Mar
06
2025
What Is Portfolio Management?
Portfolio management involves selecting and maintaining investments with a financial objective and risk tolerance in mind.
Read more
SoFi
Student Loan Consolidation and Refinancing
Mar
06
2025
10 Top Monthly Dividend Stocks for March 2025
While most dividend-paying stocks do so every quarter, some companies make monthly dividend payments. Getting dividend payouts on a monthly schedule may appeal to investors, especially those relying on dividends for a steady income stream.
A dividend is a portion of a company’s earnings that it pays to shareholders on a regular basis. Many investors seek out dividend-paying stocks as a way to generate income.
Note that there are no guarantees that a company that pays dividends will continue to do so.
Key Points
• Monthly dividend stocks can provide steady income, but are less common than quarterly dividends.
• Utility and energy companies may offer consistent dividends due to steady consumer demand and limited competition.
• Dividend ETFs are passive and often track indexes of companies with a history of strong dividend growth.
• REITs pay dividends from income-generating properties and must distribute 90% of income to shareholders.
• Consider not only a dividend stock’s yield, but the long-term stability of the company and its dividend payout ratio.
What Are Monthly Dividend Stocks?
As mentioned above, dividend stocks usually pay out quarterly. However, some companies pay dividends monthly.
Stocks that pay dividends monthly may appeal to investors who want steady monthly income. Additionally, monthly dividend stocks may help investors who reinvest the payments to realize the benefit of compounding returns.
For example, through dividend reinvestment plans (DRIPs) investors can use dividend payouts to buy more shares of stock. Potentially, the more shares they own, the larger their future dividends could be.
How Does Dividend Investing Work?
Most dividends are cash payments made on a per-share basis, as approved by the company’s board of directors. For example, if Company A pays a monthly dividend of 30 cents per share, an investor with 100 shares of stock would receive $30 per month.
Some investors may utilize dividend-paying stocks as part of an income investing strategy. Retirees, for example, may seek investments that deliver a reliable income stream for their retirement. It’s also possible to reinvest the cash from dividend payouts.
A stock dividend is different from a cash dividend. Stock dividends are an increase in the number of shares investors own, reflected as a percentage. If an investor holds 100 shares of Company X, which offers a 3% stock dividend, the investor would have 103 shares after the dividend payout.
Understanding Dividend Yield
Understanding dividends is one part of an investor’s decision when choosing dividend-paying stocks. Another factor is dividend yield, which is the annual dividend amount the company pays shareholders divided by its stock price, and shown as a percentage.
If Company A pays 30 cents per share in dividends per month, that’s $3.60 per year, per share. If the share price is $50, to get the dividend yield you divide the annual dividend amount by the current share price:
$3.60 / $50 = 7.2%
The dividend yield can be useful as it can help an investor to assess the potential total return of a given stock, including possible gains or losses over a year.
But a higher or lower dividend yield isn’t necessarily better or worse, as the yield fluctuates along with the stock price. A stock’s dividend yield could be high because the share price is falling, which can be a sign that a company is struggling. Or, a high dividend yield may indicate that a company is paying out an unsustainably high dividend.
Investors will often compare a stock’s dividend yield to other companies in the same industry to determine whether a yield is attractive. Whether investing online or through a brokerage, it’s important to consider company fundamentals, risk factors, and other metrics when selecting any investment.
Top 10 Monthly Dividend Stocks by Yield
Following are some of the top-paying dividend stocks by yield, as of March 1, 2025. The dividends for these stocks are expressed here as a 12-month forward dividend yield, meaning the percentage of a company’s current stock price that the company is projected to pay out through dividends over the next 12 months.
| Company | Ticker | 12-month forward yield |
|---|---|---|
| Orchid Island Capital | ORC | 16.84% |
| ARMOUR Residential REIT, Inc. | ARR | 15.12% |
| AGNC Investment Corp. | AGNC | 13.81% |
| Dynex Capital | DX | 13.08% |
| Ellington Financial | EFC | 10.87% |
| Gladstone Commercial | GOOD | 7.39% |
| Apple Hospitality REIT | APLE | 6.62% |
| EPR Properties | EPR | 6.61% |
| LTC Properties | LTC | 6.56% |
| Realty Income Corp. | O | 5.64% |
Source: Data from Bloomberg, as of March 1, 2025. Universe of stocks derived from Wilshire 5000 index. Companies have >$500M market cap and positive forward EPS.
