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Expect to pay 2% to 5% or even 6% of the new mortgage amount in closing costs when you refinance your mortgage.

If you have sufficient equity in your home and you’re tempted by a rate-and-term refinance or a cash-out refi, here’s what you need to know about the costs.

What Is the Average Cost to Refinance a Mortgage?

How much does it cost to refinance a mortgage? Let’s put it this way: Refinancing isn’t free. That’s because you’re taking out a new home loan and paying off your current one, and doing so brings on a host of costs, though not as many as purchase loans incur.

The main difference between the average cost to refinance vs. closing costs for home purchases is that owner’s title insurance and several inspection fees common for purchases are not necessarily required for refinances or may be cheaper. But there is evidence that fees have been creeping up in recent years. From 2021 to 2023, median total loan costs for home mortgages increased by over 36%, according to the government’s Consumer Financial Protection Bureau.

Common Mortgage Refinance Fees

Some fees to refinance are flat fees that vary by lender. Other fees are based on a percentage of the loan amount.

Then there are recurring closing costs like homeowners insurance and property taxes. Six months of property taxes are often due at closing.

Here are some common fixed closing costs, though in some cases, a borrower may not need an appraisal.

Typical Fixed Refinance Closing Costs
Fee	Average cost
Loan application	up to $500
Credit report	$25 to $75
Home appraisal	$600 to $2,000
Recording fee	$25 to $250
Attorney fees	$500 to $1,000 or more

And here are common percentage-based closing costs. Keep in mind that not all borrowers will need mortgage insurance (PMI or MIP: private mortgage insurance for conventional loans, and mortgage insurance premium for FHA loans). PMI is usually needed for a conventional loan exceeding an 80% loan-to-value ratio.

An FHA loan can be refinanced to another FHA loan or to a conventional loan if the borrower meets credit score and debt-to-income requirements for a nongovernment loan. USDA and VA loans can also be refinanced.

Typical Percentage-Based Refinance Closing Costs
Refi cost	Average amount
Loan origination fee	0.5%-1% of the purchase price
Title search and insurance	0.5%-1% of the purchase price
Mortgage points	1% of the mortgage amount per point
Mortgage insurance	Varies by type of loan

Hidden Costs to Watch For

Being aware of the range of potential closing costs and fees for a refinance is important as you’re evaluating whether a refinance would make financial sense for you. But there are some potential fees that might blindside you. Here are a few to look out for.

•   Prepayment penalties. If your original mortgage penalizes you for an early payoff, your refinance might trigger those fees. How these penalties work varies by lender, so it’s worth checking with yours to make sure you know what, if any, fees you might be facing if you refinance.

•   VA funding fee. If you’re refinancing using a VA loan, you’ll need to pay an upfront funding fee. The fee is a percentage of the amount you’re borrowing and may be higher for refinances, depending on the down payment. Current rates range from 1.25% to 3.3% of the loan amount.

•   USDA guarantee fee. If you’re refinancing to a USDA loan, expect to pay a new guarantee fee, currently 1% of your loan amount, as well as a recurring annual fee of 0.35% of the loan amount.

Are You Eligible to Refinance?

Most mortgage lenders want a homeowner to have at least 20% equity in the house in order to refinance, although those numbers are not universal.

What is home equity? Here’s an example. If your home is worth $450,000 and the current mortgage balance is $250,000, you have $200,000 in equity. The loan-to-value ratio is 56% ($250,000 / $450,000). This scenario fits the parameters of many lenders for a refinance to take place.

Credit Score and Debt-to-Income Ratio Requirements

You’ll typically need a minimum FICO® credit score of 620 to refinance a conventional loan and 580 to refinance an FHA loan. A score of 740 or above often ushers in the best rates.

Lenders will also look at your debt-to-income (DTI) ratio, which compares your monthly debt to your monthly income. What they’ll accept depends on the lender, but for a refinance, they may prefer as low as 35% or less, though some may be willing to accept higher if your other credentials are good.

Besides credit score and DTI ratios, lenders normally review recent credit applications, on-time payments, and credit utilization.

