Wondering How To Buy Options On Robinhood? You’re in the right place! Whether you’re looking to dip your toes into options trading or expand your portfolio, Robinhood makes it simple to get started. In this post, we’ll walk you through the step-by-step process of buying options, explain key terms you’ll encounter, and share helpful tips to avoid common mistakes. Ready to take the leap? Let’s dive in!
How To Trade Options On Robinhood
Table of Contents
What Are Options? A Quick Overview for New Traders
Before we jump into the steps of buying options on Robinhood, it’s important to understand what options are and how they work. At the most basic level, options are financial contracts that give you the right (but not the obligation) to buy or sell an underlying asset, like stocks, at a set price by a certain date.
There are two main types of options: call options and put options.
- A call option gives you the right to buy a stock at a specific price, within a set timeframe. For example, if you think a stock that’s currently priced at $50 is going to go up, you might buy a call option with a strike price of $50. If the stock goes above $50, you can profit from that increase.
- A put option, on the other hand, gives you the right to sell a stock at a specific price within a certain time period. You might use a put option if you believe a stock is going to decrease in value. If it does, you can sell it for more than its current price, making a profit.
Now that you have a basic idea of what options are, let’s talk about why you’d want to trade them in the first place.
Why Choose Robinhood for Buying Options?
If you’re thinking about trading options, you might wonder why Robinhood is a great choice. Well, there are a few reasons why Robinhood stands out, especially for beginners.
First, Robinhood is user-friendly. It’s designed with simplicity in mind, so even if you’re just starting, you’ll find it easy to navigate. Unlike some other trading platforms that can feel overwhelming with all the charts and data, Robinhood keeps things simple and accessible.
Second, there are no commission fees when you buy or sell options. A lot of platforms charge fees for every trade, but Robinhood has eliminated that barrier, meaning you get to keep more of your profits. This is especially great if you’re an active trader who likes to make multiple moves.
Lastly, Robinhood provides real-time data, which is crucial when you’re trading options. You get up-to-the-minute information on stocks, options prices, and more. The app also gives you access to an options chain, which shows all the available options contracts for a given stock.
Setting Up Your Robinhood Account to Buy Options
Before you can buy options on Robinhood, you need to set up your account and apply for options trading approval. Here’s how to do it:
Step 1: Create Your Robinhood Account
If you don’t already have a Robinhood account, you’ll need to sign up first. Download the Robinhood app from the App Store (or visit their website) and enter your personal information. This includes basic details like your name, email address, and phone number. You’ll also need to verify your identity by uploading a photo of your ID.
Step 2: Apply for Options Trading
Once your account is set up, the next step is to apply for options trading. Robinhood will ask you a series of questions to determine your experience with investing and your risk tolerance. Don’t worry—it’s not an exam! They just want to make sure you understand the risks involved with options trading.
After submitting your application, you’ll typically receive approval within 1-3 business days. Once you’re approved, you’ll be able to access the options trading feature on the platform.
Step 3: Fund Your Account
Before you can buy options, you’ll need to deposit funds into your Robinhood account. You can do this by linking your bank account or using a debit card.
How to Buy Options on Robinhood: Step-by-Step
Now that your account is ready, it’s time to actually place your first options trade! Here’s a step-by-step breakdown:
Step 1: Find Stocks with Available Options
The first thing you’ll need to do is find a stock that has options available. Not all stocks offer options, but Robinhood makes it easy to see which ones do. Simply search for the stock in the app, and you’ll see an options chain—this is where you can view all the available options contracts for that stock.
Step 2: Choose Your Options Contract
Once you’ve found a stock with options, it’s time to choose the type of option you want to buy. There are two main types: call and put options.
- If you think the stock price will go up, you would buy a call option.
- If you think the stock price will go down, you would buy a put option.
Next, you’ll choose a strike price. This is the price at which you can buy or sell the stock. For example, if the stock is trading at $50 and you buy a call option with a strike price of $55, you’re betting the stock will go above $55 before the option expires.
You’ll also need to select an expiration date—this is the deadline for exercising your option. Options typically have expiration dates ranging from a week to several months.
Step 3: Review the Premium
When you buy an option, you’ll pay a premium, which is the price of the option itself. For example, if the premium is $2 per share and you’re purchasing 100 shares, your total cost would be $200.
