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Mar
18
2025
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What Is a Straddle in Options Trading?

By | invest, Investing, Terminology | Comments Off on What Is a Straddle in Options Trading?

A straddle is an options trade with which investors can profit regardless of which direction an asset moves. Because of this, a straddle is considered a “neutral options strategy.”

Long straddles are used when an investor expects greater volatility in an underlying asset. They involve buying a call option and put option simultaneously. Short straddles are used when an investor expects little movement in an asset. They involve selling a call and a put at the same time. It’s important to keep in mind that straddles are a complex options strategy that aren’t suitable for most investors.

Understanding Puts and Calls

A call option gives investors the right, but not the obligation, to buy an asset. A put option versus a call gives the right to sell. A seller of a call is obligated to deliver the underlying asset if the buyer exercises the contract. Meanwhile, a seller of a put is obligated to buy the underlying asset if the contract is exercised.

Long straddles are popular when investors anticipate an event will significantly move a stock’s price, such as after a company’s earnings or big product announcement. On the flip side, short straddles are common when investors think volatility expectations are too high, meaning that share prices will move sideways or only change slightly.


💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

How to Put on a Straddle Trade

In options trading, an investor can put on a straddle in two ways: 1) They can buy a call option and put option. Both contracts need to have the same strike price and expiration date. Or 2) They can sell a call and put option that both have the same strike price and expiration date.

In options terminology, the strike price is the level at which the options contract can be exercised. For instance, say a stock is trading at $10 a share and a call option on it has a strike price of $12. If the stock reaches $12, the investor has the right, but not the obligation, to exercise the option.

An option’s expiration date is the date by which the call or put must be exercised. So an investor has until the expiry to exercise the option by buying or selling the underlying asset. After that date, the options become worthless. Another important term for options investors is the premium. This is the value or cost of the option itself.

Examples of Straddles

The two types of straddles discussed here are the long straddle and the short straddle. These are just two of many different options trading strategies.

In a long straddle, the move in the underlying asset needs to exceed the cost of the two premiums — one for the call, one for the put — in order for the investor to break even on the trade. The cost of the two premiums is the maximum amount of money the investor can lose. In a short straddle, the cost of the two premiums is the maximum amount the investor can earn from the trade.

Long Straddle Example

Let’s say an investor believes Company A will either soar or plummet after releasing its quarterly earnings call. Company A’s shares currently trade in the market at $50 each.

In order to put on a long straddle, the investor pays $2 for a call contract and $2 for a put contract for a total cost of $4. Both contracts have a strike price at $50. The total cost for the investor will be $400, since each options contract equals 100 shares of stock.

So in order for the investor to break even on the trade, the stock will have to either rise above $54 a share or fall below $46. That’s because $50 plus $4 is $54, while $50 minus $4 is $46. Here is the formula to calculate the breakeven levels in long straddles:

Upper breakeven level = Strike price + Total cost of options premiums

Lower breakeven level = Strike price – Total cost of options premiums

Short Straddle Example

In a short straddle trade, the investor sells a call and put that have the same strike price and expiration. An investor might do this when they believe the market’s expectations for volatility in a stock are too high.

Say for instance, the implied volatility for Company B has climbed substantially. Implied volatility is the market’s expectations for volatility in an asset. In other words, the market believes Company B will see a big stock move after making a product announcement.

However, one investor thinks these expectations are inflated. If the stock’s move after the announcement is actually muted, the value of both the calls and puts would drop quickly. Meanwhile, the short-straddle investor has benefited by having collected the premiums from selling the options.

However, the potential investment risks of a short straddle trade are high, because the underlying asset’s potential to climb higher is unlimited and an investor may have to pay the market price to cover the short call.

Pros & Cons of Straddles

Pros of Straddles

1.    Market neutral: Investors can benefit from an options trade even if they’re uncertain which direction the underlying asset will move.

2.    Premiums costs: With long straddles, the cost of premiums could be relatively low. Say for instance an investor finds a stock that they believe will see high volatility. Meanwhile, the cost of the calls and puts are not yet too expensive. The investor can potentially make a profit from this long straddle trade.

3.    Volatility bet: With long straddles, investors can make money when an asset’s stock volatility is high.

Cons of Straddles

1.    Pricey premiums: It can be tricky to get market timing right. When implied or expected volatility for an asset is high, the price of options premiums can also rise. This means investors looking to put on a long straddle trade can encounter costlier premiums. Plus, with long straddles, investors have to pay the cost of two premiums.

2.    Time decay: Options lose value as they get closer to their expiration date — a concept known as theta or time decay in the derivatives market. Time decay may become a concern if market volatility is low for a while and an investor is trying to exercise a long straddle position.