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.
Types of Monthly Dividend Stocks
To invest in monthly dividend stocks, investors may want to consider companies in industries that tend to offer monthly dividend payouts. These companies usually have regular cash flow that can sustain consistent dividend payments.
Energy and Utility Companies
In the world of dividend payouts, utility and energy companies (e.g. water, gas, electricity) offer investors a certain consistency and reliability, thanks to the fact that consumer demand for utilities tends to be steady, and thus so is revenue.
Utility companies are considered a type of infrastructure investment, meaning that they provide systems that help society function. As such, these companies tend to be highly durable, offering tangible benefits to consumers and investors.
Also, many energy and utility companies may have little competition in a given region, which can add to the stability of revenue and thereby dividends.
ETFs
Just as an ordinary exchange-traded fund, or ETF, consists of a basket of securities, a dividend-paying ETF includes dividend-paying stocks or other assets. And similar to dividend-paying stocks, investors in dividend ETFs may benefit from regular monthly payouts, depending on the ETF.
Like most types of ETFs, dividend-paying funds are passive, meaning they track an index. In many cases, these ETFs seek to mirror indexes that include companies with a solid track record of dividend growth.
REITs
Real estate investment trusts (REITs) offer investors a way to buy shares in certain types of income-generating properties without the headache of having to manage these properties themselves.
REITs pay out dividends because they receive steady cash flow through rent payments and sometimes profits from the sale of a property. Also, these companies are legally required to pay at least 90% of their income to shareholders through dividends. Some REITs will pay dividends monthly.
Note: REIT payouts are ordinary dividends, i.e. they’re taxed as income, not at the more favorable capital gains rate.
Ways to Evaluate Monthly Dividend Stocks
Investors may want to analyze several criteria to determine the dividend stocks ideal for a wealth-building strategy. Here are a few things investors can consider when looking for the highest dividend stocks:
Dividend Payout Ratio
Investors will also factor in a stock’s dividend payout ratio when making investment decisions. This ratio expresses the percentage of income that a company pays to shareholders.
The dividend payout ratio is calculated by dividing a company’s total dividends paid by its net income.
Investors can also calculate the dividend payout ratio on a per share basis, dividing dividends per share by earnings per share.
The dividend payout ratio can help determine if the dividend payments a company distributes make sense in the context of its earnings. Like dividend yield, a high dividend payout ratio may be good, especially if investors want a company to pay more of its profits to investors. However, an extremely high ratio can be difficult to sustain.
If a stock is of interest, it may help to check out the company’s dividend payout ratios over an extended period and compare it to comparable companies in the same industry.
Company Stability
Investors may also wish to focus on stable, well-run companies with a reputation for paying consistent or rising dividends for years. Dividend aristocrats – companies that have paid and increased their dividends for at least 25 years – and blue chip stocks are examples of relatively stable companies that are attractive to dividend-focused investors.
These companies, however, do not always have the highest dividend yields. Nor do these companies pay monthly dividends; most companies will pay dividends quarterly.
Furthermore, keep in mind a company’s future prospects, not just its past success, when shopping for high-dividend stocks.
Tax Implications
Dividends also have specific tax implications that investors should know.
• A qualified dividend qualifies for the capital gains tax rate, which is typically more favorable than an investor’s marginal tax rate.
• An ordinary dividend is taxed at an individual’s income tax rate, which is typically higher than the capital gains rate.