Recommended: 7 Signs It’s Time for a Mortgage Refinance

Benefits of Refinancing a Mortgage

The most common type of refi is a rate-and-term refinance, when you take out a new loan with a new interest rate or loan term (or both). Some people will choose a mortgage term of less than 30 years when they refi, if they can manage the new monthly payment.

Then there’s cash-out refinancing, which provides a lump sum to the homeowner.

In general, refinancing may make sense if interest rates fall below your current mortgage rate. Here are some times when a mortgage refinance could be beneficial.

If You Can Break Even Within a Suitable Time Frame

Calculate how long it would take to recoup the closing costs. Find the break-even point by dividing the closing costs by the monthly savings from your new payment.

Let’s say refinancing causes your payment to decrease by $100 a month. If closing costs will be $2,500, it would take 25 months to recoup the costs and start to see savings.

If you plan to sell the house in two years, refinancing may not be the right strategy. If you intend to stay long term, it may be an idea to explore.

If You Can Reduce Your Rate Even a Little

You might read or hear that refinancing is worth it if you can reduce your mortgage rate by one or two percentage points. But for a big mortgage, a change of just a quarter of a percentage point, or half of one, could result in significant savings, especially if you can minimize lender fees.

Again, consider the break-even point and how long you plan to keep the home.

You’d Like to Tap Home Equity

With a cash-out refinance, a percentage of your equity can be issued in a lump sum for any purpose. You will need to have at least 20% equity remaining after the transaction.

Be aware that the higher loan amount of a cash-out refinance usually results in higher closing costs.

(If your main goal is to access cash and not to change your rate or term, a home equity loan or home equity line of credit may be less expensive than paying the closing costs on a cash-out refinance.)

An ARM’s Teaser Rate Is Appealing

Refinancing a fixed-rate mortgage to an adjustable-rate mortgage could make sense for a homeowner who plans to move before the ARM’s initial rate adjustment.

A 5/1 ARM, for example, will typically come with a rate for five years that is lower than that of most fixed-rate mortgages.

In other rate environments, it could make sense to refinance an ARM to a fixed-rate mortgage.

You Want to Reduce Your Repayment Term

Some people may decide to take advantage of a lower rate and shorten their mortgage term, say from 30 years to 15. Monthly payments may well go up, but a lower rate and a shorter term mean paying much less over the life of a loan.

The amortization chart of this mortgage calculator shows how much interest may be saved.

You’d Like to Get Rid of FHA Mortgage Insurance

FHA loans come with an annual mortgage insurance premium (MIP) that ranges from 0.15% to 0.75% of the loan amount, divided into monthly payments. Unless you put down more than 10%, you must pay those premiums for the life of the loan. The only way to get rid of the MIP is to get a new mortgage that isn’t backed by the FHA.

You Want to Switch Loan Types

If you have a conventional mortgage but you’re eligible for a government-backed mortgage that may have more advantageous terms, a refinance to switch loan types could be worth exploring.

If you qualify for a VA loan, for example, it may be possible to refinance to a VA loan with a cash-out refinance. You can also potentially refinance from a conventional mortgage to an FHA cash-out refinance or FHA 203(k) refinance (used for home improvements), though you will have to pay the mortgage insurance premium.

Tips to Lower the Cost of a Mortgage Refinance

As you’re contemplating how much it costs to refinance a 30-year mortgage, bear in mind that the most important step you can take is to shop around.

Comparison Shop and Try to Negotiate

You need not apply for a refinance with just your current lender — and doing so would be a missed opportunity, the Consumer Financial Protection Bureau notes. Then again, your current lender may offer loyalty incentives.

Apply with as many lenders as you wish; you’ll receive a loan estimate from each. Compare the costs, including those of the lender’s preferred vendors.

Ask potential lenders which fees can be discounted or waived. Remember, each lender wants your business.

Typical non-negotiable closing costs found under Section B of each loan estimate include credit reports and appraisals.

Keep Your Credit Shipshape

Having at least a “good” credit score can help you get a more attractive rate, and if your credit score has improved since the initial mortgage was taken out, that could be a reason to refinance all by itself.

