What Is a Collar Option?

A collar is an options strategy used by traders to protect themselves against heavy losses. The strategy, also known as a hedge wrapper, involves taking a long position in an underlying stock, buying an out-of-the-money put, and selling an out-of-the-money call.

A collar works by protecting a trader’s existing long stock position by buying a put option, limiting any further losses should the stock price fall below the strike of the put. At the same time, the sale of an out-of-the-money call helps finance the trade, making the cost of protection cheaper than purchasing a put on the underlying shares, with the trade-off that gains will be capped should the stock rise above the strike of the call.

What is the maximum profit on a collar option?

The maximum profit on a collar is when the stock price rallies up to the call’s strike price. Above that level, gains are constant since the long stock position is offset by the short call.

What is maximum loss on a collar option?

The maximum loss on a collar option trade is when the stock price declines to the put’s strike price. Below that level, losses are limited since the long stock position is offset by the long put.

What is breakeven on a collar option?

The breakeven on a collar strategy at expiration is the current stock price minus the net credit received or the current stock price plus the net debit paid.

Investing Archives

Jan

2025

Options Collar: How the Strategy Works and Examples

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

A collar is an options strategy used by traders to try to protect themselves against heavy losses. The strategy, also known as a hedge wrapper, is a risk-management options strategy that involves taking a long position in an underlying stock, buying an out-of-the-money (OTM) put, and selling an OTM call.

With an option collar, you’re buying a protective put and a covered call at the same time on a stock that you already own or have long exposure to. Although options collars are designed with the aim to protect against losses, they may also limit any potential gains. Investors need to consider a collar’s break-even point, maximum risk of loss, and maximum potential profit.

Key Points

• Options collar strategy involves buying a protective put and selling a covered call to limit losses and gains on a stock.

• The strategy is used to protect unrealized gains while allowing some upside potential.

• Maximum profit and loss depend on whether the trade is executed at a net credit or debit.

• Time decay and volatility have specific impacts on the strategy, affecting option prices and potential outcomes.

• Collar options are effective for managing risk and protecting assets without selling stock positions.

What Is an Options Collar?

An options collar is designed to manage risk by buying a put option and selling a covered call option at the same time for the same underlying stock. Investors may use this options trading strategy when they want to potentially limit losses on a stock they own, even if it means putting a limit on potential gains.

Typically, the stock price will be between the two strike prices: the high price on the covered call, and the low price on the put option. An options trader uses a collar when they are bullish on the underlying stock but want to be protected against the potential risk of large losses.

A collar is also a useful option strategy when the goal is to protect unrealized gains on a stock.

How Options Collars Work

With a collar option strategy, a trader aims to protect their long stock position by buying a put option, limiting any further losses should the stock price fall below the put’s strike price. Traders also sell an out-of-the-money call option for more than the stock’s current price. This caps potential gains, but it may also help reduce the cost of protection when compared to the premium of a standalone put on the underlying shares. This comes with the trade-off of capped gains, however: any increase in value beyond the strike price will not be realized.Buying a put gives the trader the right (but not the obligation) to sell the stock at the put’s strike price. Selling the call requires the writer to sell the stock at the call’s strike price, if it is assigned. In the meantime, the trader remains long on the shares of the underlying stock.

A trader constructs a collar through their brokerage when they think there could be near-term weakness in the stock but do not want to sell their position.

Maximum Profit

The short call position in a collar option strategy caps upside, limiting the maximum potential profit. The maximum profit depends on whether or not the investor establishes the options trade at a net debit (upfront expense) or a net credit (upfront income).

• Net debit: Maximum profit = Call strike price – Stock purchase price – Net premium paid

• Net credit: Maximum profit = Call strike price – Stock purchase price + Net premium received

At a high level, the trader makes the most money when the stock price is at or above the call’s strike at expiration.

Maximum Loss

The protective put limits losses in the event the underlying share price falls below the put’s strike. This is calculated in one of two ways:

• Net debit: Maximum loss = Stock purchase price – Put strike price – Net debit paid

• Net credit: Maximum loss = Put strike price – Stock purchase price + Net premium received

Break-even Points

Once established, a collar option has two possible break even points – again, depending on whether the trade was executed at a net credit or debit.

• Net debit: Break-even point = Stock purchase price + Net premium paid

• Net credit: Break-even point = Stock purchase price + Net premium collected

Pros and Cons of Collars

Pros	Cons
Limits losses from a falling share price	Limits gains from a rising share price
Allows for some upside exposure	Exposes the trader to risk within the range of the collar
Cheaper than only buying puts	Can be a complicated strategy for new traders
Ownership of the stock retained	Early assignment risk may disrupt the strategy’s effectiveness

Options Collar Examples

Suppose a trader is long shares of XYZ stock that currently trades at $100. The trader is concerned about limited near-term upside and wants to avoid the risk of a significant decline in share price. A collar strategy might help with these concerns.

The trader sells a covered call at the $110 strike price, receives a $5 premium, and also buys a protective put at the $90 strike price of $4. The net credit is $1 and the trader has not paid any commissions.

With these two options trades, the trader has capped their upside at the call’s strike price and the downside at the put’s strike. The breakeven point is $99 (the current stock price, minus the net credit from the premium).

Let’s say the stock rallies to the call’s strike by expiration. In this case, the trader realizes value on the long stock position, keeps the $5 call premium, and lets the put expire worthless. The gain is $11 (the stock price’s gain plus the option’s net credit received.