Investors will receive a Form DIV-1099 when $10 or more in dividend income is paid out during the year. If the dividends are in a tax-advantaged account, an IRA, 401(k), etc., the money will grow tax-free until it’s withdrawn.
Recommended: Ordinary vs Qualified Dividends
Pros and Cons of Investing in Monthly Dividend Stocks
While dividend stocks offer some advantages, they also come with some risks and disadvantages investors must bear in mind.
Pros
• Passive income. As noted above, investing in dividend stocks can provide a source of passive income (although dividends can be cut at any time).
• The ability to reinvest. Dividend stocks allow for reinvestment (using dividend payments to buy more stocks, thus compounding returns). Steady dividends may also allow investors who reinvest the gains to buy stocks at a lower price while the market is down — similar to using a dollar-cost averaging strategy.
Additionally, the stocks of mature companies that pay dividends also may be less vulnerable to market fluctuations than a start-up or growth stock.
• Potential income during a downturn. Another plus for those who choose dividend stocks is that they may receive dividend payments even if the market falls. That can help insulate investors during tough economic times.
Recommended: Pros & Cons of Quarterly vs. Monthly Dividends
Cons
• Dividends are not guaranteed. A company can decide to suspend or cut its dividends at any time. It could be that the company is truly in trouble or that it simply needs the money for a new project or acquisition. This may be especially true for monthly dividend stocks; many REITs that pay monthly dividends suspended or cut dividends during the Covid-19 pandemic.
Either way, if the public sees the dividend cut as a negative sign, the share price could fall. And if that happens, an investor could suffer a double loss.
• Tax inefficiency. First, a corporation must pay tax on its earnings, and then when it distributes dividends to shareholders (which are considered profit-after-tax), the shareholder also must pay tax as an individual. Owing to this tax inefficiency, sometimes referred to as a type of double taxation, some companies decide not to offer dividends and find other ways to pass along profits.
Note that this tax issue doesn’t impact REITs the same way. Entities such as REITs and Master Limited Partnerships (MLPs) pass along most of their profits to investors. In these cases, the company doesn’t owe tax on the profits it passes onto the investor.
• Limited options. Also, choosing the right dividend stock can be tricky. First, monthly dividend stocks aren’t as common as quarterly dividend payouts. And the metrics for analyzing attractive dividend stocks are quite different from those for selecting ordinary stocks.
• Dividends can drop or be cut. It’s important to remember that dividends may fluctuate depending on how a company is performing, or how it chooses to distribute its profits. During a downturn, it’s possible to see lower dividends, or for a company to cut its dividend payout.
• Share price appreciation may be limited. Gains in the share price of some dividend stocks can be limited, as many dividend-paying companies are typically not in a rapid growth phase.
|
Pros and Cons of Monthly Dividend Stocks |
|
|---|---|
| Pros | Cons |
| Provide passive income | Dividend payments are not guaranteed |
| Dividend reinvestment can lead to compound returns | Selecting monthly dividend stocks can be tricky |
| Investors may earn a return even when the stock price goes down | Dividends may be cut or reduced during a downturn |
| Qualified dividends have preferential tax treatment over ordinary dividends; they qualify for the capital gains tax rate | Some companies view dividends as tax inefficient |
| Share price appreciation may be limited compared to growth stocks | |
Things to Avoid When Investing in Monthly Dividend Stocks
When investing in monthly dividend stocks, there are a few things to avoid:
• Avoid investing in a company that pays a monthly dividend solely to pay a monthly dividend. Many companies pay monthly dividends, but not all are suitable investments. Do your research and only invest in companies that you believe will be successful in the future.
• Avoid investing in a company or industry that you don’t understand. If you don’t understand how a company makes money, you should hesitate to invest in it.
• Avoid investing all of your money in monthly dividend stocks. Diversify your portfolio by investing in other types of stocks, bonds, funds, and other securities.
