Stock options can be a great way for someone to bet on the price movement of a stock. However, options are not something a beginner should be dabbling with. They are a high risk/reward type of investment vehicle where 100% loss of your investment is possible.
That being said, if you are an intermediate-to-advanced trader looking to trade options, there are a number of platforms that allow you to do so. However, not all investment platforms give you the ability to invest using stock options for free. On top of that, some do not offer options trading at all.
Robinhood is a popular, commission-free investing app that allows you to trade options free of commissions. They have provided options trading on its platform since the tail end of 2017.
Today, we are going to be covering options trading on the Robinhood platform. We will also be covering a bit of basic information about options if you are new to this investment strategy.
Trading options on Robinhood is decent. It’s not the best platform for you to use, but they do offer many features that make it an attractive platform to start trading. The free trading that they provide extends to their options trading as well. You will never have to pay extra fees in order to get your trades completed. They also offer commission free crypto trading.
The sign-up process is simple. Getting your options trading enabled only requires you to have minimal stock trading experience. When they approve your account, you will be able to begin using some basic options strategies. In order to get access to some of the higher-level investment trading strategies, you will have to gain some experience in trading options on their platform.
There are quite a few hoops to jump through to get into the more advanced features. If you are a beginner in options trading, you probably don't need these advanced features anyway. So using Robinhood to trade options if you are just starting out might be a good entry to options trading.
Robinhood is a commission-free online investment platform that launched in 2013.
They were the first to build their business around a completely free trading system. The organization offers free trades on stocks, ETFs, cryptocurrencies, and of course options.
They have since grown to over 13 million users making them one of the most popular investment platforms out there. From these investors, it is estimated that the company has around $60 billion in assets under management.
The company caters mostly to beginner investors with a lot of features that tailor to people who have no experience in the investing industry. Since it is aimed at beginners, the platform does lack some tools that more seasoned investors might have become accustomed to.
Robinhood allows you to invest in over 5,000 stocks listed in U.S. Exchanges and over 250 international stocks. All of this is available online as well as from the free mobile app.
Of course to trade options with Robinhood, you will need to create a Robinhood account first.
This is a painless process that you can complete in just a few minutes through either their mobile or web application.
In order to begin trading options with Robinhood, you are going to need to have stock trading experience before they actually allow you to start using options.
Their website does not have a list of qualifications that you must meet prior to being accepted to trade options. Regardless, you will have to go into your account settings and tap on Options Trading.
There are three tiers of options trading available on Robinhood. Depending on your prior experience with trading, you will be approved for Level 1, Level 2, or Level 3 options trading
Level 1 Options Trading - If you are approved for level 1, you will not have access to any options trading. Your account will only be allowed to trade stocks, ETFs, and cryptos.
Level 2 Options Trading - With level 2, you will have access to basic options strategies on Robinhood. This includes buying call and put options, selling covered calls, selling cash covered puts, along with straddles and strangles.
Level 3 Options Trading - Level 3 gives you access to advanced options trading strategies. This includes credit and debit spreads, iron condors, calendar spreads, and other more sophisticated strategies.
If you are initially approved for level 1 or level 2, you will have to gain further approval from Robinhood in order to progress to a higher level. They will likely require some additional experience which is intended to protect beginner traders from getting in over their heads.
Once you progress to more advanced strategies, it becomes possible to lose even more money than you initially invested, so make sure to do your research beforehand.
Once you are approved for either level 2 or level 3 options trading on Robinhood, you can start buying options contracts within your account.
To do this, you will tap the magnifying glass in the upper right-hand corner of your home screen on the mobile app. Then use the search bar to look up the stock you would like to trade options contracts on.
From there, you will select the stock and tap trade in the lower right corner of the Details page. Then select the Trade Options button in order to begin viewing options.
By default, Robinhood has selected the Buy option to highlight first when you view the options available, but it does allow you to sell them as well.
When trading options on Robinhood, you have access to the other well-known features that have made the platform stand out.