If the stock price drops to $80, the trader loses $20 on the stock position, keeps the $5 call premium, and $6 gain on the $90 strike long put. Thus, the net loss is $9. The trader benefitted from the collar as opposed to just owning the stock, which went down $20. The payoff diagram below shows how losses are limited in our trade scenario, but gains are also capped at the $110 mark.

Collar Payoff Diagram

Factors That Impact an Options Collar

There are three main factors that can impact the outcome of a collar.

Impact of Price Changes

A collar keeps a trader’s long-term bullish stance while seeking to protect unrealized profits from a short-term decline in share price. If the underlying stock price rises, the collar provides some exposure to upside gains, capped at the short call’s strike. The real value of a collar comes if the stock price drops through the long put strike: the collar protects the trader from further losses.

Another way to look at the impact of price changes is to view it from a perspective of time. A collar can help a trader with a short-term bearish outlook but a bullish long term view. Collars have a positive Delta.

Impact of Volatility Changes

Changes in volatility have a relatively smaller impact on a collar options strategy versus other options trades. This is because the trader has simultaneous long and short option positions. The collar trade usually has a near-zero vega, a calculation that measures an option’s sensitivity to the underlying asset’s volatility.

Recommended: What Are the Greeks in Options Trading?

Impact of Time

With a collar options trade, the effect of time decay depends on how close the stock price is to the option strike prices. Time decay demonstrates the loss in value that an option has as it nears expiration.

Time decay benefits the trader when the underlying stock’s price approaches the short call’s strike price. The option’s extrinsic value decreases as it approaches expiration, which can reduce the potential of assignment.

On the flip side, time decay may work against the trader if the stock price nears the long put’s strike, as the put’s extrinsic value gradually decreases approaching expiration. However, if the stock price stabilizes near the strike price, the option retains intrinsic value, which offsets the impact of time decay, unless the put expires worthless.

When the stock price is about equally between the two strikes, time decay is neutral since both option prices erode at approximately the same rate. So, while the short put value drops, the long call offsets those gains from time decay.

Reasons to Consider Using a Collar Option Strategy

A collar is an effective strategy when an investor expects a stock to trade sideways or down over a period. A trader might also use it when they expect a stock to go up over time and do not want to sell their shares, but they do want to protect unrealized gains – perhaps for tax reasons. A collar option trade is less bearish than buying puts outright, but it may still offer a hedge against large losses. Also, selling the upside call helps finance the protective position.

Limiting Risk

A collar option strategy limits risk beyond the protective put’s strike. Even if a stock price goes to zero, the trader’s loss maxes out at the protective put’s strike.

Protecting an Asset

Another way to protect your stock position is to implement a protective put. With a protective put, a trader buys a put in addition to their long position in the underlying stock. This trade would be more expensive than a collar, since there is no sale of a call option to offset the cost of buying the put, but retains the unlimited upside of the underlying stock position.

The Takeaway

An options collar is a strategy in options trading whereby a trader protects an unrealized gain on a stock at a reduced cost while still allowing some upside equity participation. This strategy is commonly used by traders engaging in online investing to manage risk. Traders might implement a collar for tax purposes or to limit the overall risk in their portfolio.

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

Are options collars bearish or bullish?

An options collar strategy is neither strictly bearish nor bullish. It is typically a neutral-to-slightly-bullish strategy because it provides downside protection through the put option while allowing limited upside potential via the call option. This makes it a common option for investors who are cautiously optimistic but want to hedge against significant downside risk.

What is the benefit of an options collar strategy

An options collar strategy offers downside protection by way of a put option while reducing costs by selling a call option. It also allows investors to retain ownership of the underlying stock. This strategy could help mitigate risk and potentially create more portfolio stability.

What is the opposite of an options collar?

The opposite of an options collar strategy can be considered one of several moves: a naked position, which is an options contract with no offsetting position, or an unhedged long or short stock position, which means holding a financial asset without risk management strategies in place (e.g., other options or futures contracts) to protect against downward price movements.

What is the risk of an options collar?

Options collars come with several potential downsides. There is limited upside potential due to the sale of the out-of-the-money call option, limited risk reduction since a collar does not protect against losses entirely, and early assignment risk, which occurs when the call option buyer exercises their right to purchase the stock before the option’s expiration, potentially disrupting the strategy.

Photo credit: iStock/gorodenkoff

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Jan

2025

Guide to 457 Retirement Plans

By Rebecca Lake | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A 457 plan — technically a 457(b) plan — is similar to a 401(k) retirement account. It’s an employer-provided retirement savings plan that you fund with pre-tax contributions, and the money you save grows tax-deferred until it’s withdrawn in retirement.

But a 457 plan differs from a 401(k) in some significant ways. While any employer may offer a 401(k), 457 plans are designed specifically for state and local government employees, as well as employees of certain tax-exempt organizations. That said, a 457 has fewer limitations on withdrawals.

This guide will help you decide whether a 457 plan is right for you.

What Is a 457 Retirement Plan?

A 457 plan is a type of deferred compensation plan that’s used by certain employees when saving for retirement. The key thing to remember is that a 457 plan isn’t considered a “qualified retirement plan” based on the federal law known as ERISA (from the Employee Retirement Income Security Act of 1974).

These plans can be established by state and local governments or by certain tax-exempt organizations. The types of employees that can participate in 457 savings plans include:

• Firefighters

• Police officers

• Public safety officers

• City administration employees

• Public works employees

Note that a 457 plan is not used by federal employees; instead, the federal government offers a Thrift Savings Plan (TSP) to those workers. Nor is it exactly the same thing as a 401(k) plan or a 403(b), though there are some similarities between these types of plans.