The Takeaway
Dividend-paying stocks can be desirable. They can add to your income, or offer the potential for reinvestment via dividend reinvestment plans or other strategies you pursue. Monthly dividend stocks offer the potential for steady income, but they are less common than stocks that pay on a quarterly basis.
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).
FAQ
How do monthly dividend stocks work?
A monthly dividend stock is a stock that pays out dividends every month instead of the more common quarterly basis. This can provide investors with a steadier stream of income, which can be particularly helpful if you rely on dividends for living expenses.
How can you get stocks that pay monthly dividends?
To invest in stocks that pay monthly dividends, you need to research financial websites and publications to find companies that pay dividends monthly. There are not many monthly dividend stocks, especially compared with stocks that pay quarterly dividends.
How can you determine the stocks that pay the highest monthly dividends?
Investors use metrics like the dividend yield and dividend payout ratio to determine the stocks that might be most desirable. However, stocks that pay the highest monthly dividends can change over time, and it’s important to consider other methods of assessing a stock, since a higher dividend isn’t always a sign of company health.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
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.
SOIN-Q125-124
Read moreMar
05
2025
Forex Binary Options, Explained: What They Are & How They Work
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.
If you have experience trading options in the stock market, you may also be aware of trading options in the forex world. Forex (short for foreign exchange) is a trading market that is separate from the stock market, and is where traders buy and sell different foreign currencies.
Two parties might exchange currency if one is traveling in a different country, or represents a multinational company. Many people also trade foreign currency as an investment, just as traders do with the stock market.
Binary options, also known as digital options, are one way to trade in the foreign currency market. This all-or-nothing investment option can be attractive to some traders, but comes with significant risk. Below, we’ll explore how binary options work and why one might choose to trade them.
Key Points
• Forex binary options involve betting on future currency pair prices with fixed outcomes.
• Traders determine their strategy by selecting a currency pair, strike price, and timeframe before the trade.
• Buyers pay upfront and “win” $100 if the option is in the money at expiration.
• Sellers put down the difference from $100 and win if the option is out of the money.
• Pros include known risks, simplicity, and lower initial investment; cons include higher costs, limited broker support, and higher risk.
What Are Binary Options?
Binary options are a type of options contract with only two possible outcomes: a fixed payout or nothing at all. Traders choose an underlying asset (such as a currency pair, stock index, or commodity), set a strike price, and select an expiration timeframe.
In binary options, both the buyer and the seller put down their money upfront. These options are typically priced from 0 to 100, and the price represents the approximate probability that the given currency pair will be at or above the strike price when the option expires.
What Are Forex Binary Options?
Forex binary options focus specifically on currency pairs, such as USD/EUR. These contracts are similar to other binary options but involve predicting whether a currency pair’s exchange rate will be above or below a chosen strike price at expiration. These are considered exotic options because they have a non-traditional payout structure and only two possible outcomes: either a fixed profit or a total loss.
How Do Forex Binary Options Work?
Unlike traditional call and put options, forex binary options have two possible outcomes: if the price of the currency pair is at or above the strike price at expiration, you make money. If it is below, you lose your investment. Each contract typically settles at either $100 or $0, depending on whether it expires in or out of the money.
For example, if an option is priced at $40, then the buyer must pay $40 per contract and the seller must pay $60 ($100 minus the $40 price) upfront. When the option closes, whichever side is on the right side of the strike price collects the entire $100. The fact that there are only two possibilities leads to the name binary option.
Pros and Cons of Forex Binary Options Trading
Here are some of the pros and cons of trading binary options when forex trading:
thumb_up
Pros:
• Limited and known upfront risk
• Can trade even with a smaller budget
• Easier to understand since there are only two possible outcomes
• Potential for a significant percentage gain if you are right
thumb_down
Cons:
• More expensive than traditional forex trading
• Supported by a limited number of brokers
• Seller, like buyer, must put money down upfront
• 100% loss of your position if you are wrong
Binary Option Risks and Rewards
Like all investments, investing in binary forex options comes with risks and rewards. These are different for the buyer and seller.
