Trading Options is a great way to make money in the stock market, but it can also be a risky endeavor. In this article, we will discuss how to trade Options on Robinhood and what you need to know before you start trading Options.
Options are financial instruments that allow their holders the right, but not the obligation, to buy or sell a stock or other asset at a set price by a specific date.
The Option buyer pays a premium for the privilege of owning the Option; the Option seller receives the premium. When the Option expires, the holder has two choices: exercise the Option (buy or sell the underlying asset) or let the Option expire worthlessly.
The value of an Option depends on many factors including the type of Option, the volatility of the underlying asset, the time until expiration, and whether the option is “in-the-money” or out-of-the-money.
In The Money Vs Out Of The Money
An Option is either in-the-money or out-of-the-money. For example, if the stock price is $100 per share and the call option with a price of $110 has been purchased, then the option is in-the-money because the strike price is above the current stock price. If the option is out-of-the-money, then the opposite is true.
When an Option is in-the-money, there is no risk involved in exercising the option since the option holder would receive more than he paid for the Option.
However, when an Option is out-of-the-money, there is a risk involved in exercising the contract since the Option holder could lose money if the underlying asset does not reach the strike price.
When an Option is in the money, there is no loss if the option is exercised since the option holder would have received more than he paid for it.
If the Option is in-out-of-the-money, the Option holder must first pay a premium to obtain the Option. Then, if the Option is exercised, the Option holder will suffer a loss if the underlying asset does fall below the strike price.
How To Trade Options On Robinhood?
Steps to Trade Options on Robinhood:
Step 1: To begin trading options on Robinhood, open your account by logging in.
Step 2: Once your account is opened, click on the ‘Funds’ tab located at the top left corner of your screen.
Step 3: Next, select ‘Trading Tools’ from the drop-down menu.
Step 4: Scroll down to the bottom of the page and click on ‘Options’.
Step 5: Click on ‘Add Option’.
Step 6: Enter the name of the option you want to enter into the box provided.
Step 7: Select the type of option you want to enter.
Step 8: Choose between Call, Put, Straddle, or Other.
Step 9: Select the number of contracts you want to enter into your portfolio.
Step 10: Click on the green plus sign to add the option to your portfolio.
Step 11: You can also view all of your options by clicking on the ‘View All’ button.
Step 12: You can edit any of your options by clicking the pencil icon next to each option.
Step 13: You can delete any of your options by selecting the trashcan icon next to each option and clicking on the red X.
Also Read: Robinhood Margin Requirements
How To Open Robinhood Account?
Before you start trading options, make sure that you have a free Robinhood account. To do so, follow these steps:
Steps to Open Robinhood Account:
Step 1: Go to Official Robinhood website: https://robinhood.com
Step 2: Click on the ‘Sign Up’ link on the home page.
Step 3: Enter your email address and password.
Step 4: Select your preferred payment method (credit card or debit card).
Step 5: Click on the “Create my account” button.
Step 6: You will be redirected to the login page where you need to enter your phone number and verify your mobile number.
Step 7: After verification, you will be logged into your account.
Step 8: Once logged in, you can now access your funds.
Once your account is opened, click on the “Trading” tab on the top menu bar and select “Options” from the drop-down menu.
Next, choose between buying or selling options. You can also use the “Buy/Sell Stocks” button to access other features such as viewing historical data for stocks.
Select the type of option you want to trade.
There are four main types of options available on Robinhood: Calls, Puts, Straddles, and Combos.
Calls:
A Call Option gives you the right to buy 100 shares of the underlying asset (e.g., Apple) at a certain price (e.g., $120). This means that if you hold this option, you are obligated to buy the underlying asset at the specified price.
Put:
A Put Option gives you the right, not the obligation, to sell 100 shares of the underlying assets at a certain price (for example, $120).
The difference between these two options is that you can exercise a call option without paying any additional fee, whereas you must pay a premium to exercise a put option.
Straddles:
A Straddle consists of both a call and put option on the same underlying asset. To create a straddle, simply combine a call and put option by selecting the strike price of one option and then clicking on the “Add to Order” button.
For example, if you wanted to create a straddle with a strike price of $100, you would first select the strike price of the call option ($100), then click on the “Add To Order” button.
Combos:
A Combo is similar to a straddle except that it only includes a call option. To create a combo, simply select the strike price of one call option and then click on the ‘Add to Order’ button.
For example, if you wanted a combo with a strike price of 120, you would first select a call option with a strike price of 110, then click on the ”Add to Order” button.
Also Read: Does Robinhood Have Custodial Accounts?
Conclusion
In conclusion, there are many ways to trade options. However, before you begin trading options, you should familiarize yourself with all the different types of options available on the platform. Also, make sure you fully understand how each type of option works before you decide which ones to trade.