How a 457 Plan Works

A 457 plan works by allowing employees to defer part of their compensation into the plan through elective salary deferrals. These deferrals are made on a pre-tax basis, though some plans can also allow employees to choose a Roth option (similar to a Roth 401(k)).

The money that’s deferred is invested and grows tax-deferred until the employee is ready to withdraw it. The types of investments offered inside a 457 plan can vary by the plan but typically include a mix of mutual funds. Some 457 retirement accounts may also offer annuities as an investment option.

Unlike 401(k) plans, which require employees to wait until age 59 ½ before making qualified withdrawals, 457 plans allow withdrawals at whatever age the employee retires. The IRS doesn’t impose a 10% early withdrawal penalty on withdrawals made before age 59 ½ if you retire (or take a hardship distribution). Regular income tax still applies to the money you withdraw, except in the case of Roth 457 plans, which allow for tax-free qualified distributions.

So, for example, say you’re a municipal government employee. You’re offered a 457 plan as part of your employee benefits package. You opt to defer 15% of your compensation into the plan each year, starting at age 25. Once you turn 50, you make your regular contributions along with catch-up contributions. You decide to retire at age 55, at which point you’ll be able to withdraw your savings or roll it over to an IRA.

Who Is Eligible for a 457 Retirement Plan?

In order to take advantage of 457 plan benefits you need to work for an eligible employer. Again, this includes state and local governments as well as certain tax-exempt organizations.

There are no age or income restrictions on when you can contribute to a 457 plan, unless you’re still working at age 73. A 457 retirement account follows required minimum distribution rules, meaning you’re required to begin taking money out of the plan once you turn 73. At this point, you can no longer make new contributions.

A big plus with 457 plans: Your employer could offer a 401(k) plan and a 457 plan as retirement savings options. You don’t have to choose one over the other either. If you’re able to make contributions to both plans simultaneously, you could do so up to the maximum annual contribution limits.

Pros & Cons of 457 Plans

A 457 plan can be a valuable resource when planning for retirement expenses. Contributions grow tax-deferred and as mentioned, you could use both a 457 plan and a 401(k) to save for retirement. If you’re unsure whether a 457 savings plan is right for you, weighing the pros and cons can help you to decide.

Pros of 457 Plans

Here are some of the main advantages of using a 457 plan to save for retirement.

No Penalty for Early Withdrawals

Taking money from a 401(k) or Individual Retirement Account before age 59 ½ can result in a 10% early withdrawal tax penalty. That’s on top of income tax you might owe on the distribution. With a 457 retirement plan, this rule doesn’t apply so if you decide to retire early, you can tap into your savings penalty-free.

Special Catch-up Limit

A 457 plan has annual contribution limits and catch-up contribution limits but they also include a special provision for employees who are close to retirement age. This provision allows them to potentially double the amount of money they put into their plan in the final three years leading up to retirement.

Loans May Be Allowed

If you need money and you don’t qualify for a hardship distribution from a 457 plan you may still be able to take out a loan from your retirement account (although there are downsides to this option). The maximum loan amount is 50% of your vested balance or $50,000, whichever is less. Loans must be repaid within five years.

Cons of 457 Plans

Now that you’ve considered the positives, here are some of the drawbacks to consider with a 457 savings plan.

Not Everyone Is Eligible

If you don’t work for an eligible employer then you won’t have access to a 457 plan. You may, however, have other savings options such as a 401k or 403(b) plan instead which would allow you to set aside money for retirement on a tax-advantaged basis. And of course, you can always open an IRA.

Investment Options May Be Limited

The range of investment options offered in 457 plans aren’t necessarily the same across the board. Depending on which plan you’re enrolled in, you may find that your investment selections are limited or that the fees you’ll pay for those investments are on the higher side.

Matching Is Optional

While an employer may choose to offer a matching contribution to a 457 retirement account, that doesn’t mean they will. Matching contributions are valuable because they’re essentially free money. If you’re not getting a match, then it could take you longer to reach your retirement savings goals.

457 Plan Contribution Limits

The IRS establishes annual contribution limits for 457 plans. There are three contribution amounts:

• Basic annual contribution

• Catch-up contribution

• Special catch-up contribution

Annual contribution limits and catch-up contributions follow the same guidelines established for 401(k) plans.

The special catch-up contribution is an additional amount that’s designated for employees who are within three years of retirement. Not all 457 retirement plans allow for special catch-up contributions.

Here are the 457 savings plan maximum contribution limits for 2024 and 2025.

	2024	2025
Annual Contribution	Up to 100% of an employees’ includable compensation or $23,000, whichever is less	Up to 100% of an employees’ includable compensation or $23,500, whichever is less
Catch-up Contribution	Employees 50 and over can contribute an additional $7,500	Employees 50 and over can contribute an additional $7,500
Special Catch-up Contribution	$23,000 or the basic annual limit plus the amount of the basic limit not used in prior years, whichever is less^*	$23,500 or the basic annual limit plus the amount of the basic limit not used in prior years, whichever is less^*

^*This option is not available if the employee is already making age-50-or-over catch-up contributions.

457 vs 403(b) Plans

The biggest difference between a 457 plan and a 403(b) plan is who they’re designed for. A 403(b) plan is a type of retirement plan that’s offered to public school employees, including those who work at state colleges and universities, and employees of certain tax-exempt organizations. Certain ministers may establish a 403(b) plan as well. This type of plan can also be referred to as a tax-sheltered annuity or TSA plan.