Risk for Buyers
Although there is risk in trading binary options, a trader knows the amount of money they’re risking upfront. With a binary option, you put down a specific amount of money (the option price). If the currency is below the strike price at expiration, you will lose all of the money you put down.
Reward for Buyers
The potential reward for a buyer purchasing a binary option is usually set at $100. If the currency is at or above the strike price at expiration, you will get the total amount of the contract.
Risk for Sellers
The risk for sellers of a binary forex option is known when the contract is agreed upon. Sellers of binary options must put their money down upfront, which is usually $100 minus the option price. If the option closes at or above the strike price, the option seller will lose all of the money they put down.
Reward for Sellers
If the currency closes below the strike price at expiration, the option will expire worthless and the seller will collect the entire $100. This could be a significant percentage gain, depending on how much was put down originally.
Binary Option in Forex Examples
Here are a few examples of how you could use a binary option in forex trading:
• EUR/USD binary option for 1.15 closing in one hour, trading at $30. A buyer would need to put down $30 and the seller $70, per contract. If the price of Euros is at or above 1.15 dollars in one hour, the buyer will collect $100. Otherwise the seller will take $100.
• AUS/JPY binary option for $83 closing next Friday, trading at $75. A buyer would put down $75 and the seller of this option would put down $25 per contract. If the price of the Australian dollar is at or above 83 yen, the buyer would take $100. If it is below 83 yen, the seller would collect the entire $100.
The Takeaway
Binary options are a way to invest in the foreign currency market. At its simplest, a binary option is a bet on the ratio of two different currencies. With a binary option, both options traders put down their money upfront. At expiration, whichever side is on the correct side of the strike price collects the entire premium put down (usually $100 per contract).
Binary options can be incredibly risky because you must predict whether the price will be at or above the strike price at expiration, and within the specified timeframe.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
🛈 While investors are not able to trade binary options through SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.
FAQ
Are forex and binary options the same thing?
The two terms are similar in that they both refer to trading on the foreign currency markets, but they are slightly different. Forex usually refers to buying and selling the actual currency itself, while binary options allow you to invest in forex for a smaller budget with more leverage.
Are binary options better than forex?
Binary options are a form of speculative currency option trading with limited outcomes: either a fixed gain or a loss. They carry higher risk than traditional forex trading, too. Which one is better will depend on your personal risk tolerance and knowledge of the foreign currency markets.
Can you trade binary options on forex?
Yes, binary options are typically traded in foreign currency pairs (like EUR/USD or AUS/JPY). Binary options give you an additional way to speculate or trade on movements in the foreign currency markets.
Photo credit: iStock/simonapilolla
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
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.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
SOIN-Q125-104
Read moreMar
05
2025
Credit Spread vs Debit Spread
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.
An options spread involves buying and selling different options contracts for the same underlying asset, at the same time. In the world of vertical spreads, there are credit spreads and debit spreads. What is the difference between a credit vs. a debit spread, and what are the potential ways investors may use these strategies?
When an investor chooses a credit spread, or net credit spread, they simultaneously sell a higher premium option and buy a lower premium option, typically of the same security but at a different strike price. This results in a credit to their account.
A debit spread differs from a credit spread in that the investor purchases a higher premium option while selling a lower premium option of the same underlying security, resulting in a net payment or debit from their account.
Keep reading to learn more about the differences between credit spreads and debit spreads, and how volatility may impact each.
Key Points
• Credit spreads result in a net credit to the investor’s account by selling a higher premium option and buying a lower premium one.
• Debit spreads result in a net debit from the investor’s account by buying a higher premium option and selling a lower premium one.
• Credit spreads benefit from time decay and require margin, while debit spreads do not require margin but face time decay as a disadvantage.
• Both strategies allow for flexible risk management without owning the underlying asset.
