How to Trade Options on Robinhood
What are Options?
A contract between two parties which allows an investor to buy or sell (depending on the Option type) an underlying instrument such as security, ETF, or even index at a pre-decided price and for a specific time is known as an Option.
There are two types of options available for investors to choose from. They are:
- Call Option: Call Option allows an investor to buy shares at a later time at the price already fixed.
- Put Option: This option allows the investor to sell shares within the given period of time at a fixed price.
An option is more or less like an insurance for your shares where somebody else gets paid for taking the risk of shares at your behalf. Furthermore, Options are not like stocks. They do not give you ownership in a company or an organization. Unlike stocks, options are low risk as they facilitate you in withdrawing options contract at any time.
When the investor buys an option, he has the right to exercise (not obligatory though) the option at any point before the deadline which means you do not necessarily have to wait till the expiration date.
What is Options Trading?
Somebody who is new to investments will mostly know only of stocks and stock markets. Majority of the people are not aware of Options Trading. What it is and how is it beneficial?
Even though buying stocks and keeping them with the aim of making long term profits is a sensible strategy and of course a common one too.
Apart from stocks, another smart option for investment has to be options trading. Well, what is options trading? Simple, Trading Options. As mentioned above, there are options which provide you security over shares, etc. Let’s say you are buying a Call option, the price of the option for a particular share or stock will be determined based on the price of the stock or share. For example, if the share you have is $1,500 then any strike price that is above the share price will be considered as ‘Out of the money’ but if the strike price is under the strike price of the share, then it will be considered as ‘in the money’.
On the other hand, for a put option, if the strike price of the share is below the present price of the share then it will be considered as ‘out of the money’ and if the price is above the current strike price of the share, then it will be considered as ‘in the money’.
What is Robinhood and What do they do?
Robinhood is an investing app used for trading stocks, cryptocurrencies, and options at low charges which was launched with an aim of setting up a smooth technology-driven brokerage with the elimination of manual account financial management. Robinhood offers commission-free investment and easy to use features which makes it a suitable app not only for expert investors but also for the ones who are new to investing.
The investors often fear the security of sensitive financial information when it comes to technology-driven investing platforms. To counter any security concerns of its investors, Robinhood uses excellent security measures while handling financial information. Hence, any financial information with Robinhood is fully encrypted and securely saved.
How to Trade Options on Robinhood?
Not long ago, Robinhood launched its commission-free options trading for its investors, in Dec 2017 after it received several requests from its customers. The options trading specifically targets the newcomers of the investment world. The options trading product provides a similar trading experience as the current stock trading.
Options trading is generally an expensive thing to opt for i.e $6.95 plus $0.75 per options contract and $4.95 for contract exercise or assignment, but with Robinhood’s commission-free options trading, on one hand, it allows users to have an inexpensive experience of investment and on the other hand, it allows Robinhood to have an extra advantage while competing with traditional brokers.
For beginners, Robinhood has an easy, transparent, and straightforward options trading setup which makes it extremely easy for the newcomers to understand the whole idea and procedure. With options trading feature, the company has tried to make the whole experience more or less similar to the one with Discover feature.
Before investors start options trading with Robinhood, they need to provide the following information to the Robinhood:
- Investment goals such as income expected, growth rate, capital speculation
- Trading experience. Either the investor is new to options trading or if he or she is an experienced investor then trading experience including the know-how of investing and mainly about options trading
- Personal financial information needs to be provided
- Lastly, the type of options the investor wants to trade with
After the investor has provided all the required and relevant information to the Robinhood and he has finally opted for the options he wants to trade with, there are three strategic choices which the investor needs to make. They include:
- The investor needs to ponder over and decide which direction the stock will move
- He will need to predict how high or low the current price of the stock will move
- The investor needs to predict a fixed time frame during which the stock will move
The direction in which the stock will move in?
The direction predicted by the investor determines the type of option the investor takes. If the user predicts that the price of the stock will rise above the current stock price, he needs to take the call option. The call option facilitates the buyer in buying a stock at an already decided price within a fixed time frame. On the other hand, if the investor feels the price of the stock will decline from the current price then he needs to opt for the Put option. The put option allows an investor to sell stocks at a pre-determined price before the deadline for the contract between the two parties expires.
How high or low the price will move from its current price?
When it comes to options, there are two important points, ‘in the money’ and ‘out of money’. The option is only valuable when the stock price at which the deadline is ‘in the money’ (for the call option, it is above the strike value and for the Put option, it’s below the strike value).
When it comes to quoting a strike price, the investor can not just quote a price like that. There are available strike prices from which an investor can choose from. The increments which are placed between the strike prices are standardized in the investment industry.
Determine the time frame
There is always a time frame fixed for every option that you take. There is an expiration date which is the last day for the investor to exercise his option. An expiration date can be any date fixed between the two parties, there are no specific rules when it comes to deadlines. The expiration date can vary from days to months to even years. There is no restriction or limitation.
Shorter deadlines such as daily or weekly are the riskiest and are mostly reserved for seasoned options traders whereas the longer deadline such as monthly and yearly are more focused on long-term benefits. Longer deadlines are always more preferred because they provide enough time for the stock values to adjust and move according to the investor’s interests. Furthermore, a longer expiration period is also beneficial in case the option’s value starts declining. Longer expiration date gives the option time to retain its value or closer to its value.
In addition to above-mentioned elements, Robinhood allows its users, mainly experienced and expert traders, to adopt advanced and sophisticated strategies which might not be very suitable for newcomers but experienced traders can surely benefit from them. These strategies include iron condors, straddles, strangles, and many more which will increase the chances of experienced users getting more benefits from the options trading.
To sum it up, the Robinhood app, considering the fact at even a fraction of a second can make a huge difference to your options trading and overall investments which is why the Robinhood has brought together a brilliant team to make the entire experience very smooth for you. The Robinhood app ensures to facilitate you in the best possible trade execution in case of self-directed orders. Additionally, Robinhood app provides free real-time data without any quotes, unlike many others who dealy the quotes even up to 20 minutes.
Robinhood, though new to the investment industry, with its unique and user-friendly features has stood out amongst the rest. With continuously increasing numbers of its followers, it is safe to say that Robinhood app has been able to turn many first-timers into its regulars users with its exceptionally well services. Unlike many other apps, Robinhood mainly focuses on its users obtaining benefits from their investments which is the main driving force behind the introduction of commission-free trading. Read more at “Is the Stock Market Risky?”