It’s important to carefully review the premium before placing your order. This cost is a risk you take on, and if your option expires worthless, you’ll lose that amount.
Step 4: Place Your Order
Once you’ve chosen your option, reviewed the premium, and are happy with the strike price and expiration date, it’s time to place the order. Robinhood lets you place limit orders or market orders for options trades.
- Limit orders: You specify the maximum price you’re willing to pay for the option. If the market price hits that price, your order will be executed.
- Market orders: Your order will be filled at the best available price in the market.
After placing your order, you can track the status of your option in the app. Robinhood will update you on how your options are performing based on the stock’s movement.
Key Terms You’ll Encounter When Buying Options
Before diving into options trading, it’s important to familiarize yourself with some key terms. Here’s a quick rundown:
- Strike Price: The price at which you can buy (call) or sell (put) the stock.
- Expiration Date: The last day you can exercise your option.
Premium: The price you pay to buy the option.
In-the-Money (ITM): When the option has intrinsic value (e.g., a call option where the stock price is above the strike price).
Out-of-the-Money (OTM): When the option doesn’t have intrinsic value (e.g., a call option where the stock price is below the strike price).
Understanding the Risks of Buying Options
While options can offer high returns, they also come with significant risks. One of the biggest risks is time decay—the closer the expiration date gets, the more value the option loses if the stock doesn’t move in your favor. If your option expires out-of-the-money, you’ll lose the premium you paid.
Additionally, options can be volatile, meaning prices can change rapidly. It’s important to manage your risks and only trade with money you can afford to lose.
Common Mistakes to Avoid When Buying Options on Robinhood
As a beginner, you’ll want to watch out for a few common mistakes when buying options.
Overtrading: It’s easy to get caught up in the excitement of options trading, but it’s important to be strategic and not trade too frequently.
Ignoring Time Decay: Time is not your friend with options. If you buy an option with a short expiration date and the stock doesn’t move as expected, you could lose your entire investment.
Failing to Set Limits: Always set limits or have an exit strategy. Without a plan in place, you might end up with bigger losses than you expected.
FAQ’s
What Is Options Trading on Robinhood?
Options trading on Robinhood allows you to buy and sell contracts that give you the right to buy or sell stocks at a set price before a specific date. It’s a flexible way to profit from stock price movements without owning the stocks themselves. Robinhood makes it accessible with a simple platform and no commission fees.
How Do I Start Trading Options on Robinhood?
To start trading options on Robinhood, you’ll need to create an account, apply for options trading approval, and fund your account. Robinhood will ask you questions about your investing experience to determine your eligibility. Once approved, you can buy and sell options through the app on your phone or desktop.
How To Apply For Options On Robinhood
To apply for options trading on Robinhood, go to your account settings and select the “Options” tab. You’ll fill out a risk tolerance questionnaire that helps Robinhood assess your experience and suitability for trading options. After your application is reviewed, you’ll be approved in 1-3 business days if you meet the requirements.
Can You Buy Options After Hours Robinhood
No, you cannot buy options after hours on Robinhood. The platform follows standard market hours for options trading. You can trade options during regular market hours (9:30 AM – 4:00 PM ET, Monday to Friday). Robinhood does not support after-hours options trading or pre-market trading for options.
How To Sell Options On Robinhood
To sell options on Robinhood, navigate to the “Portfolio” section and find the option contract you want to sell. Select the option, and click the “Sell” button. Then, set your desired selling price, expiration, and other terms. Once you confirm the sale, Robinhood will execute the transaction based on market conditions.
Why Can’t I Buy Options On Robinhood
If you can’t buy options on Robinhood, it could be due to a few reasons. First, ensure your options trading application was approved. If your application was denied, you might not meet the criteria. You also need to be sure you’re trading within regular market hours since Robinhood does not support after-hours options trading.
What Are Call Options on Robinhood?
A call option on Robinhood gives you the right (but not the obligation) to buy a stock at a specific price within a set time frame. If the stock’s price goes up, you can make a profit by exercising the option or selling it to someone else. Call options are great for bullish market expectations.
What Are Put Options on Robinhood?