A good FICO score on the credit rating scale of 300 to 850 falls in the range of 670 to 739. VantageScore®, a competitor developed by Experian, Equifax, and TransUnion, considers a score between 661 and 780 good.

If your credit profile could use some polishing, consider ways to build credit over time.

Use the Same Title Insurance Company

Save money on the lender’s title insurance policy by asking for a reissue rate from the title insurance company that was used for the original loan.

Consider a Streamline Refi for Government Loans

If you have an FHA, USDA, or VA loan, you may want to see if you’re eligible for an FHA Streamline, USDA Streamlined-Assist, or VA Interest Rate Reduction Refinance Loan. The programs may charge a lower mortgage insurance fee than regular government refinance programs and usually do not require an appraisal.

Think About a No-Closing-Cost Refi

A no-closing-cost refinance allows borrowers to roll the closing costs into the mortgage or accept a slightly higher interest rate on the new loan.

Rolling the closing costs into the refinance loan will increase the principal and total interest paid. But if you’re going to keep the loan for more than a few years, this move could be worth it.

Accepting a slightly higher rate could work for borrowers who can skip the upfront payment and who plan to keep their new loan for only a few years.

Lock In a Favorable Interest Rate

When you’ve gotten an offer for an interest rate you like, you may want to get a rate lock, which will ensure the offer won’t change for a specified period of time – usually 30 to 60 days – as long as nothing else changes. Ideally, this will let you be sure you can close the deal with this rate. Some lenders may lock your rate when they issue the loan estimate, but others may not automatically lock your rate and may charge a fee. Check with your potential lender to understand your options.

Recommended: Guide to Buying, Selling, and Updating Your Home

The Takeaway

How much does it cost to refinance a typical 30-year mortgage? Refinancing your mortgage could cost anywhere from 2% to 5% or more of the loan amount but might make financial sense if you are able to capture a lower interest rate, shorten your payment term (and thus lower the amount of interest you pay), or escape paying a mortgage insurance premium on an FHA loan. To contain costs, always compare offers from multiple lenders and don’t forget to include both interest and closing costs (and fees) in your calculations.

SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.

A new mortgage refinance could be a game changer for your finances.

FAQ

Is refinancing your mortgage free?

No. A whole new loan must be approved and processed, and fees will apply.

Is refinancing a mortgage worth the closing costs?

It might be. You’ll want to calculate your break-even point: Divide your closing costs by whatever your monthly savings will be to find the number of months it will take you to break even. Beyond that point, the refinancing benefits kick in.

Is it worth refinancing to save $100 a month?

Refinancing to save $100 a month could be worth it if you plan to keep your home long enough to cover the closing costs. Divide your closing costs by 100 to calculate how many months it will take you to break even.

Will refinancing cost me more in the long run?

If you get a new 30-year mortgage several years into your original 30-year loan, you are, in essence, lengthening the term of your loan, and that can cost you. It may make more sense to shorten the term to 20 or 15 years.

Is it cheaper to refinance with the same bank?

Your lender might offer a slightly lower rate, but it’s still a good idea to see what competitors are offering by comparing loan estimates.

Can you negotiate closing costs when refinancing?

Yes. Many lender fees and third-party vendor fees are negotiable. On each loan estimate, Section A lists the lender charges. Try to negotiate the lowest total lender charge, keeping the rate in mind. And third-party fees in Section C are negotiable.

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*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.

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

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.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOHL-Q325-026

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When you realize that the average tab for law school tuition approaches $50,000 a year (more than double the average cost of other graduate schools) you may wonder — how will I ever be able to pay for law school?

Fortunately, there are numerous programs that can cover part, or even all, of your legal education, including scholarships, grants, and loans. Read on to learn more about how to pay for law school without going broke.

Average Cost of Law School

The cost of law school will vary depending on where you study. According to the Education Data Initiative, the average total cost of law school (including living expenses) is $217,480.

Tuition alone runs, on average, $138,088 (or $46,029 per year), while living expenses average $79,391(or $26,464 per year).

