Robinhood Options Explained

Robinhood options explained

Options can be defined as the contract between two people in which the owner gives the other person the right to sell or buy the asset mentioned in the contract. 

One thing about these contracts is that the other person will get the right to buy or sell the assets but there are no obligations. The whole value of the contract depends upon the market price of the stock. 

The most common idea of the options is to earn some profits from the options. But, there are times when the option expires without any value. Therefore, the user needs to understand the risk associated with options. 

We completely understand that this is a new concept for a lot of people and they may not be aware of it completely.

If you are also one of them, you have landed on the right page. Here is all you need to know about options on Robinhood. 

What are Options?

Options are a contract between two parties in which the owner allows the other party to buy or sell the stocks within the specified time and specified price. Usually, all the options for almost 100 share the specified stock. 

Moreover, an option can also be considered as a bond or stock with some specified terms and conditions.

Now, before you wish to invest in the stocks, you must know the types of options that you will get. There are two types: Call option and Put options. They are also called puts and calls. 

Another thing that you need to know is that one contract is for almost 100 shares. But, it is up to you to decide the number of contracts that you wish to buy or sell. 

So, to understand more about the call and put options, keep reading. We have discussed the call option and put the option in detail.

Robinhood Call Option

Robinhood Call Option means that you are buying the right from the owner to buy 100 shares of the specified stocks when you choose to buy the call option. 

The price at which you need to buy the stocks is also mentioned in the contract and that price is known as the strike price. You need to exercise the option before the expiry date. 

When you buy the contract, you will have to pay an amount or fee to the owner as of the security. This amount is known as the premium. 

One thing that most people are confused about is why to hold the contract. The basic logic behind holding the option contract is to see if the price of the stock grows with time. 

If the price grows in the future and surpasses the strike price, you can buy the stock from the owner at the strike price. Later on, you can choose to sell the stock at the market price to earn a profit.

Another scenario is when the stock falls. In this case, you may choose not to exercise your contract and the amount charged to you will be only the premium amount. You will not get the premium amount back.

Also Read: How To Buy Warrants on Robinhood?

Robinhood Put Option

Now, another type of option is Put opinion. In this type of option, the party will buy the right to sell the stock at the strike price. 

So, if you are holding a put option, you will want the price of the stock to go lower so that the other party will purchase the order from you at the strike price. 

In this case, the strike price is higher than the market value of the stock at that time. You will then be able to force the buyer to buy the shares from you at the market value. 

This may also work as an insurance policy for sellers against the value of their share. Other than this if the price for your stock increases more than the strike price, you will have to let the option expire. This will cost you only the premium of the put option.

Robinhood Options Fees

There are no fees for Robinhood Options. So, by now you may be aware of what Robinhood options are and what is a call option and put option. 

Another common question people ask is if there are any fees charged by Robinhood for options. Fortunately, you will not have to pay any fees to sell or buy options on Robinhood. 

Moreover, you will not have to pay any monthly fees for the same. Another best thing about trading options on Robinhood is that you will not need any kind of Gold subscription to trade opinions. You can trade options using your instant accounts only.

How Do I Use Robinhood Options?

So, enough talking about what Robinhood options are and how many types of options are available. This section of the article covers how you can use Robinhood options.

You can directly place the order of your first order from the application only. To know how to place an options trade, check out all the steps below.

Step 1: Download Robinhood App and Create an Account

The very first thing that you will have to do is to download the Robinhood application on the system. You must know that the Robinhood application is not available in all the US states.

You will then have to install the application and then you will have to create an account on Robinhood. Keep in mind to fill in all your correct details.

Step 2: Know More About Trading Options

So, the next thing that you will have to do is to learn how trading options work on Robinhood. For this, you can reach out to the support team or read related articles on the Robinhood website only.

Step 3: Approval Process of Options

The next step in the process is to get the required approval to trade options. To do this, you will have to enable the option in Robinhood.

For this, you need to tap on the Settings option and then tap on investing.

Now, under the investing tab, click on the options tab.

After this, you will have to click on the option to enable options trading.

Next, some verification questions may occur on the system. Make sure to answer all the questions correctly.

When done, you will have to wait for Robinhood to review your trading options and if you are approved, the team will contact you.

Step 4: Place the Option Trade

If you get all your option trade successful, you will have to place the actual trade option. Here are all the steps to place the option trade.

  • Open the homepage on your screen and then click on the search icon.
  • You will now have to look for the security that you want to trade.
  • When done, you will have to click on the security’s name.
  • After this, you will have to click on the Trade option present on the ETF’s page.
  • Now, click on the trade options.

Also Read: When Will Robinhood Tax Documents Be Available?

Is Robinhood Safe for Options Trading?

Yes, it is completely to use Robinhood for Options trading. For most people, safety is one of the major concerns. 

People often ask if they should trade options on Robinhood. Fortunately, Robinhood is completely safe to use for options trading and another trading. 

Other than this, Robinhood implies that there are still some potential risks associated with options trading and Robinhood is not responsible for the same. 

The same goes for other financial investments that you may make on the platform. Other than this, the security brokerage is regulated by the SEC.

Can you Lose Money on Robinhood Options?

It depends. So, if you are buying options on Robinhood, theoretically you will have to pay for the premium if you do not exercise your option. 

Therefore, there is a risk of the premium that you have paid for the option. This is the worst-case scenario when the option you invested in is expired, worthless, and out of money. In this case, you will lose the premium paid for the option.