3.    Potential losses: In a short straddle, the potential loss is unlimited while the potential upside is limited.



💡 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.

Straddles vs Strangles

In contrast to a straddle, a long strangle involves buying both calls and puts but with different strike prices.

Strangles are more common when investors believe a stock is more likely to move in one direction, but still want to hold some protection in case the opposite scenario occurs.

The advantage of a strangle is that the costs of putting them on are typically lower than straddles.

The Takeaway

An options straddle is essentially a two-trade bundle that’s designed to allow investors to wager whether there will be a major move in an asset’s price or not.

In a long straddle, investors have the potential to capture a significant profit while having paid only a relatively low cost for the options premiums. However, If the stock trades sideways or doesn’t post a big move, the investor will lose the money they invested in the premiums. In a short straddle, the opposite is true. If the underlying asset doesn’t post a big move, the investor can make money.

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®.


With SoFi, user-friendly options trading is finally here.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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.
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.
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Mar
18
2025
In the Money (ITM) vs Out of the Money (OTM) Options

In the Money vs Out of the Money Options: Main Differences

By | Growing Wealth, invest, Investing | Comments Off on In the Money vs Out of the Money Options: Main Differences

Key Points

•   Understanding the difference between “in the money” and “out of the money” options is crucial for options traders to gauge potential profitability.

•   Options classified as “in the money” have intrinsic value and can yield profits when exercised, while “out of the money” options lack intrinsic value and may expire worthless.

•   The potential for profit from options depends on the relationship between the strike price and the current market price of the underlying asset.

•   Higher volatility often leads to options being written “out of the money,” appealing to speculators due to lower premiums and potential for larger price swings.

•   Decisions to buy “in the money” or “out of the money” options should align with an investor’s goals, risk tolerance, and confidence in the underlying asset’s future performance.

In options trading, knowing the difference between being “in the money” (ITM) and “out of the money” (OTM) allows the holder of a contract to know whether they’ll enjoy a profit from their option. The terms refer to the relationship between the options strike price and the market value of the underlying asset.

“In the money” refers to options that have profit potential if exercised today, while “out of the money” refers to those that do not. In the rare case that the market price of an underlying security reaches the strike price of an option exactly at the time of expiry, this would be called an “at the money option.”

What Does “In the Money” Mean?

In the money (ITM) describes a contract that would be profitable if its owner were to choose to exercise the option today. If this is the case, the option is said to have intrinsic value.

A call option would be in the money if the strike price is lower than the current market price of the underlying security. An investor holding such a contract could exercise the option to buy the security at a discount and sell it for a profit right away.

Put options, which are a way to short a stock, would be in the money if the strike price is higher than the current market price of the underlying security. A contract of this nature allows the holder to sell the security at a higher price than it currently trades for and pocket the difference.

In either case, an in the money contract has intrinsic value, so the options trader can exercise the option and make money doing so.


💡 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.

Example of In the Money

For example, say an investor owns a call option with a strike price of $15 on a stock currently trading at $16 per share. This option would be in the money because its owner could exercise the option to realize a profit. The contract gives the holder the right to buy 100 shares of the stock at $15, even though the market price is currently $16.

The contract holder could take shares acquired through the contract for a total of $1,500 and sell them for $1,600, realizing a profit of $100 minus the premium paid for the contract and any associated trading fees or commissions.

While call options give the holder the right to buy a security, put options give holders the right to sell. For example, say an investor owns a put option with a strike price of $10 on a stock that is trading at $9 per share. This would be an in the money option. The holder could sell 100 shares of stock at a price of $10 for a total of $1,000, even though it only costs $900 to buy those same shares. The contract holder would realize that difference of $100 as profit, minus the premium and any fees.

What Does “Out of the Money” Mean?

Out of the money (OTM) is the opposite of being in the money. OTM contracts do not have intrinsic value. If an option is out of the money at the time of expiration, the contract will expire worthless. Options are out of the money when the relation of their strike prices to the current market price of their securities are opposite that of in the money options.

For calls, an option with a strike price higher than the current price of the underlying security would be out of the money. Exercising such an option would result in an investor buying a security for a price higher than its current market value.

For puts, an option with a strike price lower than the current price of its security would be out of the money. Exercising such an option would cause an investor to sell a security at a price lower than its current market value.

In either case, contracts are out of the money because they don’t have intrinsic value – anyone exercising those contracts would lose money.

Example of Out of the Money

Say an investor buys a call option with a strike price of $15 on a stock currently trading at $13. This option would be out of the money. An investor might buy an option like this in the hopes that the stock will rise above the strike price before expiration, in which case a profit could be realized.