And the cost of law school keeps going up. In fact, law school tuition costs have risen by about $4,352 every four years since 2011. Based on that inflation rate, the average yearly cost of tuition for the 2026-27 academic year is expected to be $51,016.

Private and Public Law School Tuition

Public law schools generally run about $25,409 a year less per year than private law schools. If you attend a traditional three-year law program, the gap between public and private schools increases to around $76,227.

Based on tuition alone, the most expensive law school is Columbia University at $81,292 a year, while the least expensive is University of Puerto Rico at $9,750 a year.

However, when you include living expenses, the most expensive law school is Stanford University, ringing in at $47,832 a year, while the least costly school is Oklahoma City University, at $12,600 a year for tuition and living expenses.

How to Pay for Law School

1. Apply for Federal Aid, Grants, and Scholarships

Filling out the Free Application for Federal Student Aid (FAFSA®) allows you to find out whether you qualify for federal grants, work-study programs, federal student loans, as well as student aid from your state or school.

The FAFSA may be a familiar presence since your undergrad days, but now you may be considered an independent student. You may be eligible for a Direct Unsubsidized Loan (current rate: 7.94%), Direct PLUS Loan (current rate: 8.94%), or the Federal Work-Study program.

Keep in mind that the aggregate federal student loan limit, which includes federal loans for undergraduate study, is $138,500 for graduate or professional students.

Law schools also typically offer some form of need-based financial aid based on information you provide on your FAFSA.

In addition to submitting the FAFSA, you may also want to seek out law school scholarships and grants from non-government sources. Grants and scholarships can be particularly helpful because they don’t require repayment. The Law School Admission Council’s website is a good resource for possible scholarship opportunities.

If you’re going into public interest law, you may also want to research the many programs that offer tuition assistance or law school loan forgiveness for working in eligible legal areas.

You can also check whether your school offers graduate student assistantships, which would cover some of your tuition in exchange for helping with research or teaching.

Recommended: Guide to Law School Scholarships

2. Consider a Part-Time Job or Temp Work

It can be challenging to make a side job jibe with your academic responsibilities, but if you can manage it, making some money while you’re still in school can be one of the best ways to reduce the debt you take on.

It might be a good idea to see if you can get a job that also boosts your résumé, such as working for a professor or as a paralegal.

Even if you can’t commit to a consistent job, you might consider temping during breaks, slow periods, and summers. A staffing agency may be able to quickly set you up with work that lasts just a few weeks or months. Short-term work can include customer service, data entry, or serving as an executive assistant.

If you have additional skills, such as a background in accounting or IT, you may be able to qualify for more specialized roles that demand higher pay. Some temp agencies even specialize in staffing for legal organizations.

3. Attend Law School Part Time

It’ll take longer to complete your degree, but working full time while you go to law school part time is another way to support yourself as you go.

Part-time programs usually allow you to earn your J.D. in four years rather than three. The downside is that you might miss out on opportunities such as clinics, summer clerkships, and student organizations.

4. Look Into Military Aid

The Department of Veterans Affairs (VA) has many educational benefit programs. One of the most popular is the Post-9/11 GI Bill program (Chapter 33), which provides eligible veterans and members of the Reserves with funding for tuition, fees, books, and housing.

Law schools that participate in the Yellow Ribbon Program provide additional funding to veterans, or their children, who are eligible for the Post-9/11 GI Bill benefits. The Department of Veterans Affairs matches these schools’ contribution, which could potentially help you to attend law school at a significantly reduced price.

Recommended: What Are Student Loans for Military Dependents?

5. Think About Private Student Loans or Refinancing

After grants, scholarships, and federal student loans, you may want to consider a private student loan to fill any gaps. If you have good or excellent credit (or can recruit a cosigner who does), you may be able to get a lower rate than some federal graduate school loans.

If you have loans from your undergraduate education or your first year or two of law school, refinancing your student loans with a private lender may allow you to take advantage of a lower interest rate and, depending on the loan term you choose, could lower your monthly payment or put you on track to repay your loans faster. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)

Just keep in mind that private student loans don’t offer the same protections you get with federal loans, such as forbearance, income-based repayment plans, and loan forgiveness programs. However, some private refinance lenders provide flexible options while you’re in school or experiencing economic hardship.