• The maximum potential gain or loss is determined by the strike prices’ difference and the net premium paid or received.
Why Use a Spread Strategy When Trading Options?
Options contracts give their holder (or buyer) the right, but not the obligation, to buy or sell an underlying asset, often a security like a stock. Having different strategies to trade options gives investors exposure to price movement in an underlying asset, allowing them to take a bullish or bearish position without having to own the security itself. Beyond the market price of the underlying asset, a number of factors — including the level of volatility, time to expiration, and market interest rates — impact the value of the options contract.
With so many factors to consider, investors have developed a host of strategies for how to trade options. A vertical spread comes in two flavors — a credit or a debit spread — which can involve buying (or selling) a call (or put), and simultaneously selling (or buying) another call (or put) at a different strike price, but with the same expiration. Let’s look at these two strategies for trading options.
How a Credit Spread Works
In a credit spread, the investor sells a high-premium option at one strike price and buys a low-premium option at a different strike price, both for the same underlying security and expiration date. Those trades result in a credit to the trader’s account, because the option they sell is worth more than the one they buy. In this scenario, the investor hopes that both options will be out-of-the-money on the expiration date and expire worthless, allowing the investor to keep the original net premium collected.
How a Debit Spread Works
In a debit spread, the investor buys a high-premium option and sells a low-premium option of the same security. Those trades result in a debit from the trader’s account. But they make the trade in the expectation that the price movement during the life of the options contract will result in a profit. The best case scenario is that both options are in-the-money on the day of expiration, allowing the investor to close out both contracts for their maximum potential gain.
Credit Spreads
To help with understanding how credit spreads works: An investor simultaneously buys and sells options on the same underlying security with the same expiration, but at different strike prices. The premium that the investor receives on the option they sell is higher than the premium they pay on the option they buy, which leads to a net return or credit for the investor.
Credit spreads often require traders to have a margin account, as the short leg (or short position) may create a financial obligation if exercised. Before a trader can engage in a credit spread, they’ll need to make sure their brokerage account is appropriately set up.
The strategy takes two forms. The first credit spread strategy is the bull put credit spread, in which the investor buys a put option at one strike price and sells a put option at a higher strike price. Put options tend to increase in value as the underlying asset price goes down, and they decrease in value as the underlying price goes up.
Thus, this is a bullish strategy, because the investor hopes for a price increase in the underlying such that both options expire worthless. If the price of the underlying asset is above the higher strike price put on expiration day, the investor achieves the maximum potential profit. On the flip side, if the underlying security falls below the long-put strike price, then the investor would suffer the maximum potential loss on the strategy. The maximum potential loss is equal to the difference between the two strike prices, minus the net premium received.
Another factor that can work in favor of the investor in credit spread is time decay. This is the phenomenon whereby options tend to lose value as they approach their expiration date. Holding the price of the underlying asset constant, the difference in value between the two options in a credit spread will naturally evaporate, meaning that the investor can either close out both contracts for a gain or let them expire worthless.
The other credit-spread trading strategy is called the bear call credit spread, or a bear call spread. In a way, it’s the opposite of the bull put spread. The investor buys a call option at one strike price and sells a call option at a lower strike price, hoping for a decrease in the price of the underlying asset.
A bull put spread can be profitable if the price of the security remains under a certain level throughout the duration of the options contracts. If the security is below the lower call’s strike price at expiration, then the spread seller gets to keep the entire premium on the options they sell in the strategy. But there’s a risk, too. If the stock falls below the lower strike price at expiration, the investor will face the maximum loss, which is the difference between the strike prices minus the net premium received.
Debit Spreads
A debit spread is the inverse of a credit spread. Like a credit spread, a debit spread involves buying two sets of options, in equal amounts, of the same underlying security with the same expiration date. But in a debit spread, the investor buys one set of options with a higher premium, while selling a set of options with a lower premium.