A put option gives you the right to sell a stock at a specific price by a certain date. If the stock’s price drops, you can sell it for more than its market value, making a profit. Put options are ideal for bearish investors looking to profit from falling stock prices.
How Do I Buy Options on Robinhood?
To buy options on Robinhood, first, find the stock you’re interested in. Once on the stock’s page, swipe up to access the options chain. Choose the strike price, expiration date, and type of option (call or put). After reviewing the premium, confirm your order, and your trade will be placed instantly.
What Is a Strike Price in Options Trading?
The strike price is the price at which you can buy or sell the underlying stock in your options contract. For example, if you buy a call option with a strike price of $50, you can buy the stock for $50, no matter how high the stock price rises, within the option’s expiration date.
How Does Expiration Date Affect Options?
The expiration date of an option determines how long you have to exercise it. As expiration approaches, options lose value due to time decay. This is important because if the stock doesn’t move in your favor by the expiration date, your option could expire worthless, and you lose the premium you paid.
What Is a Premium in Options Trading on Robinhood?
The premium is the price you pay to buy an options contract. It’s like a fee for having the right to buy or sell a stock at a set price. The premium depends on factors like the stock’s volatility, the strike price, and the time until expiration. It’s paid upfront when you buy the option.
How Do I Choose the Right Strike Price for My Option?
When choosing a strike price, you’ll need to consider how much you think the stock will move. For call options, choose a strike price below the current stock price for a better chance of profit. For put options, pick a strike price above the current stock price. Make sure your expectations match your risk tolerance.
What Is Time Decay in Options?
Time decay refers to how the value of an options contract decreases as it nears its expiration date. The closer to expiration, the faster the value erodes, especially for out-of-the-money options. Understanding time decay is crucial, as it can significantly impact the profitability of your options trade.
Can I Trade Options on Robinhood Without Commission Fees?
Yes! Robinhood allows you to trade options without paying any commission fees. This is one of the platform’s most appealing features for new and experienced traders alike. The absence of fees makes it a cost-effective way to explore options trading and execute multiple trades without worrying about extra charges.
What Is an Options Chain on Robinhood?
An options chain is a list of all available options contracts for a particular stock. It shows the call and put options, along with their strike prices, expiration dates, and premiums. Robinhood makes it easy to read an options chain and find the contract that fits your trading strategy.
How Do I Sell an Option on Robinhood?
To sell an option on Robinhood, find your open position in the “Portfolio” section of the app. Tap on the option you want to sell, select “Sell,” and choose the number of contracts. You’ll be asked to confirm your sell order, and once completed, the trade will be executed.
Can I Lose More Than My Initial Investment with Options?
Yes, you can lose more than your initial investment with certain options strategies, but buying basic options like calls and puts limits your loss to the premium you paid. However, selling options or engaging in complex strategies can expose you to greater risk. Always be mindful of your risk tolerance.
How Do I Know if My Option Is In-the-Money or Out-of-the-Money?
An option is in-the-money if it has intrinsic value. For a call option, this means the stock price is above the strike price. For a put option, it means the stock price is below the strike price. If an option has no intrinsic value, it’s out-of-the-money and may expire worthless.
What Is Implied Volatility in Options Trading?
Implied volatility is a measure of how much the market expects a stock’s price to fluctuate in the future. Higher implied volatility typically means higher premiums for options, as traders expect more movement. Keep an eye on implied volatility as it can impact the profitability of your options trades.
How Do I Use Robinhood’s Paper Trading Feature for Options?
Robinhood offers Paper Trading for users with Robinhood Gold. This feature lets you practice buying and selling options without using real money. It’s an excellent way to gain experience and test strategies in a risk-free environment before diving into actual options trading.
What Is a Limit Order in Options Trading on Robinhood?
A limit order lets you set the maximum price you’re willing to pay when buying options, or the minimum price you’re willing to accept when selling. It ensures you don’t pay more or sell for less than your desired price. Robinhood will execute your order when the price meets your limit.
What Is a Market Order in Options Trading?
A market order is an order to buy or sell an option immediately at the best available price in the market. Unlike limit orders, market orders don’t guarantee a specific price, so they may be filled at a price different from what you expected, especially in fast-moving markets.