In a nuthsell, there are no extra costs in order to trade options on Robinhood.
What this means is that when you trade options on Robinhood, the only costs that you will have to be are the prices of the contract premiums.
However, if you have experience using options on a different platform, you might find that you are lacking in the tools you rely on.
Robinhood does not offer some of the analytics that many options investors really like to use. If you are coming from a different platform like Webull, you will see that there is a lot less data for you to use to make your trades.
For this reason, your best bet might be to use an external platform to do your research and plan your trades and then just use Robinhood for the execution of your trades.
Most sources encourage you to have some investing experience before trying out options. We’ll go over the basics so you can make sense of what Robinhood offers.
Options offer investors a different way to take advantage of the stock market other than just buying securities outright. They give you the choice, but not the obligation, to buy or sell a security at a predetermined price by a set date.
There are two broad types of options that investors utilize; puts and calls.
There are various different subtypes and strategies, but these are the most basic ones so you can get a feel for what they do.
Puts: When you purchase a put, you are buying the right to sell that security at a set price. Put options are used when an investor believes a security is going to fall in price within a timeframe.
Calls: Calls give you the right to buy a security at a set price by the contract date. A call is basically the opposite of a put. Investors may purchase a put when they believe a stock is going to rise in price by a certain date.
We will use an example of a simple call option here in order to get a clearer understanding of how they work if you are brand new to options trading.
For the purposes of our explanation, let’s use a fake stock called XYZ.
An investor has been watching XYZ for the past few weeks and their stock has held steady at $150. They believe that it is soon going to rise up above this amount in the near future.
This investor could just purchase shares of the stock at $150 and if the value goes up then they have, of course, an unrealized gain.
However, if this investor does not want to risk a large amount of capital on his assumption, he could buy a call option for this stock instead and use leverage.
An investor could purchase a call option on stock XYZ for $2.00 at a strike price of $150. This means the investor would be in the money (profitable) if the stock rose to $152 or higher.
As you can see, options trading can get confusing quickly. That is why it is not recommended for beginners!
Options contracts carry leverage because each contract controls 100 shares of the underlying security.
For this reason, stock options tend to have more volatile price movements as they control a large number of underlying shares of stock.
A call option with a $2.00 premium would cost $200. This options contract would control 100 shares of the underlying security.
Buying the call option means that if the stock does go down, or stays the same, the option buyer is only out the money of the contract, called the premium.
Options offer a bit more flexibility in the way of investing that is different from traditional stock trading.
But at the same time, the risks are also magnified.
Most options traders actually end up losing 100% of their investment. That is because all options contracts have an expiration date. After this date, the contract expires and can no longer be used.
If you reach the expiration date and are not in the money, the contract will expire worthless and you'll be left with nothing to show for it. It's important to keep this in mind going into any options trading either on Robinhood or elsewhere.
When buying your options on Robinhood, you'll be able to select the expiration date for your options. In general, the farther away the expiration date is, the more expensive the options are. This is because there is a higher chance of your contract reaching breakeven if there is more time.
You'll need to weigh the trade-off between the expiration date and the price in any options trades you make on Robinhood.
Trading options on Robinhood is a solid choice. It’s not the best platform for research and technical analysis, but they do offer many features that make it an attractive platform to start trading.
The free trading that they are known for extends to their options trading as well, making it even more attractive for beginners. You will never have to pay extra fees in order to get your trades completed. They also offer commission-free crypto trading.
The sign-up process is simple. Getting level 2 options trading enabled only requires you to have minimal stock trading experience. When they approve your account, you will be able to begin using some basic options strategies.
In order to get access to some of the more advanced level 3 options trading strategies, you will have to gain some experience in trading options on their platform.
There are quite a few hoops to jump through to get into the more advanced features.
If you are a beginner in options trading, you probably don't need these advanced features anyway. So using Robinhood to trade options if you are just starting out might be a good entry to options trading.