Like 457 plans, 403(b) plans are funded with pre-tax dollars and contributions grow tax-deferred over time. These contributions can be made through elective salary deferrals or nonelective employer contributions. Employees can opt to make after-tax contributions or designated Roth contributions to their plan. Employers are not required to make contributions.

The annual contribution limits to 403(b) plans, including catch-up contributions, are the same as those for 457 plans. A 403(b) plan can also offer special catch-up contributions, but they work a little differently and only apply to employees who have at least 15 years of service.

Employees can withdraw money once they reach age 59 ½ and they’ll pay tax on those distributions. A 403(b) plan may allow for loans and hardship distributions or early withdrawals because the employee becomes disabled or leaves their job.

Investing for Retirement With SoFi

When weighing retirement plan options, a 457 retirement account may be one possibility. That’s not the only way to save and invest, however. If you don’t have a retirement plan at work or you’re self-employed, you can still open a traditional or Roth IRA to grow wealth.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

How does a 457 plan pay out?

If you have a 457 savings plan, you can take money out of your account before age 59 ½ without triggering an early withdrawal tax penalty in certain situations. Those distributions are taxable at your ordinary income tax rate, however. Like other tax-advantaged plans, 457 plans have required minimum distributions (RMDs), but they begin at age 73.

What are the rules for a 457 plan?

The IRS has specific rules for which types of employers can establish 457 plans; these include state and local governments and certain tax-exempt organizations. There are also rules on annual contributions, catch-up contributions and special catch-up contributions. In terms of taxation, 457 plans follow the same guidelines as 401(k) or 403(b) plans: Contributions are made pre-tax; the employee pays taxes on withdrawals.

When can you take money out of a 457 plan?

You can take money out of a 457 plan once you reach age 59 ½. Withdrawals are also allowed prior to age 59 ½ without a tax penalty if you’re experiencing a financial hardship or you leave your employer. Early withdrawals are still subject to ordinary income tax.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/Nomad

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

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

Jan

2025

Trading Futures vs. Options: Key Differences to Know

Futures vs Options: What Is the Difference?

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

Futures and options are both derivative contracts that enable an investor to buy or sell an investment for a certain price by a certain date. Although they share similarities, they work quite differently and pose different risks for investors.

With an options contract, the holder has the option (but not the obligation) to buy an underlying asset, such as stock in a business, for a specified price by a specific date. A futures contract requires the holder to buy the asset on the agreed-upon date (unless the position is closed out before then).

The underlying asset for a futures contract is often a physical asset, such as commodities like grain or copper, but you can also trade futures on stocks or an equity index, such as the S&P 500. The underlying asset for an options contract can be a financial asset like a stock or bond, or it could be a futures contract.

Key Points

• Futures contracts make obligations about trading an underlying asset at a set price and date.

• Options give the buyer the right, not the obligation, to trade the underlying asset.

• Futures are riskier due to high leverage and daily mark-to-market adjustments.

• Options buyers risk only the premium paid, while futures leverage amplifies gains and losses.

• Both futures and options are used by hedgers and speculators for different purposes.

Main Differences Between Futures and Options

Although futures and options are similar, as they are both derivative contracts tied to an underlying asset, they differ significantly in terms of risk, obligations, and the ways in which they are executed.

How Futures Work

Futures contracts are a type of derivative in which buyers and sellers are obligated to trade a specific asset on a certain future date, unless the asset holder closes their position prior to the contract’s expiration.

A futures contract consists of a long side and a short side, where the short side is obligated to make delivery of the underlying asset, and the long side is obligated to take it (unless the contract is terminated before the delivery date).

Both options and futures typically employ some form of financial leverage or margin, amplifying gains and losses, increasing potential risk of loss.

How Options Work

Options trading consists of buying and selling derivatives contracts that give the holder the right, but not the obligation, to buy or sell an asset at a specified price (the strike price) by the contract’s expiration date.

• The options buyer (or holder) may buy or sell a certain asset, like shares of stock, at a certain price by the expiration of the contract. Buyers pay a premium for each option contract; this represents the cost of acquiring the option.

• The options seller (or writer), who is on the opposite side of the trade, has the obligation to buy or sell the underlying asset at the strike price, if the options holder exercises their contract.

There are only two types of options: puts and calls. Standard equity options contracts are for 100 shares of the underlying security.

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

The Role of Risk

Trading options come with certain risks. The buyer of an option could lose the premium they paid to enter the contract. The seller of an option is at risk of being required to purchase or sell an asset if the buyer on the other side of their contract exercises the option.

Futures can be riskier than options due to the high degree of leverage they offer. A trader might be able to buy or sell a futures contract putting up only 10% of the actual value, known as margin. This leverage magnifies price changes, meaning even small movements can result in substantial profit or loss.

With futures, the value of the contract is marked-to-market daily, meaning each trading day money may be transferred between the buyer and seller’s accounts depending on how the market moved. An option buyer is not required to post margin since they paid the premium upfront.

The Role of Value

Futures pricing is relatively straightforward. The price of a futures contract should approximately track with the current market price of the underlying asset, plus any associated costs (like storage or financing) until maturity.

Option pricings, on the other hand, is generally based on the Black-Scholes model. This is a complicated formula that requires a number of inputs. Changes in several factors other than the price of the underlying asset, including the level of volatility, time to expiration, and the prevailing market interest rate can impact the value of the option.

Holding constant the price of the underlying asset, futures maintain their value over time, whereas options lose value over time, also known as time decay. The closer the expiration date gets, the lower the value of the option gets. Some traders use this as an options trading strategy. They sell options contracts, anticipating that time decay will eat away at their value over time, expire worthless, and allow them to keep the premium collected upfront.