Another example would be an investor buying a put option with a strike price of $7 on a stock currently trading at $10. This would also be an out of the money option. An investor might buy this kind of option with the belief that the stock will fall below the strike price before expiration.


💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.

What’s the Difference Between In the Money and Out of the Money?

The premium of an options contract involves two different factors: intrinsic value and extrinsic value. Options that have intrinsic value at the time they are written to have a strike price that is profitable relative to the current market price. In other words, such options are already in the money when written.

But not all options are written ITM. Those without intrinsic value rely instead on their extrinsic value. This value comes from speculative bets that investors make over a period of time. For this reason, assets with higher volatility often have their options contracts written out of the money, as investors expect there to be bigger price swings. Conversely, assets considered to be less volatile often have their options written in the money.

Options written out of the money are ideal for speculators because such contracts come with less expensive premiums and are often created for more volatile assets.

Recommended: Popular Options Trading Terminology to Know

Should I Buy ITM or OTM Options?

The answer to this question depends on an investor’s goals and risk tolerance. Options that are further out of the money can be more rewarding, but come with greater risk, uncertainty, and volatility. Whether an option is in or out of the money (and how far they’re out of the money), and the amount of time before the expiry of the option impacts the premium for that option, with riskier options typically costing more.

Whether to buy ITM or OTM options also depends on how confident an investor feels about the future of the underlying security. If a trader feels fairly certain that a particular stock will trade at a much higher price three months from now, then they might not hesitate to buy a call option with a very high strike price, making it out of the money.

Conversely, if an investor thinks a stock will fall in price, they can buy a put option with a very low strike price, which would also make the option out of the money.

Beginners and those with lower risk tolerance may prefer buying options that are only somewhat out of the money or those that are in the money. These options usually have lower premiums, meaning they cost less to buy. There are also generally greater odds that the contract will wind up in the money before expiration, as it will take a less dramatic move to make that happen.

Investors can also choose to combine multiple options legs into a spread strategy that attempts to take advantage of both possibilities.

Recommended: 10 Important Options Trading Strategies

Test your understanding of what you just read.

The Takeaway

In options trading, “in the money” refers to options that have profit potential if exercised immediately, while “out of the money” refers to those that don’t. Options contracts don’t have to be exercised to realize a profit. Sometimes investors buy contracts with the intent of selling them on the open market soon after they become in the money for quick gains.

In either case, it’s important to consider if an option is in the money or out of the money when buying or writing options contracts, as well as when deciding when to execute them. Options trading is an advanced investing strategy, and investors should know what they’re doing before engaging with it – or should speak with a financial professional for guidance.

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).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/damircudic

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.
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.

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Mar
18
2025
Short Calls vs Long Calls: Complete Comparison

Short Calls vs Long Calls: Complete Comparison

By | Growing Wealth, invest, Investing | Comments Off on Short Calls vs Long Calls: Complete Comparison

What’s the Difference Between Short Calls and Long Calls?

Every time a call option contract transaction takes place there is a seller and a buyer. The seller is said to have gone short the calls and the buyer is long the calls. “Short calls” and “long calls” are simply shorthand for these two positions and strategies.

Short calls are a bearish options strategy used to profit from an expected sideways to downward price action on a security. On the other hand, a long call is a bullish options strategy that aims to capitalize on upward price movements on an asset such as a stock or exchange-traded fund (ETF).

Short calls are the opposite strategy to long calls and their potential payoffs reflect that. Long calls have the potential to be unlimited in gain, and short calls the maximum gain is the premium.

What Are Short Calls?

“Short calls” is shorthand for pursuing the strategy of selling a call option.

Short call sellers receive a premium when the call is sold. The seller hopes to see a decrease in the underlying asset’s price to achieve the maximum profit.

It is also possible for the seller to profit if the underlying asset price stays the same. Options prices are based on intrinsic value (the difference between the strike price and the asset price) and time value.

If the asset price remains stable, intrinsic value will also be stable. However, as the option nears expiration the time value will drop to zero due to theta decay.

Furthermore, there are two types of short calls, naked and covered calls. Short calls are “naked” when the seller does not own the underlying asset. Short calls are “covered” when the seller owns the underlying asset at the time of sale.

Short calls have a fixed maximum profit equal to the premium collected and losses are undefined. Theoretically, a stock could rise to infinity, so there is no cap on how high the value of a call option could be.

Therefore short calls can be highly risky. For this reason, traders should have a risk management plan in place when they engage in naked call selling.

Short Call Example

It’s helpful to see an example of a short call to understand the upside reward potential and downside risks involved with such a strategy.

