More and more people are choosing to invest with leverage to potentially unlock greater returns much faster. In one surprising poll, 43% of retail investors say they use options, margins, or both, with 23% just using options exclusively.
The rise in options trading is partly due to accessibility, with online brokers increasingly offering this complex approach to investing to retail investors.
As such, it’s becoming easier for average investors to try their hands at this advanced technique.
The Robinhood app is one popular mobile service that allows users to trade options.
Keep reading to learn more about options trading and how you can potentially use Robinhood to start trading with leverage.
Robinhood is a modern trading platform for commission-free stock trading and investing.
This app is ideal for inexperienced investors. It’s essentially a slimmed-down trading service, with fewer bells and whistles than competitors like Schwab and Fidelity.
Robinhood has an ongoing promotion that gives you free stock when you sign up for the service. Stocks can range in value and can sometimes be worth as much as $250.
In reality, most free stocks on Robinhood are worth much less. But, you never know — you could be one of the lucky ones.
Opening a Robinhood account enables you to trade options contracts for stocks and exchange-traded funds (ETFs). Yet while Robinhood is for inexperienced traders, options trading most certainly isn’t. If you are new to investing, options may not be an ideal fit.
Of course, you know your situation and experience level better than anyone. Be honest with yourself before trading options so that you don’t wind up getting in over your head and losing your hard-earned cash.
How To Trade Options on Robinhood: A Step-by-Step Guide
Here’s a breakdown of how to start trading options on Robinhood:
- Review Your Risk Tolerance
- Open a Robinhood Brokerage Account
- Fun Your Account
- Request Approval to Trade Options
- Place an Options Trade
- Hope You Made the Right Bet
1. Review Your Risk Tolerance
Before you dive in and start trading options, you must understand your risk tolerance.
This refers to the total loss you can stand to endure in your portfolio. If you’re young and making money, you generally have a higher risk tolerance than someone approaching retirement age.
Granted, that doesn’t mean that you should trade options. But it can at least indicate whether you’re in a position to consider it.
Some of the major determining factors include your age, your financial goals, your annual income, how much debt you have, and how you expect to use the money you’re investing.
My two cents? If you have credit card debt or student loans, pay those off first before even considering options trading.
2. Open a Robinhood Brokerage Account
If you’re in a position to take on some risk and want to trade options, then head over to Robinhood and open an account. Robinhood is available on Android, iOS, and most web browsers.
To use Robinhood, you need to be at least 18 years or older, have a valid Social Security number, and have a legal U.S. residential address within the 50 states or Puerto Rico. you also have to be a U.S. citizen, a permanent resident or have a valid U.S. visa.
It’s very simple to open a Robinhood account. To begin, look for the green sign-up button on the main screen and enter your basic contact information, including your name and email address.
During the sign-up process, Robinhood asks you to provide your investment experience. You can select from the following: “not much,” “I know what I’m doing,” or “I’m an expert.” Choose the one that’s right for you to complete your account setup.
Robinhood makes investing simple with their mobile app. You'll also trade commission-free, and can start building your portfolio with just $1. Use our link to earn up to $200 in free stock.
3. Fund Your Account
After you go through the sign-up process and create an account, you’ll be able to access the Robinhood mobile app. But before you make a trade, you’ll need to fund your account.
This won’t automatically enable you to start trading options; I’ll get to that part shortly. But it’s a good idea to fund your account outright, regardless of whether you trade options.
Even if the app doesn’t let you trade options, you can still trade stocks without paying commissions.
Robinhood doesn’t charge to deposit or withdraw funds. Further, you don’t have to invest money once it’s in your account, and there isn’t any minimum deposit requirement.
To deposit money, you’ll have to select your bank from the list of options. If the bank doesn’t appear on Robinhood, submit a request and wait for approval. Most leading banks are immediately available, such as Wells Fargo, Chase, and Bank of America, among others.
After linking your bank, select the amount that you want to transfer into Robinhood.
4. Request Approval to Trade Options
Not everyone is eligible to trade options on Robinhood. The app has a built-in vetting system to weed out people who shouldn’t be dealing with these complex financial instruments.
To gain approval on Robinhood, you’ll have to disclose some specific details to help the app determine your eligibility. This includes your investment objectives, financial data, and investment experience.
After you submit your information, Robinhood reviews your application and determines whether to enable you to trade options.
Robinhood supports two levels of options trading, including Level 2 and Level 3.
- Level 2 Trading: Level 2 approval lets you engage in long call and long put options, as well as covered calls and cash-covered puts.
- Level 3 Trading: Level 3 approval comes with all the options of Level 2, in addition to the entire collection of limited spread risks — including iron condors, iron butterflies (also known as ironflys), and credit spreads.
5. Place an Options Trade
To execute an options trade in Robinhood, tap the magnifying glass in the top right corner of your screen and search for the security that you want to trade options for.