Options come with limited downside, since the maximum loss is the premium. Futures, however, can fall below zero: the contract’s value is tied to the underlying asset’s price, meaning traders may have to pay more than the contract’s original value.

Here are some of the key differences between futures and options:

Futures	Options
Buyer is obliged to take possession of the underlying asset, or make a trade to close out the contract. Seller is obligated to deliver the asset or take action to close the position.	Buyer has the right, but not the obligation, to buy or sell a certain asset at a specific price, while the seller has the obligation to fulfill the option contract if exercised.
Futures typically involve taking much larger positions, which can involve more risk.	Options may be less risky for buyers because they are not obliged to acquire the asset.
No up-front cost to the buyer, other than commissions.	Buyers pay a premium for the options contract.
Price can fall below $0.	Price can never fall below $0.

Understanding Futures

Futures contracts are similar to options in that they set a specific price and date for the trade of an underlying asset. Unlike options, that give the holder the right to buy or sell, futures investors are obligated to buy at a certain date and price.

Among the most common types of futures are those for commodities, with which speculators can attempt to benefit from changes in the market without actually buying or selling the physical commodities themselves. Commodity futures may include agricultural products (wheat, soybeans), energy (oil), and metals (gold, silver).

There are also futures on major stock market indices, such as the S&P 500, government bonds, and currencies.

Rather than paying a premium to enter a futures contract, the buyer pays a percentage of the market value, called an initial margin.

Recommended: Margin Account: What It Is and How It Works

Example of a Futures Contract

Let’s say a buyer and seller enter a contract that sets a price per bushel of wheat. During the life of the contract, the market price may move above that price — putting the contract in favor of the buyer — or below the contracted price, putting it in favor of the seller.

If the price of wheat goes higher at expiration, the buyer would make a profit off the difference in price, multiplied by the number of bushels in the contract. The seller would incur a loss equal to the price difference. If the price goes down, however, the seller would profit from the price difference.

Who Trades Futures?

Traders of futures are generally divided into two camps: hedgers and speculators. Hedgers typically have a position in the underlying commodity and use a futures contract to mitigate the risk of future price movements impacting their investment.

An example of this is a farmer, who might sell a futures contract against a crop they produce, to hedge against a fall in prices and lock in the price at which they can sell their crop.

Speculators, on the other hand, accept risk in order to potentially profit from favorable price movements in the underlying asset. These may include institutional investors, such as banks and hedge funds, as well individual investors.

Futures enable speculators to take a position on the price movement of an asset without trading the actual physical product. In fact, much of trading volume in many futures contracts comes from speculators rather than hedgers, and so they provide the bulk of market liquidity.

Understanding Options

Options buyers and sellers may use options if they think an asset’s price will go up (or down), to offset risk elsewhere in their portfolio, or to potentially enhance returns on existing positions. There are many different options-trading strategies.

Example of a Call Option

An investor buys a call option for a stock that expires in six months, paying a premium. The stock is currently trading at just below the option’s strike price.

If the stock price goes up above the strike price within the next six months, the buyer can exercise their call option and purchase the stock at the strike price. If they sell the stock, their profit would be the difference in the price per share, minus the cost of the premium.

The buyer could also choose to sell the option instead of exercising it, which can also result in a profit, minus the cost of the premium.

If the price of the stock is below the strike price at the time of expiration, the contract would expire worthless, and the buyer’s loss would be limited to the premium they paid upfront.

Example of a Put Option

Meanwhile, if an investor buys a put option to sell a stock at a set price, and that price falls before the option expires, the investor could earn a profit based on the price difference per share, minus the cost of the premium.
If the price of the stock is above the strike price at expiration, the option is worthless, and the investor loses the premium paid upfront.

Who Trades Options?

Options traders often fall into two categories: buyers and sellers. Buyers purchase options contracts — be they calls or puts — with the hope of making a profit from favorable price movements from the underlying asset. They also want to limit potential loss to the premium they paid for the option. Sellers can potentially profit from the premium they’ve collected when writing the options contract, but they face the risk of having to fulfill the contract if the market moves unfavorably.

The Takeaway

Futures and options are two types of investments for those interested in hedging and speculation. These two types of derivatives contracts operate quite differently, and present different opportunities and risks for investors.

Futures contracts specify an obligation — for the long side to buy, and for the short side to sell — the underlying asset at a specific price on a certain date in the future. Meanwhile, option contracts give the contract holder (or buyer) the right to buy or sell the underlying asset at a specific price, but not the obligation to do so.

Explore SoFi’s user-friendly options trading platform.

🛈 SoFi does not offer future derivatives at this time.

FAQ

Are futures more risky than options?

Both options and futures are considered high-risk investments. Futures are considered more risky than options, however, because it’s possible to lose more than your total investment amount.

Which uses more leverage: futures or options?

Typically, futures trading uses more leverage, and that’s part of what makes futures higher risk, and potentially appealing to speculators.

Which is easier to trade: futures or options?

Options strategies can be more complicated, and in some ways futures contracts are more straightforward, but futures trading can be highly speculative and volatile.

Photo credit: iStock/DonnaDiavolo

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.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.

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.

¹Claw Promotion: Probability 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-Q424-053

Jan

2025

Short Position vs Long Position, Explained

Short Position vs Long Position: What’s the Difference?

By Mike Zaccardi, CMT, CFA | 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.

When you own shares of a security, that’s a long position. When you borrow shares in order to sell them, that’s a short position (since you’re literally “short” of the shares).