While the credit spread strategy results in a net credit to the trader’s account when they make the trade, a debit spread strategy results in an immediate net debit in their account, hence the name. The debit occurs because the premium paid on the options the investor purchases is higher than the premium the investor receives for the options they buy.
Investors typically use debit spread strategies to offset the cost of buying an option outright, or to speculate on moderate price movements in the underlying asset. They may choose a debit spread over purchasing a lone option if they expect moderate price movement in the underlying asset.
Like credit spreads, debit spreads can reflect bullish or bearish outlooks. For instance, a bull debit spread involves call options, where the investor purchases a call option at a lower strike price and sells a call option at a higher strike price. A bear debit spread involves puts, where the investor purchases and sells a put option at a lower strike price, aiming to profit from a decline in the underlying asset’s price.
The maximum potential gain is equal to the difference in strike prices minus the net premium paid up front, and is achieved if the underlying asset goes above the higher strike price call on expiration day. Similarly, one can construct a bear-debit spread using put options.
With debit spread strategies, the investor faces an initial outlay on their trade, which also represents their maximum potential loss. Unlike with credit spreads, time decay is typically working against the investor in a debit spread, since they are hoping for both options to expire in-the-money so that they can close out both contracts and pocket the difference.
Pros and Cons of Credit and Debit Spreads, Depending on Volatility
When comparing a credit spread vs. debit spread, here are a few key details to keep in mind.
| Credit Spreads | Debit Spreads |
|---|---|
| Investor receives a net premium when the trade is initiated. | Investor pays a net premium when the trade is initiated. |
| Maximum potential loss may be greater than the initial premium collected upfront. | Maximum potential loss is limited to the net premium paid. |
| Requires the use of margin. | Does not require the use of margin. |
| Time decay works in favor of the investor. | Time decay is working against the investor. |
The Takeaway
Spreads are commonly used options trading strategies, whether it’s a credit spread or a debit spread. The spread in these strategies refers to a practice of buying and selling of different options with the same underlying security and expiration date, but with different strike prices.
Key to the strategy is the fact that spreads create upper and lower bounds on potential gains and losses. It’s at the discretion of the investor to choose the strike prices of the options they buy and sell when creating the spread. This gives the investor a degree of flexibility with respect to how much risk they take on.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
🛈 While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.
Photo credit: iStock/Pekic
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SOIN-Q125-102
Read moreMar
05
2025
Guide to Risk Reversal
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.
Risk reversal refers to two distinct concepts: an options hedging strategy in stock trading, or a measure of volatility in forex trading.
From a stock market perspective, you can use a risk reversal option strategy by buying and selling options to protect either a long or short position from risk, though it also limits potential profits.
Risk reversal is also used in foreign exchange trading (forex, or FX) with a slightly different definition. There, risk reversal refers to the difference in implied volatility between call and put options. This can give forex traders an idea of the overall market conditions.
Key Points
• A risk reversal strategy uses options to hedge against potential losses in stock trading.
• For long stock positions, this often means selling a call and buying a put typically out of the money.
• For short stock positions, this often means selling a put and buying a call, typically out of the money.
• In stock trading, a risk-reversal strategy reduces but does not eliminate all risks, including market volatility and premium erosion.
• In forex trading, risk reversal measures the difference in implied volatility between call and put options.
What Is a Risk Reversal Option Trade?
Risk reversal is an options strategy that allows you to protect either a long or short position in a stock by buying put or call options to hedge your position. If you are long a stock, you can buy an out-of-the-money put and sell an out-of-the-money call option to help offset potential losses from adverse movements in the stock. If you are short a stock, you can use a risk reversal trade by selling an out-of-the-money put and buying an out-of-the-money call option contract.
How Does Risk Reversal Work?
Here is how options traders use risk reversal options, and how you might use them to hedge a position that you hold. It’s important to note that while risk reversal can hedge a position, it does not eliminate all risk and may result in losses should the price move unfavorably.
