How to Trade Options on Robinhood

How to Trade Options on Robinhood

Trading options on this groundbreaking platform is easy to do. From the moment you begin opening the account, right up to the point of placing your order, Robinhood designed the user experience to be as straightforward as possible. To say that Robinhood revolutionized an industry is an understatement, but competition has increased in recent years. Despite the pressure from competitors, however, Robinhood remains a popular platform for beginning option traders.

How to Trade Options on Robinhood

To get started trading options on Robinhood, you need to open and fund an account. You can download the app to your smartphone or access the sign-up page on a personal computer. The process doesn’t take long, and it helps to have your key information nearby as you complete the following steps.

Step 1: Open a Robinhood account. Opening an account with Robinhood is intended to be a simple process. When the app was first designed, it was released in an industry that had a lot of room for improvement. Robinhood’s step-by-step account application makes it easy to enter the personal information needed to verify your identity.

Once you have entered your personal information, you’ll need to provide financial information to establish whether you are investing in a way that is suitable for your circumstances. The app will request information about your bank account balances, your employment status, and the trading or investing strategies you are pursuing.

Step 2: Fund your Robinhood account: Robinhood’s sign-up procedure includes asking for bank account information through Plaid, or other secure connection tools. It makes funding the account simple and quick, so that customers don’t even have to leave the app to get ready for trading.

Step 3: Log in to your Robinhood account. The sign-up process automatically logs you into your Robinhood account once you have completed all the steps. You can also log into the website or the app at any point in time thereafter.

Step 4: Enable option trading. The sign-up application also includes a couple of questions about option trading and what level of permissions you would prefer. If your financial status isn’t strong enough, you may be assessed as too high of a risk for making losses.

That means the app will wait until you have made several trades before approving you for option trading. Once you are capable of being approved for options trading, you can enable that function by adjusting your app’s account settings under the Investing tab.

Step 5: Select options and complete orders. The design of the app’s trading screens is elegant and they are easy to read. The app may feature the simplest presentation of options quote data and order functions out of any of the major brokers. But such simplicity doesn’t always lend itself to clarity. The screens tend to obscure the bid and ask prices for new traders who don’t know to look for them.

That’s why it is important to research which options you want to trade, and be certain you clearly understand their cost. Once you have thoroughly researched your intended option trade, you’ll find that executing option orders on Robinhood is really very streamlined.

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What You Need to Open a Robinhood Brokerage Account

Opening an account requires only that you download the app (or sign up online through a web browser) and provide the personal and financial information requested by the brokerage.

Personal Information

When opening an account with Robinhood, the app takes you through a series of screens that collect personal information. Brokers are legally required to collect the following information:

  • Name
  • Address
  • Citizenship
  • Tax ID

The app steps you through a few screens where you can provide this personal information and verify your identity. Note that even though you provide a tax ID such as a Social Security number, this application will not affect your credit score. Once the application has all the personal information required to open your account, it will request that you provide financial information.

Financial Information

Robinhood collects financial information to remain compliant with the Know Your Client (KYC) standards designed to fulfill SEC regulations. Brokers benefit from KYC standards because it helps them assess both the suitability of a customer’s choices and the risk those choices may represent.

Where options trading is concerned, this becomes very important to the broker. Since some option strategies can end up losing more than the initial trading capital, a broker needs assurance that the customer can make up for any losses that go beyond the initial balance. The typical financial information collected includes:

  • Bank account information
  • Trading and investing experience
  • Employment status
  • Job type
  • Job industry

Having this information on file not only satisfies legal requirements but also provides Robinhood with an adequate assessment of the risk it may face if a user makes a trade that takes on more liability than their account balance.

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The Benefits of Trading on Robinhood

From its founding, Robinhood was intended to democratize finance by making investing more accessible to everyone. The brokerage worked hard to develop a simple and intuitive trading experience on its app.

The initial success was so strong that demand for the app necessitated a waiting period for new users early on. Even though a web-based platform is available as well, Robinhood leans into its expertise as a mobile offering, catering to traders who are looking for basic features that are easy to navigate quickly.

However, the hallmark of Robinhood’s platform was its groundbreaking model for no trading commissions. The innovative challenge this model brought sent ripples through the industry that have yet to subside. The customer-oriented model also allowed for user-focused features like fractional-share trading and direct cryptocurrency access.

It’s no surprise that even small account holders find Robinhood attractive. They enjoy cash management features and recurring investment functionality, including an innovative cash card that lets users invest rewards earned from purchases.

FAQs

What Are Options?

Options are transferable contracts that give the holder an opportunity to buy or sell a security. The contract gives the owner the right, but not any obligation, to buy or sell shares at a predetermined price up until the date the option expires. Option contracts can also be traded.

Trading options creates leverage, sometimes as much as 10 to 1, and since option prices are influenced by changes in the underlying security as well as the number of days left before expiration, price changes can be complex. Traders could take on significant risk of losing money if they do not diligently study the definitions, concepts, and strategies behind the types of options they are trading.

What Is Robinhood?

Founded in 2013 by Vlad Tenev and Baiju Bhatt, Robinhood is an online broker known for its groundbreaking monetization of a practice called payment for order flow. By optimizing revenues from selling its customers’ orders to various exchanges, Robinhood  was able to pass the transaction costs to the exchanges, rather than the retail trader. That meant that customers could trade commission-free. The popularity of Robinhood’s business model grew rapidly after its founding, and eventually all the major brokers took on the same practice of offering commission-free trades.

What Is the Best Option Trading Platform?

Robinhood was designed as a mobile trading app right from its inception. Early on, the app was known for its comparative ease of use, but in recent years other brokerages have surpassed Robinhood in this category. Meanwhile, users have come to demand better education and research from their broker platforms, and Robinhood hasn’t kept up here either.

Recently Investopedia reviewed the field of brokerages and named its best brokers for option trading. Tastytrade came out on top overall, though TD Ameritrade, Interactive Brokers, E*Trade, and Webull all had notable strengths in ease of use, advanced functionality, education resources and research tools.

Robinhood didn’t make the list because it fell short in each of these areas. Where option traders particularly find Robinhood lacking is in educational resources and research amenities. Option trading can be complicated and too many beginning traders have lost money rapidly with options. That’s why they want a broker with trustworthy guidance for navigating the many facets of option trading.

Can You Trade Options on a Robinhood Paper Account?

Perhaps the biggest shortcoming of Robinhood is the fact that it does not offer a simulated trading account of any kind. This would be especially helpful for option traders as an educational resource, but despite the fact that competitors have done so, Robinhood is still without this feature.

Simulated trading for options is particularly important to new traders. This kind of trading experience helps new traders learn how option pricing changes over time. It is difficult to comprehend how option prices are influenced by changes in the price of the underlying security, as well as by the decreasing amount of time until expiration. The experience of paper trading allows new traders to learn this more effectively.

How Much Does It Cost to Trade Options on Robinhood?

Unlike some brokers, options trading, like stock trading, can be done without commissions on Robinhood. There are some fees that users pay as part of their transactions, including a trading activity fee and a regulatory trading fee.

These fees don’t always apply to every trade, but one of them, the trading activity fee, does apply to every option trade a customer makes.1 The fee differs for option buys and sells, but either way, it is only a fraction of a penny per contract. This small amount is rarely noticed by customers and shouldn’t have a big impact on the outcome of trades.

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