When you find the one that you’re looking for, tap the name of the security and hit “trade” in the bottom right corner of the stock or ETF detail page. Then tap “trade options.”
When you’re trading options, you need to pay attention to the expiration date, which you can find underneath the underlying security. You should also look at the strike price, which is the price which you can execute a put or call option.
Another thing to pay attention to is the break-even point, which is where the underlying security needs to trade at expiration to break even on the investment.
It’s also necessary to analyze the break-even percentage, which tells you the percentage change the underlying security has to move to break even at expiration. Further, the chance of profit percentage lets you see the probability that your investment will be profitable if you sell.
6. Hope You Made the Right Bet
As mentioned above, options trading is a huge gamble. Once you place your bet, you can only hope that a wide variety of market factors sway in your direction.
I’m talking about really complex market factors, such as inflation, interest rates, unemployment, the pandemic, oil prices, and political unrest, to name a few. This is why, in my opinion, the vast majority of investors are much better off playing the long game.
Now that I’ve said my piece and you have a better understanding of what options trading looks like on Robinhood, let’s briefly examine some other platforms that also support this advanced trading technique.
Alternative Platforms for Trading Options
While you can trade options on Robinhood, you might be interested in more advanced platforms for options trading. If so, check out some of these brokers for a more comprehensive trading experience.
Webull is an online broker that many young investors are now using to manage their portfolios. The company offers free options trading with $0 commissions and no contract fees.
Schwab is a leading online broker that you can use to trade stocks, options, futures, and futures options. Schwab is currently in the process of merging with TD Ameritrade, in a deal that should close in 2023.
Schwab currently charges $0.65 options per contract, with no base online commission.
Fidelity is another popular broker that you can use to trade options. The company has five levels of options trading, each with rigorous approval requirements. Fidelity charges $0.65 per contract fee for options.
Vanguard has a reputation for low-cost index and mutual funds, but they also let you trade options. The company charges $0 to $1 per contract for assets with a value of less than $1 million.
Interactive Brokers (IBKR) is widely known as a top platform for professional traders and seasoned personal investors. IBKR charges from $0.15 to $0.65 per US options contract and offers more advanced trading tools than the above-mentioned alternatives.
Disclaimer: Options Trading is Very Risky
An option is a contract that gives you the ability to purchase or sell an asset at a specific price at some point in the future. The value of an option, which is technically a category of derivatives, comes from its underlying asset.
You can trade options of stocks, bonds, commodities, and currencies. Brokers have different rules regarding the types of options that you can trade, so do your due diligence before jumping in.
On one hand, trading options can lead to large returns if you time the market correctly and make the right moves. At the same time, options trading is a straight-up gamble. You could lose a lot of money if you make the wrong moves.
Suffice it to say that it’s not easy to make money trading options — especially for beginner investors. So, as a word to the wise, proceed with caution if you’re thinking about exploring options trading.
Frequently Asked Questions
Should I trade options?
If you play your cards right, you could increase your net worth by trading options. However, you could also lose your entire investment — and then some. At the risk of sounding like a broken record — trading options is very risky and something that’s typically better for experienced investors with a high-risk tolerance. If you’re just starting your investment journey, my advice is to stick to the basics.
Does Robinhood support day trading?
Robinhood limits customers to no more than three-day trades across a five-day trading period unless you have at least $25,000 of portfolio value, minus cryptocurrency positions. Day trading is another option that’s typically better for experienced investors. It requires a significant amount of data and expertise.
My Advice: Don’t attempt to day trade unless you are in a position to lose money without sweating it. If you try to day trade, you’ll almost certainly lose at one point or another. Remember, everyone would be rich if timing the market were easy.
Can you buy crypto on Robinhood?
Robinhood lets you buy and sell cryptocurrencies such as Bitcoin and Ethereum. The cryptocurrency market is extremely volatile, but it can also be a great way to diversify your portfolio.
The Bottom Line
In all honesty, options trading isn’t one of my favorite trading strategies. Many financial experts tend to agree that options trading is more trouble than it’s worth.
Generally speaking, it’s better to think long-term when investing and put your money into companies that you believe in rather than moving money around recklessly.
When exploring the stock market, look for companies that have solid financials and a positive long-term growth trajectory. You may also want to consider index funds and mutual funds for broad market exposure.
Of course, the decision is ultimately yours and yours alone — and if you decide to become an advanced options trader, the Robinhood trading app is a decent one. Just keep in mind that there are other platforms out there that provide a more comprehensive trading experience.
The road to financial freedom is long and winding, and there are ups and downs along the way. It’s virtually impossible to get rich overnight. While options trading might seem attractive from the outset, it can have disastrous results. If I were you, I’d wait until I had a strong portfolio before even considering whether to roll the dice on options.
Whatever you decide, here’s to making the best decisions on your path to financial freedom.