Recommended: Private Student Loans vs Federal Student Loans

Paying for Bar Exam Expenses

Sitting for the bar exam, a two-day affair, requires preparation (and often a bar review course), exam registration fees, and possibly travel expenses.

You may want to hunt around for bar preparation scholarships to help cover these costs. If you’re working for a law firm, your employer will usually cover the cost of the prep course, and many firms will pay review course fees for prospective employees.

Still, if you find yourself short, you could take out a “bar loan” in your final semester of law school or up to a year after graduating. A bar loan is a type of private loan you can use to cover all the costs associated with taking the bar. While rates can be high, they are generally lower than what you would pay with a credit card.

Recommended: What to Do After You Graduate From Law School

The Takeaway

While earning a law degree may lead to a lucrative career, figuring out how to pay for law school can be challenging. The good news is that there are numerous programs, including financial aid, work-study, scholarships, grants, and loans that can help you cover the cost of your legal degree.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

How can I save money on law school?

To save money on law school, consider attending a public institution, applying for scholarships and grants, working part-time, and choosing a school with affordable tuition and living costs. Financial aid and work-study programs can also help.

What is the average cost of law school?

The average cost of law school can range from $20,000 to $60,000 per year, depending on whether the school is public or private and whether the student is in-state or out-of-state.

What are the main factors that affect the cost of law school?

The main factors affecting the cost of law school include the type of institution (public or private), the student’s residency status (in-state or out-of-state), and the availability of financial aid.

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

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SOISL-Q325-037

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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.

A naked (or uncovered) option is an option that is issued and sold without the seller owning the underlying asset or reserving the cash needed to meet the obligation of the option if exercised.

While an options writer (or seller) collects a premium upfront for naked options, they also assume the risk of the option being exercised. If exercised, they’re obligated to deliver the underlying securities at the strike price (in the case of a call option) or purchase the underlying securities at the strike price (in the case of a put).

But because a naked writer doesn’t hold the securities or cash to cover the option they wrote, they need to buy the underlying asset on the open market if the option moves into the money and is assigned, making them naked options. Given the extreme risk of naked options, they should only be used by investors with a very high tolerance for risk.

What Is a Naked Option?

When an investor buys an option, they’re buying the right (but not the obligation) to buy or sell a security at a specific price either on or before the option contract’s expiration. An option giving a buyer the right to purchase the underlying asset is known as a “call” option, while an option giving a buyer right to sell the underlying asset is known as a “put” option.

Investors pay a premium to purchase options, while those who sell, or write options, collect the premiums. Some writers hold the stock or the cash equivalent needed to fulfill the contract in case the option is exercised before or on the day it expires. The ones who don’t are sometimes called naked writers, because their options have no cover.

Writing naked options is extremely risky since losses can be substantial and even theoretically infinite in the case of writing naked calls. The maximum gain naked option writers may see, meanwhile, is the premium they receive upfront.

Despite the risks, some writers may consider selling naked options to try to collect the premium when the implied volatility of the underlying asset is low and they believe it’s likely to stay out of the money. In these situations, the goal is often to try to take advantage of stable conditions and reduced assignment risk, even if premiums are smaller, though there is still a high risk of seeing losses.

Some naked writers traders may be willing to risk writing naked options when they believe the anticipated volatility for the underlying asset is higher than it should be. Since volatility drives up options’ prices, they’re betting that they may receive a higher premium while the asset’s market price remains stable. This is an incredibly risky maneuver, however, since they stand to see massive losses if the asset sees bigger price swings and moves into the money.

Recommended: A Guide to Options Trading

The Pros and Cons of Naked Options

Naked options offer writers the potential to profit from premiums received, but they come with a high risk of resulting in substantial losses. Here’s what to consider before using this advanced strategy.

Potential benefits of naked options

Premium income: Option writers collect premiums upfront, which can generate income if the contract expires worthless.

No capital tied up in the underlying asset: Because the writer doesn’t hold the underlying asset, their available capital may be invested elsewhere.