How Do I Monitor My Options Positions on Robinhood?
You can monitor your options positions by going to the “Portfolio” section of the Robinhood app. Here, you’ll see an overview of all your active trades, including options. You can track the performance of your positions in real-time and make adjustments if necessary.
What Are the Risks of Buying Options on Robinhood?
The main risks of buying options on Robinhood include losing the premium you paid for the option if the stock doesn’t move as you expect. Additionally, time decay can erode the value of your option as it nears expiration. Options can be highly volatile, so it’s crucial to manage risk carefully.
How Do I Close an Option Position on Robinhood?
To close an option position on Robinhood, go to your portfolio and select the option you want to close. Tap on “Sell” (or “Buy” if you sold the option) and confirm the order. The app will execute the trade, and your position will be closed.
Can I Buy Options Contracts on Robinhood for Any Stock?
You can buy options contracts on Robinhood for any stock that offers options trading. Not all stocks have options available, but Robinhood provides a list of stocks with active options chains. You can search for stocks by ticker symbol to see if options are offered for that particular stock.
What Is the Robinhood Gold Feature for Options?
Robinhood Gold is a premium subscription that offers extra features, including access to margin trading, professional research, and larger instant deposits. It also gives you access to additional market data, which can help with options trading. Robinhood Gold is particularly useful if you plan to trade more frequently or with larger amounts.
What Is the Difference Between a Call Option and a Put Option on Robinhood?
A call option gives you the right to buy a stock at a specific price, while a put option gives you the right to sell it at a specific price. You buy a call when you think the stock will go up and a put when you expect the stock to go down.
What Is an Option’s Delta in Robinhood?
Delta is one of the Greeks used to measure an option’s sensitivity to changes in the price of the underlying stock. Delta represents the amount an option’s price will move for every $1 change in the stock’s price. For example, a delta of 0.5 means the option will increase by 50 cents for each $1 increase in the stock.
Can I Trade Options on Robinhood in Pre-Market or After-Hours?
Yes, Robinhood allows you to trade options during extended hours, including pre-market and after-hours trading. However, liquidity is generally lower during these periods, which can lead to wider bid-ask spreads. Be cautious if trading outside regular market hours.
How Much Does It Cost to Buy Options on Robinhood?
Buying options on Robinhood itself has no commission fees, which is a big plus. The only cost is the premium, which is the price of the options contract. The premium depends on factors like the strike price, expiration date, and implied volatility.
Can I Buy Options on Robinhood With Margin?
Yes, you can buy options on Robinhood using margin if you’re a Robinhood Gold subscriber. Margin allows you to borrow money to make larger trades, but it also increases the risk. You’ll need to be cautious when using margin for options trading to avoid significant losses.
How Do I Know If My Option Will Expire Worthless?
Your option may expire worthless if the stock doesn’t reach the strike price by the expiration date. For a call option, this means the stock price remains below the strike price. For a put option, this means the stock price stays above the strike price. Options that expire worthless lose the premium you paid.
How Do I Read an Options Chain on Robinhood?
To read an options chain on Robinhood, look for the column that shows the strike prices. You’ll see options listed by expiration date and their corresponding premiums. The left side typically shows calls, and the right side shows puts. You can filter based on the expiration date and other criteria.
Can I Trade Weekly Options on Robinhood?
Yes, Robinhood allows you to trade weekly options, which expire every Friday. These options are popular for traders looking for short-term trades and quick profits. Weekly options are often cheaper due to the shorter expiration date, but they can be riskier due to their time sensitivity.
What Is a Covered Call on Robinhood?
A covered call involves owning the underlying stock and selling a call option against it. This strategy allows you to earn income from the premium while holding the stock. If the stock price goes above the strike price, you may have to sell your stock, but you keep the premium.
What Happens If I Let My Option Expire on Robinhood?
If you let your option expire on Robinhood without exercising it, it becomes worthless. You lose the premium you paid for the option. However, if your option is in-the-money at expiration, you can exercise it or sell it to lock in any gains.
How Do I Calculate the Profit or Loss on an Option?
To calculate your profit or loss on an option, subtract the premium you paid from the amount you received from exercising or selling the option. If you bought a call option and the stock rose above the strike price, your profit would be the difference minus the premium.