Suppose your outlook on shares of XYZ stock is neutral to bearish. You think that the stock, currently trading at $50, will trade between $45 and $50 in the next three months.

A plausible trade to execute would be to sell the $50 strike calls expiring in three months. We’ll assume those options trade at $5. The breakeven price on a short call is the strike price plus the premium collected.

In this example, the breakeven price is thus $50 plus $5 which is $55. You profit so long as the stock is below $55 by the time the options expire but will experience losses if the stock is above $55 by expiry.

Two months pass, and the stock is at $48. The calls have dropped in value thanks to a minor share price decline and since there is less time until expiration. The drop in time value relates to decaying theta, one of the option Greeks, as they’re called. Your short calls are now valued at $2 in the market.

Fast-forward three weeks, and there are just a few days until expiration. The stock has rallied to $49, but the calls have actually fallen in value. They are now worth just $1. Time decay has eaten away at the value of the calls — more than offsetting the rise in the underlying shares. Time decay becomes quicker as expiration approaches.

You choose to buy-to-close your options in the market rather than risk a late surge in the stock price. Most options are closed out rather than left to expire (or be exercised) as closing options positions before expiration can save on transaction costs and added margin requirements. You cover your short calls at $1 and enjoy a net profit of $4 on the trade ($5 collected at the trade’s initiation and a $1 buy back to close the position).

Pros and Cons of Short Calls

Pros of Short Calls

 Cons of Short Calls

Benefits from time decay Unlimited risk if the underlying asset rises sharply
Can be used in combination with a long stock position to generate extra income (covered call) You may be required to deliver shares if the options holder exercises the call option
The underlying stock can be sideways to even slightly higher and you can still profit Reward is capped at the premium you received at the onset of the trade

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

What Are Long Calls?

Long calls are the opposite strategy to a short call. With a long call, the trader is bullish on the underlying asset. Once again, a key piece of the options trade is the timing aspect.

A long call benefits when the security rises in value, but it must do so before the options expire.

Long calls have unlimited upside potential and limited downside risk. A long vs short call differs in that respect since a short call has limited profit potential and unlimited risk.

A long call is a basic options strategy that is often a speculative bullish bet on an underlying asset. It’s a good options strategy for those just starting out since there is a limited loss potential and the strategy itself is not complicated.

Long Call Example

Buying a long call option is straightforward. Long calls vs short calls involve different order types. With long calls, you input a buy-to-open order and then choose the calls you wish to purchase.

You must enter the underlying asset (often a stock or ETF, but it could be an option on a futures contract such as on a commodity or currency), along with the strike price, options expiration date, and whether the order is a market or limit order.

Suppose you go long calls on XYZ shares. The stock trades at $50 and you want to profit should the stock rise dramatically over the next month. You could buy the $60 strike calls expiring one month from now. The option premium — the cost to buy the option — might be $2. Because the call is out-of-the-money, that $2 is composed entirely of extrinsic value (also known as time value).

Since you are going long the calls, you want the underlying stock price to rise above the strike price by expiration. It’s important to know your breakeven price with a long call — that is the strike price plus the premium paid. In our example, that is $60 plus $2 which is $62. If the stock is above $62 at expiration, you profit.

After three weeks, the stock has risen to $70 per share. Your calls are now worth $13.

That $13 of premium is made up of $10 of intrinsic value (the stock price minus the strike) and $3 of time value since there is still a chance the stock could keep increasing before expiry.

A few days before expiration, the shares have steadied at $69. Your $60 strike calls are worth $10. You decide to take your money and run.

You enter a sell-to-close order to exit the position. Your proceeds from the sale are $10, making for a tidy $8 profit considering your $2 premium outlay.

Pros and Cons of Long Calls

Pros of Long Calls

Cons of Long Calls

Unlimited upside potential The premium paid can be substantial
Risk is limited to the premium paid You can be correct with the directional bet and still lose money if your timing is wrong
Is a leveraged play on an underlying asset There’s a chance the calls will expire worthless

Comparing Short Calls vs Long Calls

There are important similarities and differences between a short call vs long call to consider before you embark on a trading strategy.

Similarities

Traders use options for three primary reasons:

•   Speculation — Speculators often do not take positions in the underlying stock. Investors can buy a call and hope the underlying asset rises or they can sell a call and hope the asset price drops. Either way, the investor is taking a risk and could lose their investment, or more in the case of naked short calls.

•   Hedging — Short sellers of stock may sometimes buy call options to hedge their stock positions against unexpected price movements.