May appeal in low-volatility markets: While options writers often seek higher premiums during periods of elevated volatility, naked options may be attractive to some when implied volatility is low and premiums are relatively stable. This is because the price of the underlying asset may be less likely to see bigger price movements and move into the money. There is always the possibility, however, that the asset’s price could move against them.

Significant risks of naked options

Unlimited loss potential: For naked calls, a rising stock price can create uncapped losses if the writer must buy at market value. Naked puts can also lead to significant losses if the stock price falls sharply, obligating the writer to purchase shares at a strike price that is well above market value.

Margin requirements: Brokerages often require high levels of capital and may issue margin calls if the position moves against the writer.

Limited to experienced investors: Most brokerages restrict this strategy to individuals who meet strict approval criteria due to its complexity and risk.

Recommended: 10 Options Strategies You Should Know

How to Use Naked Options

Because naked call writing comes with almost limitless risks, brokerage firms typically require investors to meet strict margin requirements and have enough experience with options trading to do it. Check the brokerage’s options agreement, which typically outlines the requirements for writing options. The high risks of writing naked options are why many brokerages apply higher maintenance margin requirements for option-writing traders.

Generally, to sell a naked call option, for example, an investor would tell their broker to “sell to open” a call position. This means the investor is initiating the short call position. The trade is considered to be “naked” only if they do not own the underlying asset. An investor would do this if they expected the stock to go down, or at least not go any higher than the volatility priced into the option contract price.

If the investor who writes a naked call is right, and the option stays “out of the money” (meaning the security’s price is below a call option’s strike price), then the investor will pocket a premium. But if they’re wrong, the losses can be theoretically unlimited.

This is why some investors, when they expect a stock to decline, may instead choose to purchase a put option and pay the premium. In that case, the worst-case scenario is that they lose the amount of the premium and no more.

How to Manage Naked Option Risk

Most investors who employ the naked options strategy will also use risk-control strategies given the high risk associated with naked options.

Perhaps the simplest way to hedge the risk of writing the option is to either buy the underlying security, or to buy an offsetting option that would create an option spread, which may help limit potential losses if the trade moves against the writer. This would change the position from being a naked option to a covered option.

Some investors may also use stop-loss orders or set price-based exit points to try to close out a position before assignment, though this requires monitoring and quick execution. These strategies aim to exit the option before it becomes in-the-money and is assigned. Other risk-mitigation strategies can involve derivative instruments and computer models, and may be too time-consuming for most investors.

Another important way that options writers try to manage their risk is by being conservative in setting the strike prices of the options. Consider an investor selling a put option with a $90 strike price when the stock is trading at $100 (for a premium of say $0.50). Setting the strike price further from where the current market is trading may help reduce their risk. That’s because the market would have to move dramatically for those options to be in the money at expiration.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

The Takeaway

With naked options, the investor does not hold a position in the underlying asset. Because this is a risky move, brokerage firms typically restrict it to high-net-worth investors or experienced investors, and they also require a margin account. It’s crucial that investors fully understand the very high risk of seeing substantial losses prior to considering naked options strategies.

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

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

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FAQ

What is a naked option?

A naked option is a type of options contract where the seller does not hold the underlying asset, nor has sufficient cash reserved to fulfill the contract if exercised. This exposes the seller to potentially unlimited losses. Naked calls and puts are typically permitted only for experienced investors with high risk tolerance and margin approval.

What is an example of an uncovered option?

A common example of an uncovered, or naked, option is a call option sold by an investor who doesn’t own the underlying stock. If the stock price rises significantly and the option is exercised, the seller must buy shares at market price to deliver them, which can result in substantial losses.

Why are naked options risky?

Naked options are risky because the seller has no protection if the market moves against them. Without owning the underlying asset or an offsetting position, losses can be substantial or even technically unlimited in the case of naked call options if the stock price rises sharply.

Can anyone trade naked options?

No, not all investors can trade naked options. Many brokerages restrict this strategy to high-net-worth individuals or experienced traders who meet strict margin and approval requirements, due to the significant risk involved.

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

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

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.

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

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