Going long is considered a bullish strategy, whereas selling short is a bearish strategy because you’re banking on the share price declining. But there are exceptions to these conventions, and ultimately your strategy can depend on the securities being traded.

Key Points

• Long positions in stocks involve buying shares with the expectation of potential price increases, that may come with unlimited upside and limited downside risk.

• Short positions in stocks involve borrowing shares to sell, hoping for price drops, with unlimited risk and interest costs.

• Long options positions can be bullish or bearish, influenced by time decay and volatility.

• Short options positions involve selling contracts, aiming for price drops, with strategies based on market projections.

• Long positions are typically used when bullish, while short positions are typically used for bearish outlooks or hedging.

Long vs. Short Position in Stocks

An investor in a short position aims to benefit from a decline in the price of the asset. When you go short, your goal is to borrow shares at one price, sell them on the open market and then — assuming the price drops — return them to the broker at a lower price so you can keep the profit. Executing a short stock strategy is more complicated than putting on a long trade, and is for experienced traders.

When you go long on an asset, you are bullish on its price. Your potential downside is limited to the total purchase price, and your upside is unlimited. That’s a key difference in a long vs short position, since short positions can feature an unlimited risk of loss (if the price rises instead of dropping), with a capped upside potential (because the price can only drop to zero).

Long Positions and Stocks

To take a long position on shares, you execute a buy order through your brokerage account. This involves purchasing the stock with the expectation that its price will increase over time, allowing you to sell it later at a profit. In essence, a long position represents traditional stock ownership — buying low and selling high.

Short Selling a Stock

Short selling a stock is done by borrowing shares from your stock broker, typically using a margin account, then selling them on the open market. This is known as “sell to open” because you’re opening a short position by selling the shares first.

By using a margin account (a.k.a. leverage), you would owe interest on the amount borrowed, and you face potentially unlimited losses since the stock price could hypothetically rise to infinity. Investors must meet specific criteria in order to trade using margin, given its potential for significant losses as well as gains.

You must close your short position in the future by repurchasing the shares in the market (hopefully at a lower price than that at which you sold them), and then return the shares to the broker, keeping the profit. Remember: you’re paying interest on the money borrowed to open the position, which may influence when you decide to close.

A short squeeze is a danger short sellers face since intense short-covering — a rush to buy stock to cover short positions — leads to a rapidly appreciating share price (when traders rush to buy back stock, causing prices to increase quickly). It can also create opportunities for market participants who anticipate the squeeze, however.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

Long vs. Short Position in Options

Long and short positions also exist in the world of options trading.

Long Position in Options

In options trading, going long means entering a buy-to-open order on either calls or puts. A long options position can be bullish or bearish depending on the type of option traded.

• For example, in a long call position, you hope that the underlying asset price will appreciate so that your call value increases. The maximum potential gain for buying a long call is unlimited, while the maximum loss is limited to the premium paid.

• In a long put position, you want to see the underlying asset price drop below the strike price, since buying a put offers the holder the right, but not the obligation, to sell a security at a specified price within a specified time frame. The maximum potential gain for buying a long put is the difference between the strike price and the asset price, minus the premium paid, while the maximum loss is the premium paid.

Investors may employ options strategies designed to seek returns from volatility, though these also tend to be higher risk. These strategies for options trading rely on the expectation that a stock price may become more erratic, thus making the options potentially more valuable.

A long straddle strategy, for example, is one of several strategies that bets on higher volatility by taking bullish and bearish positions of different financial values, anticipating upside or downside while still hedging against one or the other. These strategies may under perform if volatility decreases or remains stable. In that case, the maximum potential loss is limited to the total premiums paid for both options.

Short Selling Options

You can sell short options by writing (a.k.a. selling) contracts. The goal is the same as when selling shares short: you are expecting the option price to drop. Unlike shorting shares, which always reflects a bearish expectation, shorting options can involve either a bearish or bullish outlook, depending on whether you short calls or puts. An options seller enters a sell-to-open order to initiate a short sale.

You can take a bearish or bullish strategy depending on the options used. Whether you short call vs put options makes a difference: If you short call options, you are bearish on the underlying security. Shorting puts is considered a bullish strategy.

With options, you can short implied volatility and benefit from the passage of time. Entering a short position on calls and puts is done in the hope of seeing the option premium decline in value — that can come from changes in the underlying asset’s price, but it can also come from a decline in implied volatility and as expiration approaches.These are plays on two of the options Greeks: vega and theta.

Examples of Long Positions

Long positions come in different forms: going long on a stock – where you purchase shares outright, and going long on calls and puts – where you anticipate fluctuation on the price an investor pays to purchase the stock.

Going Long on a Stock

When you go long on shares of stock, you actually own shares in the company. Typically, you would go long on shares if you believe the price will rise, and would look to eventually sell them to potentially realize a gain. Here, you have unlimited upside potential (if the price continues to rise), and the downside is limited to what you paid for the shares ($1,000).

Going long on options, however, works a bit differently.

Going Long on Calls and Puts

Consider this example of going long on a call option. Say, for example, that you believe stock XYZ is poised to increase in value. You can purchase a call option on XYZ with an expiration date of three months, and wait to see if the stock increases within the contract window. If it does, you can exercise the option and purchase the stock at the agreed-upon strike price, with the likelihood of making a profit. If the price doesn’t move or declines, your option expires worthless, and you would lose the premium per share that you paid for the option.