•   Generate Income — Covered short calls help to generate extra income in a portfolio. The seller sells a call that is out-of-the-money, collects the premium, and hopes the stock doesn’t rise to that strike price. However, the investor can also choose a strike that they would be happy to sell at such that, if the stock rises and the option is exercised, they are happy to sell their shares.

Differences

Long calls are a bullish strategy while short calls are a neutral to bearish play.

Potential profits and possible losses are the opposite in long calls vs. short calls. A long call has unlimited upside potential and losses are limited to the premium paid. A short call has an unlimited loss potential with a max profit that is simply the premium collected at the onset of the trade.

Time decay works to the benefit of an options seller, such as when you enter a short call trade. Time decay is the enemy of those who are long options.

When implied volatility rises, the holder of a call benefits (all else equal) since the option will have more value. When implied volatility drops, options generally become less valuable, which is to the option writer’s benefit.

It’s also important to understand the moneyness of a call option. A call option is considered in-the-money when the underlying asset’s price is above the strike price. When the underlying asset’s price is below the strike, then the call option is considered out-of-the-money.

A call writer prefers when the call is more out-of-the-money while a call holder wants the calls to turn more in-the-money.

Short Calls

Long Calls

Neutral-to-bearish view Bullish view
A more advanced options play A trade that is good for options beginners
Limited reward, unlimited risk Unlimited reward, limited risk

The Takeaway

Long calls and short calls are two options trading strategies you can use to place a directional and timing wager on an underlying asset — often a stock or ETF. Buying calls is a bullish play while selling calls is a neutral to bearish strategy.

If you’re ready to try your hand at options trading online, You can set up an Active Invest account and trade options from the SoFi mobile app or through the web platform.

And if you have any questions, SoFi offers educational resources about options to learn more. SoFi doesn’t charge commissions, but some fees apply, and members have access to a complimentary 30-min session with a SoFi Financial Planner.

With SoFi, user-friendly options trading is finally here.

FAQ

Are long calls better than short calls?

Long calls are not necessarily better than short calls. Using one versus the other depends on your outlook on how a security will move between now and expiration.

Long calls appreciate when the underlying asset rises in value. Short calls, on the other hand, are useful if you have a neutral to bearish view on a security. Short calls drop in value as time value erodes and when the underlying asset’s price falls.

Like long calls, it is important that your directional bet and timeframe line up with the calls you look to sell short.

How do short calls and covered calls differ?

Short calls are often naked positions. That means they traded outright without having an existing long stock position. Naked short calls are risky since there is unlimited loss potential should the stock rise.

Covered calls work by owning shares of a stock, then selling calls against that long stock position. Covered calls are a common options trading strategy whereby a trader looks to enhance a portfolio’s income by collecting a premium while the underlying shares trade sideways or decline in value.

The downside of covered calls is that your shares can get called away from you if the stock price rises above the strike price. Covered calls have the benefit of protecting the trader from unlimited losses since the long stock position offsets the short calls’ unlimited loss potential.

Photo credit: iStock/Prostock-Studio

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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.
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.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Mar
18
2025

Understanding the HELOC Closing Process

By | Growing Wealth, Home Ownership, mortgage, Terminology, Tools & Calculators | Comments Off on Understanding the HELOC Closing Process

because of the paperwork and possible stress involved, here’s some good news:

The HELOC closing process is typically less complicated than what you’ll go through when you’re getting a primary home mortgage. With a HELOC, the transaction is between just you — as the homeowner and borrower — and your lender. Which can give you more control over the pace and potential problems.

Still, it’s a good idea to have an understanding of how the process works. In this guide, we’ll look at the documents you may need, the costs you can expect, and the steps you can take to prepare for a HELOC closing.

Key Points

•   Application and documentation submission initiates the HELOC process.

•   Underwriting and a home appraisal follow to assess eligibility and property value.

•   Lending agreements are then prepared for review and signature.

•   Closing and funding occur. Funds arrive after a three-day waiting period.

•   Post-closing, borrowers manage the HELOC and may convert it to a fixed-rate loan.

Preparing for HELOC Closing

For most borrowers, getting a HELOC takes about two to six weeks from application to closing. Here’s a quick summary of how the process generally works:

Completing Your HELOC Application

After you’ve researched how a HELOC works, as well as the terms various lenders are offering, and you’ve chosen who you want to work with, you can complete your application (online or in person). As part of this step, you’ll be asked to provide information about your income, credit, debt payments, and home equity to help determine your eligibility for a HELOC.

Going Through the Underwriting Process

Once you submit your application and any documentation the lender requires, an underwriter — a financial expert who assesses risk for lenders, insurers, or investment companies — will examine your financials. You will likely be required to have a home appraisal performed to assess your home’s current market value, and the underwriter may contact you with follow-up questions or a request for additional documentation. A HELOC monthly payment calculator can show you what your monthly payments would look like based on how much you borrow and your interest rate and repayment term.

