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How to trade options on Robinhood
Take advantage of basic and advanced options strategies on an app that might not be advanced enough for all traders.
Trading app Robinhood was designed for everyday investors, but it allows investors to do more advanced trading. That includes trading options.
In fact, Robinhood offers two levels of approval for trading options, requiring personal and financial information to determine whether you’re best suited for basic options trades or ready for advanced strategies.
What to know before trading options on Robinhood
Options are high-risk, high-reward derivatives based on the underlying value of a stock, making them riskier than buying stocks. You’re basically betting a stock will go up or down.
As a result, Robinhood requires investors to go through an approval process before trading options on its platform. This process includes disclosing your experience with options, your income and investment objectives, and more.
If you’re approved for a Level 2 designation, you’re eligible to trade a limited number of options that include long calls and puts, cash-covered puts and covered calls.
If you’re a more experienced trader, you may see approval for a Level 3 designation, which opens up the opportunity to place more advanced trades like spreads.
Key options terms
Two key terms you’ll want to understand when trading options on Robinhood are calls and puts:
- Call options. Traders buy call options hoping an stock’s price will rise. Call option buyers can purchase shares of an asset from a seller at the strike price until an option contract’s expiration date.
- Put options. By contrast, option traders sell put options hoping the price will fall. Put option buyers sell shares of assets to a buyer at the strike price until an option contract’s expiration date.
Other terms you’ll want to put under your belt before trading options on Robinhood include:
- Options contract. A contract that gives buyers the right — but not the obligation — to buy or sell 100 shares of an underlying asset at a specific price or date.
- Strike price. The fixed price at which you, as owner of the option, have the right to buy or sell an underlying asset.
- Expiration date. Last date that an options contract is valid — often on the third Friday of the contract month.
- Premium. Price a buyer gives a seller for an options contract.
Strategies for Level 2 investors
Robinhood offers basic options strategies to investors approved for Level 2.
|Option||What it is||When to use it|
|Buying a call||Buying the right to buy shares of a stock at strike price before expiration date||If you’re bullish on a stock and believe the price will rise|
|Selling a covered call||Selling call options while simultaneously owning an equal number of a stock’s shares||If you don’t think the stock price will rise in the short term and you want to generate income|
|Buying a put||Buying the right to sell shares of a stock at strike price before expiration date||If you’re bearish on a stock and believe the price will fall|
|Selling a cash-covered put||Earning a premium from selling a put and having cash to cover obligation to buy underlying asset||If you want to buy shares of stock at a low price|
Options strategies: Straddles and strangles
Two additional strategies for trading options on Robinhood are straddles and strangles. The difference comes down to the number of calls and puts and strike price:
- Straddles are the purchase of equal numbers of calls and puts with the same strike price and expiration date.
- Strangles involve buying a different number of calls and puts with different strike prices and the same expiration date.
Among the many trading strategies popular among investors, straddles and strangles can be useful when you’re trading options on Robinhood. They offer safer hedges if a call falls below the strike price or a put rises above the strike price.
Strategies for Level 3 investors
Robinhood extends more advanced options strategies to those approved for Level 3.
|Option||What it is||When to use it|
|Call credit spreads||If you think a stock’s underlying price will stay the same or fall before a specific date|
|Put credit spreads||Selling a put at a higher strike price and buying a put at a lower strike price||If you think a stock’s underlying price will stay the same or rise before a specific date|
|Call debit spread||Selling a call at a higher strike price and buying a call at a lower strike price||If you think a stock will rise even slightly before a specific date|
|Put debit spreads||Buying a put at a higher strike price and selling a put at a lower strike price||If you think a stock will fall even slightly before a specific date|
|Iron condors||Combining two calls and two puts with the same expiration date and different strike prices||If you think a stock’s price will stay the same|
|Calendar spreads||Buying long-term options and selling near-term options with the same strike price and different strike dates||If you think a stock’s price will stay the same|
|Iron butterfly||Combining two call credit spreads and two put credit spreads with different strike prices and the same expiration date||If you think a stock’s price will stay the same|
Does Robinhood allow box spreads?
No. Robinhood says this complex strategy involving arrays of calls and puts carries a hidden dividend risk can result in you losing more money on a contract than you expect.
4 steps to trading options on Robinhood
- Log in to your Robinhood account and select the magnifying glass icon at top right.
- Find and select a stock that trades options on Robinhood.
- Hit trade at lower right of the stock’s detail page.
- Select trade options and follow the prompts.
Pros of trading options on Robinhood
While the convenience of mobile trading on a device is convenient, here are other perks of trading options with Robinhood:
- $0 commission. A draw for investors is Robinhood’s free options trading.
- Simple interface. Even beginner investors will find the app is easy to navigate.
- Trade multiple strategies. The app offers the flexibility to trade multiple options at the same time.
Cons of trading options on Robinhood
Robinhood struggles with poor customer service ratings online, along with a handful of other potential drawbacks to consider:
- Limits select stocks. The app recently landed in trouble in early 2021 for its temporary halt on trading “meme stocks” like GameStop (GME), citing issues with collateral.
- Limited analytical data. More experienced traders might find Robinhood’s basic education options, customization and filters lacking when compared with competitors like TD Ameritrade and Charles Schwab.
- Frequent glitches. Robinhood investors report tech issues that hamper trades and account access, including a glitch as recent as January 2020.
Compare trading platforms
*Signup bonus information updated weekly.
Robinhood attempts to mitigate the risk of trading options by requiring would-be investors to submit personal and financial details for approval at one of two levels. Depending on the level you’re approved for, you may have access to either basic or advanced strategies.
If this popular app isn’t robust enough for your expertise or you’d rather keep your own options open, compare other options trading platforms to find the best fit with your comfort level and goals.
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