Let’s say on the other hand that you believe stock XYZ’s will decline in a few months. You may then wish to go long on a put option. You would buy a put option for XYZ with an expiration date of three months. If the stock price falls below the strike price before the expiration date, you can exercise the option to sell the stock at its lower price, likely generating a profit (minus the premium). If you believe the stock price will stay flat or rise, your option would expire and be rendered useless – and you would only be out the premium you paid.

Examples of Short Positions

Like long positions, short positions come in various forms as well. Shorting a stock is when you borrow shares in order to sell them and (hopefully) repurchase them at a lower price, while shorting an option is when you sell an option contract with the expectation that the underlying stock will rise to a certain price.

Shorting a Stock

If you wanted to short shares of XYZ, currently selling at $10 per share, this is a bearish strategy as you’re essentially betting on a price decline.

Let’s say you want to short stock XYZ. You would borrow shares from a stock broker and sell them on the open market. If the price falls, you buy back the shares at a lower price and return them to the broker, thus pocketing the difference as profit. Bear in mind that if the stock price rises, instead of falling, your losses are theoretically unlimited. This makes shorting stocks potentially riskier.

Going Short on an Option

If you think that stock XYZ is overvalued, and that its price will remain flat or decline, you might sell a call option with an expiration date of three months. Should the stock price stay below the strike price by the contract’s expiration, the option will expire worthless, and you’ll keep the premium paid by the buyer. If the stock price rises above the strike price, however, the buyer may exercise their right to purchase the stock at the strike price. This would leave you responsible for delivering the shares, which could result in losses.

If you believe stock XYZ is undervalued and its price will rise, you might sell a put option with the same three-month expiration. Should the stock price stay above the strike price, the option will expire worthless and you keep the premium. But if the price falls below the strike price, the buyer may exercise their right to sell the stock to you, and you’d be obligated to buy it, potentially incurring losses if the market price of the stock drops.

Comparing Long Positions vs Short Positions

Although long and short positions have different aims, these strategies do share some similarities.

Similarities

Both exposures require a market outlook or a prediction of which direction a single asset price will go.
If you’re bullish on a stock, you could consider going long by buying shares directly or buying call options. Both may profit from a rising stock price. Alternatively, if you’re bearish, you may opt to short the stock or sell call options. Both depend on a view of a share, or of the markets in general.

Differences

Short vs. long positions have several differences, and the ease with which you execute the trade is among them. For example, when taking a short position you’ll typically be required to pay interest to a broker. With a long position, you do not usually pay interest.

Additionally, long positions have unlimited gains and capped losses, whereas short positions have unlimited losses and capped gains.

Similarities in a Long Position vs. Short Position	Differences in a Long Position vs. Short Position
You can go long or short on an underlying stock via calls and puts.	Taking a long position on shares is bullish, while going short is bearish.
Both long and short positions offer exposure to the market or individual assets.	Short positions can have potential losses that are unlimited with capped upside — that is the opposite of some long positions.
Both rely on predicting price movements within a specific timeframe.	Long positions require paying the upfront cost in full; short positions often require having a margin account.

💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.

Pros and Cons of Short Positions

When considering a short position, it can be helpful to look at both the pros and cons.

Pros of Short Positions	Cons of Short Positions
You benefit when the share price drops.	You owe interest on the amount borrowed.
You can short shares and options.	There’s unlimited risk in selling shares short.
Shorting can be a bearish or bullish play.	There are limited gains since the stock can only drop to zero, and a risk of complete loss if the share price continues to rise.

Pros and Cons of Long Positions

Likewise, when considering a long position, assessing the benefits and drawbacks can be helpful.

Pros of Long Positions	Cons of Long Positions
You can own shares and potentially benefit when the stock rises and may also profit from puts when the underlying asset drops in value.	You face potential losses on a long stock position and on call options when the share price drops.
You can take a long position on calls or puts.	You must fully pay for the asset upfront, or finance through a margin account.
There’s unlimited potential upside with calls and shares of stock.	A long options position may be hurt from time decay (loss of value near expiration date).

The Takeaway

Buying shares and selling short are two different strategies to potentially profit from changes in an asset’s price. By going long, you can purchase a security with the goal of seeing it rise in value. Selling short is a bearish strategy in which you borrow an asset, sell it to other traders, then buy it back — hopefully at a lower price — so you can return it profitably to the broker.

Shorting options can also be a bullish strategy, depending on whether you’re shorting call or put options. Shorting calls is considered bearish, while shorting puts reflects a more bullish sentiment since you profit if the asset’s price rises or remains stable.

Explore SoFi’s user-friendly options trading platform.

FAQ

Are short positions riskier than long positions?

Yes, short positions can be riskier than long positions. That goes for selling shares of a stock short and when you write options. Speculators often face more risk with their short positions while hedgers might have another position that offsets potential losses from the short sale.

What makes short positions risky?

You face unlimited potential losses when you are in a short position with stocks and call options. Selling shares short involves borrowing stock, selling it out to the market, then buying it back. There’s a chance that the price at which you buy it back will be much higher than what you initially sold it at.

How long can you hold a short position?

You can hold a short position indefinitely. The major variable to consider is how long the broker allows you to short the stock. The broker must be able to lend shares in order for you to short a stock. There are times when shares cannot be borrowed and when borrowing interest rates turn very high. As the trader, you must also continue to meet margin requirements when selling short.

Photo credit: iStock/Charday Penn

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

SOIN-Q424-042

Jan

2025

What Are Brokerage Checking Accounts?

By Ashley Kilroy | Growing Wealth, invest, Investing | Comments Off

Brokerage checking accounts combine the everyday usability of a checking account with the investment potential of a brokerage account, allowing you to manage both your bills and investments from a single platform. Often referred to as a “cash account” or “cash management account,” these accounts offer flexibility — you can buy, sell, or trade securities whenever you wish without facing penalties.