Preparing the Lending Agreement

Upon approval, the lender will finalize the terms of your HELOC and prepare your lending agreement, which should include a detailed explanation of your HELOC, including how long you can withdraw money from the account (during the “draw period”), how long you’ll have to pay back the balance you owe (during the “repayment period”), and your interest rate.

Proceeding to Closing and Funding

At your closing, you (and any co-applicants) will be asked to sign your loan documents and pay your closing costs. If your HELOC is secured by your primary residence, you shouldn’t expect to get your money right away. There is a mandatory three-day “right of rescission” waiting period before you can access the funds in your account. (This right, which is also called the three-day cancellation rule, is required by a federal Truth in Lending Act, and gives borrowers an opportunity to change their mind about certain types of home loans. Technically, a HELOC is a second mortgage, assuming you still have a first mortgage.) Once your funds are available, however, you can tap into your HELOC at any time, up to the approved amount.

Recommended: Calculating Home Equity

Required Documents for HELOC Closing

Before and during your HELOC closing, you should be prepared to provide and/or sign several documents. The HELOC requirements may vary depending on the lender, but the requested paperwork could include:

•   Your photo ID (a driver’s license or passport) and Social Security number

•   Proof that you have appropriate homeowner’s coverage on your property

•   An appraisal report that assesses your home’s current market value

•   A property title search and title insurance that ensures there won’t be any problems with liens or other issues

•   A mortgage or deed of trust that secures the loan against your home

•   A loan agreement that outlines your loan terms, such as the interest rate, repayment schedule, and penalties for late payments

•   A Truth in Lending Disclosure Statement that provides additional information about the costs of your loan

•   A closing disclosure that breaks down the fees, charges, and credits related to closing your loan

These documents are in addition to the paperwork you may be asked to provide during the application and underwriting process. Your lender will let you know ahead of time what and who you should have with you when you come to your closing.

Home Appraisal Process

Lenders typically require a home appraisal to get an accurate valuation of a property before approving different types of home equity loans. For a HELOC, this may be accomplished through a full-home appraisal, a drive-by appraisal (assessing only the exterior of the home and its condition), or with automated valuation tools. The type of appraisal you get may depend on how much you’re borrowing and other factors.

The lender typically orders the appraisal and will try to schedule it for a time that’s convenient for you. When it’s completed, the appraiser will provide the lender with a report that includes the home’s value, market comparisons, and other findings. The borrower usually pays for the appraisal at the closing.

Understanding HELOC Closing Costs

HELOC closing costs — the fees associated with getting your line of credit from a lender — are generally lower than the costs to close on a primary mortgage, cash-out refinance, or home equity line of credit. Still, the fees can add up quickly, and you may want to keep them in mind when you’re calculating the total cost of borrowing.

Typical Fees Involved

Some of the expenses you may encounter at closing include:

•   Application and/or origination fee: $15 to $75

•   Credit report fee: $10 to $100

•   Annual fee: $5 to $250

•   Appraisal fee: $300 to $450

•   Filing/notary fees: $20 to $100

•   Title search fee: $100 to $450 (if required)

Negotiating Closing Costs

Most HELOCS have closing costs or fees, but some lenders may offer to cover a few or all of those expenses. Others may give you the option of rolling your fees into the amount you’ll pay monthly. Remember that if you do this, you’ll add to the interest cost of your HELOC.

If you’re concerned about closing costs, you can always do some online comparison shopping to find out how much different lenders are charging. Or if you find a lender with an offer you like, you could ask if certain costs are negotiable.

HELOC Closing Meeting

Your lender will manage the final details of your closing meeting, including arranging the time and location (whether it’s in person or online) and letting you know what to bring. The lender will also ensure that a notary is on hand as you go through and sign the necessary paperwork.

You should have an opportunity to review your HELOC closing documents prior to the signing, but if you have any last-minute questions, you can cover them at this meeting. Any co-applicants should also be there, and you should bring a Power of Attorney document if someone can’t attend.

You probably won’t need to have an attorney at your HELOC closing, but you may want to have an attorney or financial advisor review the terms of your HELOC before you go. This person can also help you understand how HELOCs can affect your taxes.

Post-Closing Considerations

Once your HELOC is funded, you can borrow from it any time during the draw period (which usually lasts 10 years). You may be able to make interest-only or minimum payments during that time, or you may choose to pay something more toward the principal, in order to keep payments more manageable when you enter the repayment period. (Most HELOCs come with a variable interest rate, which means your interest rate — and monthly payments — could rise over time. In the HELOC vs. home equity loan decision-making process, this is one key difference. Home equity loans often have a fixed rate.)