How does Robinhood Make Money on Options?

Most people ask how Robinhood makes money on options if they charge no fees for buying or selling options on Robinhood. 

So, one must know that though Robinhood charges no fees for buying and selling options, they charge money from the market maker and trading firms. 

These are the firms that pay for all the order flow from the retail traders. It has been estimated that almost 75% of the payment comes from the PFOF and order flow payments.

Levels of Options In Robinhood

There is no doubt that Options are great and flexible investment deals that one can choose for them. 

You must also know at the same time that Options are not the best investment option for everyone. But for the security of both parties, the options trading needs approval. 

For this, Robinhood has allowed 4 levels of the options approval process. One must know that the approval process becomes more rigorous as the levels of options increase. 

It depends on different factors to make you eligible for options trading. 

Using level 2 approval, you can use the strategies mentioned below.

  • Sell covered calls
  • Exercise options
  • Buy Calls and Puts
  • Sell cash covered puts

Moreover, Using level 3 approval, you can use the strategies mentioned below including the ones mentioned in the level 2 approval.

  • Iron condors
  • Calendar spreads
  • Credit and debit spreads
  • Iron butterflies

Also Read: How to Enable Dark Mode in Robinhood?

Things You Need to Get Options Approved on Robinhood

As we have mentioned, you will have to go through the particular approval process to trade options on Robinhood. 

But to get approval, you will have to disclose certain important and confidential details on your application. Here is what you need to get approved.

  • The first thing is to disclose the reason for which you are attempting to invest in options
  • You will have to disclose your prior investment experience as well as your knowledge.
  • You will also have to disclose your income and other financial reports.

After submitting all the details, Robinhood will assess the details and then approve trading. It analyses and determines the level of options trading you are eligible for.

How to Get Level 2 Robinhood options?

You must know that there is more risk involved in options trading than in stocks. Therefore, to reduce the risk, brokerage firms choose to limit the option of trading until the applicant meets certain parameters. 

Level 1 options are easier to get and enable all the investors to carry out transactions whose risk levels are low. 

When it comes to level 2, the user will get more instructions about what operations an investor can carry out and what he can not. 

To get level 2 Robinhood, you will have to pass through the criteria. It includes three major factors: investment experience, account size, and margin. 

For this, you will have to submit all the required documents and ask for approval. After this, you will have to fill out the form to answer questions related to experience level, goals related to options, and more. Another thing that plays a major role in the process is how you have used the level 1 access.

How to Get Level 3 Robinhood Options?

Like any other level, your profile will undergo an approval process to enable you to trade on level 3. To get approved on level 3 Robinhood options, you will have to get the required experience in trading. 

There are times when the application will notify you that you are still not eligible and require more investing experience. In such a case, you will have to apply again after making some more trades. 

Also, you will have to keep in mind the risk tolerance is more in level 3 options trading.

Does Robinhood have Level 4 options?

So, after level 2 and level 3 options, most people are concerned if Robinhood has level 4 options. Robinhood does have level 4 options. 

In case you also want to get access to naked or uncovered put or call options, you will have to unlock Level 4 options. 

For this, you need to have prior investing experience. If you get rejected for level 4 approval, you will have to retry again after gaining the appropriate experience.

Also Read: Robinhood Margin Requirements

How Much Time Does It Take for Option Approval?

It doesn’t take much time for approval. So, if you have applied for approval on Robinhood, it may not take much time for approval.

When you enable options trading on Robinhood, it will take some days to get the approval. 

So, if you have any emergency to buy or sell the options you can also try the alpha platform.

One thing that you need to know is that you will have to deposit at least 2000$. Also, you will have to maintain this balance or more than this in your account if you wish to continue trading with Robinhood.

What If Options Expire On Robinhood?

Now, one question that most people ask is what if they chose not to exercise your option and they expire? 

What will happen to the options? Well, if you decide not to exercise options on Robinhood, two things can happen at that time. 

If your option is in the money, Robinhood will attempt to exercise that option on its own. Otherwise, if it is out of money, your option will expire. 

Moreover, we have come up with some points which may help you understand more about the expiry date of Options Robinhood.

  • In case you hold more than one option and they are in the money, Robinhood will make an attempt to exercise those options for you.
  • Moreover, your broker will attempt to sell the contract to someone else in the market one hour prior to the expiry time.
  • Robinhood checks your account against different parameters to check the closing position of your account.

However, if the option is in the money, it may still be not able to exercise the option because of the following reasons:

  • Even after exercising the stock, it will have a short position
  • You have submitted the request for exercise after 5 PM
  • Lastly, if you have submitted a DO NOT EXERCISE request on Robinhood.

Moreover, when the option expires, it will be removed from the home screen. However, you will find it in the transaction history section on the account.

Will You Still be Able to Exercise Option With NO Funds in Robinhood?

Yes, you can exercise options with no funds. What if you wish to exercise an option and your account does not have any funds? Will you still be able to do so? Fortunately, you can surely do it on Robinhood. 

If you are using Call options, you may lose the premium amount for the contract that you have paid. Therefore, you will be in profit if you are in or out of money.

Also Read: Robinhood Hidden Fees

Conclusion

The option is a good investment. Robinhood has surely made the whole process a lot easier than ever. We have attempted to provide you with all the details about Robinhood options trading.

Hopefully, the article has helped you in a way. If you wish to check out more articles, visit our website.