Can I Buy Options on Robinhood for ETFs?
Yes, Robinhood allows you to buy options on Exchange-Traded Funds (ETFs). ETFs are often used for options trading since they allow you to trade diversified baskets of stocks. You can trade both call and put options for popular ETFs like SPY or QQQ on Robinhood.
What Is the Role of Open Interest in Options Trading?
Open interest refers to the total number of outstanding options contracts for a given stock. It provides an indication of market interest in a particular option. High open interest can mean more liquidity, while low open interest might indicate limited trading activity, potentially leading to wider bid-ask spreads.
How Can I Reduce the Risks of Options Trading on Robinhood?
To reduce risks, start small, stick to simple strategies, and trade options only with money you can afford to lose. Make sure you understand how time decay, volatility, and other factors impact options. Use stop-losses and set exit strategies to protect your capital and limit losses.
What Are the Taxes on Options Trading on Robinhood?
Profits from options trading on Robinhood are subject to capital gains tax. If you hold the option for less than a year, your profits are taxed at short-term capital gains rates. If you hold for over a year, you’ll be taxed at the long-term capital gains rate.
Can I Use Options for Hedging on Robinhood?
Yes, options can be used for hedging, which means protecting an existing investment from potential losses. For example, if you own stocks and are worried about a decline, you can buy put options to protect your position from a downward movement in the stock price.
What Is the Robinhood Instant Deposit for Options?
The Instant Deposit feature allows Robinhood users to access funds immediately for trading options, without waiting for bank transfers to clear. With this feature, you can buy options as soon as the funds are available, giving you quicker access to opportunities.
How Do I Use Robinhood’s Mobile App for Options Trading?
The Robinhood mobile app makes options trading simple. Just search for a stock, access its options chain, choose your contract details, and place the order. The app gives you real-time data on options prices, strike prices, and expiration dates. You can also track your options positions directly on the app.
How Does Robinhood Handle Options Contracts Expiring?
Robinhood will automatically close options contracts on their expiration date if they are in-the-money. If the contract is out-of-the-money, it will simply expire, and you will lose the premium. You’ll receive notifications to remind you about any upcoming expirations to avoid surprises.
What Are the Most Popular Options Strategies on Robinhood?
Some popular strategies include buying calls or puts, selling covered calls, and using spreads (vertical, horizontal). These strategies vary in risk level and can be tailored to different market conditions. Robinhood makes it easy to experiment with these strategies due to its simple platform and zero-commission policy.
Can I Trade Options Using Robinhood’s Web Version?
Yes, you can trade options using Robinhood’s web version. The desktop version of Robinhood has all the same features as the mobile app, including access to the options chain and the ability to place and manage options trades.
Do I Need a Large Account Balance to Buy Options on Robinhood?
No, you don’t need a large account balance to start trading options on Robinhood. However, the amount of capital you use will determine how many contracts you can purchase. Keep in mind that the premium for options can vary greatly depending on the stock and expiration.
Can I Buy Options on Robinhood for Crypto Stocks?
Yes, Robinhood allows options trading on stocks, but not on cryptocurrency assets directly. However, you can trade stocks related to crypto or other digital assets. For instance, if you’re interested in trading options related to companies like Coinbase, Robinhood offers those options.
What Are the Benefits of Using Robinhood for Options Trading?
Robinhood offers a beginner-friendly platform with no commissions, real-time data, and a simple interface. It’s a great choice for anyone looking to start trading options without paying additional fees. You also get access to educational resources and a community of traders.
Can I Buy Options on Robinhood for Penny Stocks?
Yes, you can buy options on penny stocks if those stocks have options available. However, trading options on penny stocks can be risky due to their volatility. Be cautious when trading options on low-priced stocks as they can fluctuate quickly and lead to large losses if you’re not careful.
Conclusion: Ready to Buy Your First Option?
Now that you’ve learned the basics of how to buy options on Robinhood, you’re ready to take the plunge. Just remember to start small, be mindful of the risks, and continuously educate yourself as you trade. The more you practice, the more confident you’ll become in your options strategy.
Happy trading, and remember, options trading can be exciting, but it’s always important to trade wisely and responsibly!