Understanding what a brokerage checking account is and how it works can help you determine if this type of account makes sense for your banking needs.

Key Features of Brokerage Checking Accounts

Investing can become quicker when you have an investment checking account, especially for active traders or those combining their checking and investment accounts. It gives you direct access to the stock market without the delays of traditional transfers between accounts.

Similar to other brokerage investment accounts, these accounts are not tax-advantaged. Here are some other noteworthy features.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Linked to Brokerage Investment Accounts

Brokerage checking accounts let you invest directly from your account, so there’s no waiting for transfers to start investing. Instead of opening one with a bank or credit union, you’ll need to go through a brokerage firm to get a brokerage checking account. Brokerages typically charge fees for opening and maintaining them.

Debit/ATM Card Access to Funds

Brokerage checking accounts generally offer checks, a debit card, and ATM access, similar to other types of checking accounts. Depending on the brokerage you choose, you might also get perks like ATM fee refunds or earn interest on your account balance.

Some brokerages may even waive foreign transaction fees when you travel abroad.

Benefits of a Brokerage Checking Account

Brokerage accounts with checking offer features like traditional bank checking accounts, but they often come with additional benefits not typically found in standard checking accounts.

Easily Move Money Between Investments

For active investors who trade regularly, investment checking accounts may simplify the trading process. Depending on your brokerage’s rules, you may be able to buy securities straight from it. This can make investing quicker and more convenient, streamlining the whole process.

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

Potential for Higher Interest Earnings

Depending on the brokerage you choose, some accounts stand out by offering high annual percentage yields (APYs), allowing you to earn more interest on your money compared to regular checking accounts. This can make them a good choice for growing your savings while still having easy access to your funds.

Integrated Money Management

Instead of juggling separate accounts for savings, spending, and investing, investment checking accounts let you manage all your money under one umbrella. This means you can handle everything from one place, making it potentially easier to keep track of your finances.

Potential Drawbacks

While brokerage accounts with checking have many advantages, there are a few drawbacks to consider.

May Require Minimum Balances

While some brokerages let you open accounts with no upfront cost, others require an initial deposit. Additionally, you may need to keep a specific balance in your account to avoid incurring maintenance fees.

Fees for Certain Transactions

While brokerage checking accounts typically have low relative fees, you might still encounter some costs for opening and maintaining your account. Additionally, certain brokerages may require you to connect a separate investment account, which could come with additional fees. It’s a good idea to check the specific terms and conditions of each brokerage to understand all potential costs.

No In-Person Service

If you choose an online brokerage firm, remember that you may not have access to in-person services. These firms operate entirely online, so you won’t be able to visit a physical branch for face-to-face assistance. Instead, all your interactions will be digital, through their website, app, or customer service hotline.

Eligibility and Account Opening

Before selecting a brokerage account with checking, make sure to compare your options by looking at fees, interest rates, and accessibility. Then once you’ve picked a brokerage firm, you can usually get started by opening your account online. If you opt for an online brokerage firm, that’ll be your main route.

You’ll need to have your personal details ready and transfer money from another account to fund your investment checking account. Most of the time, there’s no need to meet a minimum balance requirement just to get things up and running.

Comparing To Traditional Checking

Choosing asuitable checking account depends on what you need and what you’re looking for in your banking experience. Whether it’s easy access, fees, or extra features, understanding the differences between traditional and brokerage checking accounts can help you make a smart choice. Let’s break down the main factors to compare.

• Opening and maintenance fees: Traditional checking accounts usually have minimal opening fees and low maintenance costs, especially if you use your account abroad or maintain a minimum balance. Brokerage checking accounts also tend to have low fees, but some may require a significant initial deposit or a linked investment account, which could involve additional fees.

• Access: Traditional checking accounts offer convenient in-person access through branches and ATMs. On the other hand, brokerage accounts with checking linked to online brokerages may not have in-person services, although they typically provide ATM access.

• Features: Both account types generally include essentials like check-writing, debit card access, and online bill pay. Brokerage checking accounts often go further by offering investment options such as direct investing from the account and sometimes perks like ATM fee reimbursements.

• FDIC Insurance: Money in traditional checking accounts are FDIC-insured up to $250,000, ensuring your money is protected. Similarly, some brokerage checking accounts may hold your uninvested funds in FDIC-insured banks, providing comparable security. But you may need to opt-in, and generally, this may not be standard practice.

The Takeaway

Brokerage checking accounts may give you the best of both worlds:allowing you to handle your everyday banking needs while also offering investment opportunities. In effect, you can manage your bills and investments all in one place, with direct access to the stock market. However, before you decide if a brokerage checking account fits your needs, be sure to compare fees, interest rates, and how accessible it is for your financial goals.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

What banks offer brokerage checking?

Online and traditional brokerages may offer brokerage checking accounts, but keep in mind they can differ significantly. So, take your time to shop around and find one that really suits your needs, with the features you want and fewer fees.

Can I have multiple brokerage checking accounts?

Similar to how you can have multiple investment accounts, you can have multiple brokerage checking accounts.

Are brokerage checking accounts FDIC-insured?

Brokerage accounts are backed by the Securities Investor Protection Corporation (SIPC) if your brokerage firm shuts down. For uninvested money, brokerage checking accounts usually keep it in FDIC-insured banks, just like regular banks do. Some firms might also offer extra FDIC coverage by using multiple banks.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

Photo credit: iStock/miniseries

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

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