Depending on your lender, you also may have an opportunity to convert all or a portion of your HELOC balance to fixed-rate loan, which can make payments more predictable and easier to budget for.

Recommended: Home Equity Conversion Mortgage vs. HELOC

Common Issues and How to Avoid Them

As with any type of financing, challenges may arise that delay or complicate the process. You may have control over some of them, while others may be out of your hands. Here are some common issues that could come up:

Problems with Documentation

Life gets busy, and the paperwork required for closing on a HELOC can easily get away from you. The lender’s closing checklist can be a useful tool for staying on track. You also can contact the lender before the closing to be sure everything is ready to go.

Unexpected Issues with Credit

A significant change in your financial situation could affect your loan approval, even in the final stages before closing. It can be a good idea to avoid making major purchases or opening a new credit account until your HELOC is a done deal. And be upfront with your lender about anything that might affect your eligibility, so there aren’t any surprises at the closing.

Delays in Getting the Appraisal

Your home appraisal can be a major factor in keeping your HELOC closing on track. Try to schedule the appraisal appointment as soon as possible, and ask if one of the quicker options (such as a drive-by or automated appraisal) is available.

Misunderstandings About Terms

Don’t wait until the last minute to read through your loan agreement. And compare the lender’s closing disclosure to the most recent loan estimate. If you’re unclear about the interest rate, repayment period, or any other details related to how your HELOC works, be sure to ask your lender ASAP.

Arranging Funds for Closing Costs

Verify the exact amount you’ll need for closing costs — and how you’ll be expected to get those funds to your lender (a wire transfer or cashier’s check, for example) — well in advance of the closing.

The Takeaway

A HELOC can offer a convenient and flexible way to tap into your home equity when you need money for renovations, debt consolidation, a rainy day fund, or other purposes. But it can take a few weeks to open this kind of account, and there’s some paperwork involved.
One way to help minimize problems or delays is to prepare in advance for each stage of the application and closing process. Your lender’s closing checklist can be a useful tool to help you stay on track. And it’s important to familiarize yourself with the terms of your HELOC agreement, so you can address any questions or concerns as soon as possible, and get your money without too much stress.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.


Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.


FAQ

How long does the HELOC closing process typically take?

For most borrowers, getting a HELOC takes about two to six weeks from application to closing. If you’re worried about the timeline, you can ask your lender how long it usually takes a HELOC to close and what you can do to speed things up.

Can I back out of a HELOC after signing the closing documents?

Yes. There is a three-day cancellation period for borrowers who use their primary residence to secure a HELOC. If you change your mind during that time, you may be able to back out of the transaction, even if you’ve signed the closing documents.

Do I need an attorney present at my HELOC closing?

You probably won’t need to have an attorney at your HELOC closing. But you may want to have an attorney or financial advisor review the terms of your HELOC before you go to your closing.

Photo credit: iStock/andresr

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


SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.



*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.


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.

²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.


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

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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Mar
18
2025

Can You Pay off a HELOC Early?

By | Growing Wealth, Home Ownership, mortgage, Terminology, Tools & Calculators | Comments Off on Can You Pay off a HELOC Early?

Can you pay off a HELOC early? Yes, it’s possible. But depending on your financial institution, there may be fees involved in clearing out what you owe on your home equity line of credit, so it’s important to understand how much you can truly save before you start making extra payments.

Key Points

•   A HELOC includes both a draw and a repayment period.

•   Early payoff can result in significant interest savings.

•   Some lenders impose prepayment penalties on early HELOC closure.

•   Paying off a HELOC improves equity and financial flexibility.

•   Consider possible tax implications and credit score impact before paying off early.

HELOC Repayment Structure Explained

A home equity line of credit is broken into two periods: the draw and the repayment period.

Draw period: In this portion of your HELOC, you can make interest-only payments on whatever amount you draw. It usually lasts between five and 10 years, during which time you can pay off some or all of the balance and replenish your available credit. Then you can draw again as needed and only accrue interest on your outstanding principal.

Repayment period: Once the draw period closes, you can’t pull funds from your HELOC anymore. Repayment begins on both principal and interest. Oftentimes, you’ll have a 10 to 20-year term to repay the full balance. The rate usually starts as variable, but you may be able to roll the balance into a fixed-rate home equity loan.

In some cases, however, there’s a balloon payment: Your entire balance, including principal and interest, comes due at one time unless you refinance.

Benefits of Paying Off a HELOC Early

There are some potential benefits to take advantage of when you pay off a HELOC early.