Setup
How you set up a risk reversal depends on whether you are long or short the underlying stock. You’ll want to use both a call and put option contract in each case, but which one you sell and which you buy depends on if you are long or short.
If you are long a stock, you will hedge by writing (or selling) a call option and purchasing a put option. If you are short a stock, you will do the opposite — selling a put option and buying a call option that expires at the same time.
Profit/Loss
Let’s examine a scenario where you are long a stock and want to use risk reversal to hedge some of the risk in your position. So you sell an out-of-the-money call option and buy an out-of-the-money put option, usually at a net credit to yourself.
If the stock’s price goes up past the strike price of your call, you will profit based on the increased value of your stock holding. Your maximum loss occurs if the stock price declines below the strike price of the put option, reduced by the net premium you receive from executing the strategy.
Breakeven
Because you generally hold the underlying stock as well as the option when using risk reversal, there is not a specific breakeven price.
Exit Strategy
Often when using a risk reversal strategy, you will keep repeating the process each month as new options expire. That way you can continue to hold the underlying stock and collect the net premium from your options each month. One of your options may expire in the money, depending on stock price movements. At that point, you’ll need to decide whether to adjust or close your position.
Maintaining a Risk Reversal
Maintaining your risk reversal will depend on the movement of the underlying stock. In an ideal situation, the stock will not make any drastic movements. If the stock’s price closes between the strike price of your call and put options, both will typically expire worthless. That will allow you to continue to use the risk reversal strategy and collect an additional premium.
Risk Reversal Example
Let’s say you are slightly bullish on a stock that is trading at $80 per share. You own 100 shares of that stock and want to protect against risk. You can use the risk reversal strategy by buying a $75 put and selling an $85 call through your brokerage. Prices will vary depending on the delta or theta of the options, but you may receive a slight credit.
If the options expire with the stock in between $75 and $85, both financial instruments will expire worthless. Then you can continue the strategy by buying another put and selling another call. If the stock price rises above $85, your call option will be exercised, and you will close your stock position with a slight profit. This strategy reduces your exposure to downward price movements of the stock below $75, but does not fully eliminate risk. Additionally, put premium could cut into returns as the value of the put option declines over time, potentially offsetting gains from the hedge.
Forex Risk Reversal
Risk reversal has a slightly different meaning in the world of forex trading, having to do with the volatility of out-of-the-money call or put options. In forex trading, positive and negative risk reversal figures reflect the sentiment of traders and their expectations for future price direction.
A positive risk reversal is when the volatility of call options is higher than that of the corresponding put options. A negative risk reversal is when the volatility of put options is higher than that of call options. This information can help traders decide on which strategies might be more effective.
The Takeaway
The risk reversal options strategy is a way to mitigate potential losses from market volatility when trading options to hedge a position in the stock market. In forex trading, risk reversal refers to differences in implied volatility between call and put options. Understanding how different options strategies work can help you better understand the stock market.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
🛈 While investors are not able to trade forex or sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.
FAQ
Why is it called risk reversal?
The risk reversal strategy gets its name because it allows investors to mitigate or reverse the risk you have from a long or short stock position. If you’re slightly bullish on a stock, you can use risk reversal to protect you against downward movement on the stock.
How are long and short risk reversal different?
With a long risk reversal, you are hedging against a short position in the underlying stock. You can do this by purchasing a call option and funding that call purchase by selling a put option. In a short risk reversal, you are mitigating the risk of a long position by selling a call and buying a put option.
How can you calculate risk reversal?
In forex trading, you can calculate the risk reversal by looking at the implied volatility of out-of-the-money call and put options. If the volatility of calls is greater than the volatility of the corresponding put option contracts, there is positive risk reversal, and vice versa.
Photo credit: iStock/Likoper
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOIN-Q125-103
Read moreSee what SoFi can do for you and your finances.
Select a product below and get your rate in just minutes.