchase the shares at the strike price, regardless of the current market price. This could result in a loss for the seller if the market price is significantly lower than the strike price.

5. Short Calls or Naked Calls

Level of Expertise: Intermediate

When an investor is short on call options, they are typically bearish or neutral on the underlying stock, and may sell 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 similar to covered calls, but in this case, the investor selling the options doesn’t already own the underlying shares, hence the term “naked calls.” This makes them riskier, and not a fit for beginner investors.

For example, if an investor sells a call option at a strike price higher than the stock price to a trader. If that stock never rises to the strike price, the investor pockets the premium they earned from selling the call option.

However, if the shares rise above the strike price, and the trader exercises the call option, the investor is obligated to sell the underlying shares to the trader. In this case, the investor must then purchase the shares at the current market price to sell them to the trader at the agreed-upon strike price to cover the transaction.

6. Straddles and Strangles

Level of Expertise: Intermediate

Straddles are an options strategy in which an investor either buys or sells call and put options on the same underlying asset, both sharing the same strike price and expiration date. This allows the investor to potentially benefit from significant price changes.

With straddles in options trading, investors expect an asset’s price to move significantly, but they are unsure if it will move up or down in value. Thus, they take positions on both sides to capitalize on whichever way the asset moves.

Understanding Long Straddles

Long straddles involve buying call and put options on an asset with the same strike price and expiration date. The goal is for one of the two options positions to increase in value to offset the expense of the other. Investors risk losing the total premium paid for both options; this is the maximum loss so long as the asset’s price stays close to the strike price and neither option becomes profitable.

Let’s look at a hypothetical long straddle. An investor pays the same for a call contract as they do a put contract on the same asset. Both have the same strike. In order for the investor to break even, the stock must move enough in either direction to offset the combined premium cost.

If the asset’s price rises significantly, the call option can become profitable. If profitable enough, it can offset the cost of the premium of the put. The inverse is also true: if the asset’s value drops significantly, the put becomes profitable, and can offset the price of the call if it gains enough value. If the asset’s price remains close to the strike price, and neither the call nor the put options become profitable, the investor loses the entire premium paid for both options.

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Understanding Short Straddles

Short straddles are the opposite: investors sell both a call and put at the same time, profiting when the asset’s price stays close to the strike price. The goal is to benefit from minimal price movement, and to keep the premiums from both options. Unlike a long straddle, investors face unlimited risk if the asset moves significantly in either direction.

For example, let’s say an investor believes a stock is not likely to move during the length of an options contract. They may want to benefit from this anticipated inactivity by putting a short straddle in place, gaining the premium from selling their options on an asset that they don’t believe will move much outside the strike price.

If they’re right, they keep the premium. If not, they stand to lose significant amounts of money because they are required to fulfill their obligation whether that means buying or selling the asset above or below market price.

Understanding Long Strangles

In a long strangle, the investor buys calls and puts at different strike prices. The investor believes the stock is more likely to move up than down, or vice versa. In a short strangle, the investor sells a call and a put with different strike prices. The idea is to benefit from large price movements in either direction, and maximum loss is limited to the premiums paid.

Understanding Short Strangles

Short strangles are similar to long strangles, but involve selling rather than buying options. An investor sells both a call and a put option on the same asset with different strike prices, but the same expiration date.

The short strangle strategy looks to gain an advantage from low volatility, and the investor anticipates the asset’s price to stay between the strike prices of both options. Thus, the maximum profit is the total premium they receive from selling both options. If the asset’s price moves significantly beyond either strike price, however, the investor can face potentially unlimited losses, as they are obligated to buy or sell the asset at an unfavorable price.

Let’s say an investor sells a call and a put option on a stock with strike prices set above and below the current price. The investor does not foresee the stock price moving much outside the strike price. If the investor is right, and the stock stays between the two strike prices, they should be able to keep the premium. However, if the stock moves beyond either strike price, the investor faces potential losses as they must fulfill the option contracts at prices higher or lower than they may have expected.

7. Cash-Secured Puts

Level of Expertise: Intermediate

The cash-secured put strategy may generate income while positioning investors to potentially purchase a stock at a lower price than they might have through a simple market buy order.

With a cash-secured put, an investor writes a put option for a stock they do not own. The option has a strike price below the asset’s current trading level. The investor must have enough cash in their account to cover the cost of buying the 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 often employed when the investor has a bullish to neutral outlook on the underlying asset. If exercised, the option writer receives shares below market price while also holding onto the premium. Alternatively, if the stock trades sideways, the writer will still receive the premium without being obligated to purchase the shares.

8. Bull Put Spreads

Level of Expertise: Advanced

A bull put spread strategy 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 generate income from the premium received on the short put, as well as potentially from time decay. The maximum profit occurs if the stock price stays above the higher strike price at expiration, while the maximum loss occurs if the stock price falls below the lower strike price.

For example, a trader sells a put option with a higher strike price and buys a put option with a lower strike price, both on the same underlying asset. The maximum profit occurs if the stock price finishes above the higher strike price, making both options expire worthless. The maximum loss happens if the stock price falls below the lower put’s, as the trader incurs a net loss between the strikes, offset by the initial premium.

9. Iron Condors

Level of Expertise: Advanced

The iron condor consists of four option legs (two calls and two puts), and is designed to generate income in low-volatility environments through multiple options positions. Although the strategy has defined risk-reward limits, its potential for profit is small compared to the maximum possible loss if the asset price moves outside the defined range.

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 a call with a higher strike

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

An iron condor strategy works best in low-volatility conditions. The trade profits from net premiums collected if the underlying asset stays between the short call and short put strike prices by expiration. These trades have defined risk and reward parameters. The maximum loss is limited to the difference between the long and short strikes, minus the net premium, while the maximum profit is limited to the net premium collected.

Let’s say an individual makes an iron condor on shares of a company that show signs of low volatility. The trader’s best case scenario for these positions would be for all the options to 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 collected from 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 out-of-the-money call with a higher strike price.

The potential for maximum profit occurs if the stock reaches the middle strike price at expiration, since both short calls are exercised and the long calls no longer have intrinsic value. Maximum loss occurs when the stock price falls below the lower strike price, or if it rises above the higher strike price. Both would result in the loss of the total premium paid to open the position.

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 unsuitable for some investors, but for experienced traders, these strategies can be worth considering.

Each strategy comes with its own set of risks and rewards — as well as the potential for losses. Ensure that your strategy of choice aligns with your market outlook, investing goals, and risk tolerance.

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.

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