Interest savings: Interest accrues throughout the life of a HELOC and can increase even more over time if you have a variable rate. Paying off a HELOC early could save you money in the long run. (Different types of home equity loans accrue interest in different ways, so make sure you understand how a HELOC, for example, differs from a home equity loan.)

Improved equity position: A HELOC is considered a second mortgage, which means it has precedence in getting paid off right after your original mortgage. Paying off your HELOC means that when you calculate home equity, your equity number will be greater. And it may also smooth the path to a sale of your home. (Some lenders may require you to pay off your HELOC before you can sell your home.)

Financial freedom: Getting rid of your HELOC payment also frees up more of your budget to work toward other financial goals, like retirement savings, or putting money toward a special trip or other large expense.

Recommended: Home Equity Loan Calculator

Potential Drawbacks of Early HELOC Payoff

Can you pay a HELOC off early without any drawbacks? It depends. Here’s what to consider before making a decision.

Prepayment Penalties

Some financial institutions charge a HELOC early payoff penalty if you close your account within a certain timeframe, often within the first five years of repayment. Instead of charging a flat fee, banks usually charge a percentage of your loan balance, usually 2%.

The average HELOC balance in 2023 was $42,139; paying off that balance with a 2% early penalty would cost $843.

But not all lenders charge this fee. If you’re considering a HELOC and may pay it off ahead of schedule, prioritize quotes that don’t include any kind of HELOC early payoff penalty.

Loss of Tax Deduction

In some instances, you may be eligible for HELOC-related tax deductions. Any interest paid on a HELOC or home equity loan between 2018 and 2025 may be tax deductible if the funds are used to buy, build, or substantially improve your home. Additionally, the property must be your main or second home. Paying off your HELOC means losing that deduction, but you can only take this deduction if you itemize (and many people don’t). Consult a tax advisor so you’re not surprised by the numbers when it comes tax time.

Recommended: HECM vs. HELOC

Strategies for Early HELOC Payoff

Now let’s look at how can you pay off a HELOC early. There are a few strategies to choose from.

Lump sum payments: Making large payments on top of your regularly scheduled payments can help you chip away at your balance and interest accrual. However, check into can you pay off a HELOC during the draw period, because some lenders may limit you to interest-only payments during this time. Also, clearly communicate to your lender that the additional payments should be credited to principal only; otherwise the lender may apply the funds to interest.

Accelerated payment schedules: Consistently make extra payments toward your principal to lower your balance at a faster pace over time. Use a HELOC monthly payment calculator to experiment with how your monthly payment would look using different payoff dates.

Refinancing options: It’s possible to refinance your HELOC into another line of credit in order to change the terms, such as the available credit line or draw period. To pay off your balance early, however, you can apply to transfer it into a home equity loan, which could have a fixed interest rate and payoff schedule.

Impact on Your Credit and Financial Profile

You can close a HELOC early without hurting your credit in the short-term because accounts in good standing stay on your credit report for as long as 10 years. Once that period expires, the average age of your credit history may drop, which could temporarily affect your score. Incorporating other types of no-fee credit could help mitigate any future damage, especially if you’re confident you won’t carry a balance.

Evaluating Your Financial Situation Before Early Payoff

Take a look at your entire financial picture before deciding to pay off your HELOC early. Do you have a solid emergency savings account? Are you contributing to your retirement account? If you have other high-interest debt, consider whether you should pay that off as you decide where the HELOC balance falls on your priority list.

Another factor is how long you plan to stay in your house. If you want to move soon, find out if you need to pay off the HELOC in full before listing your home, or if you can repay the balance with the proceeds from the sale.

The Takeaway

Paying off a HELOC early can save you in interest payments over time. However, it’s important to understand the details of your financing agreement to avoid any unwanted prepayment penalty fees. If you’re actively searching for a HELOC, make sure that’s part of your comparison process so you have more control over when you pay off your balance without worrying about extra costs.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.


Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.

FAQ

Can I pay off my HELOC during the draw period?

Most lenders only require interest payments during the draw period, but you can usually make principal payments as well. That will lower the amount of interest being accrued while also replenishing your available credit.

How do I calculate potential savings from early HELOC payoff?

Use a HELOC calculator to find out how much interest you would save by paying off your balance ahead of schedule. If your lender charges an early payment fee, factor that cost into your potential savings to see if it’s worth it.

Will paying off my HELOC early affect my credit score?

As long as your account is in good standing, a HELOC will stay on your credit report for up to 10 years. After that, your average credit account age may drop unless you have other mature accounts to make up for the loss.

Photo credit: iStock/Riska

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


SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.



*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.


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


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.

²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.


Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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