Everything you need to know about opening option trading on Robinhood

Summary
Option trading has become an increasingly popular investment strategy for those seeking to expand their portfolio and potentially make significant profits. One platform that has gained attention in recent years is Robinhood, a commission-free trading app that allows users to trade stocks, cryptocurrencies, and options. In this comprehensive guide, we will explore everything you need to know about opening option trading on Robinhood.

Understanding Options Trading

Before we dive into the specifics of option trading on Robinhood, it is important to have a solid understanding of how options work. Options are financial derivatives that give traders the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, known as the strike price, within a specified time period.

There are two types of options: calls and puts. A call option gives the buyer the right to buy the underlying asset, while a put option gives the buyer the right to sell the underlying asset. Traders can use options to speculate on the direction of the underlying asset's price, or to hedge their existing positions.

Options trading can be complex, and it is crucial for traders to have a thorough understanding of the various strategies and terminology involved. It is recommended to educate yourself about options trading before getting started on any trading platform.

About Robinhood

Robinhood is a popular trading platform that was founded in 2013 with the mission of democratizing finance. The app quickly gained traction due to its commission-free model, which allows users to trade stocks, ETFs, cryptocurrencies, and options without paying any fees.

One of the key features that sets Robinhood apart from traditional brokerage firms is its user-friendly interface and simplicity. The platform is designed to be intuitive and accessible, making it an attractive option for both beginner and experienced traders.

Opening an Account on Robinhood

To start trading options on Robinhood, you will first need to open an account. The process is relatively straightforward and can be done entirely online. Here's a step-by-step guide:

1. Download the Robinhood app from the App Store or Google Play Store. 2. Open the app and click on "Sign Up" to create a new account. 3. Provide the required personal information, including your name, email address, and phone number. 4. Complete the identity verification process by uploading a photo of your ID. 5. Once your identity is verified, you will need to answer a few additional questions to assess your trading experience and risk tolerance. 6. After completing the questionnaire, you will be asked to link your bank account to fund your Robinhood account. 7. Once your bank account is linked, you can start trading options on Robinhood.

Funding Your Account

Once your Robinhood account is open, you will need to fund it before you can start trading options. Robinhood offers several funding options, including bank transfers, wire transfers, and debit card transfers.

To fund your account, follow these steps:

1. Open the Robinhood app and navigate to the "Account" tab. 2. Click on "Transfer Funds" and select the funding option of your choice. 3. Enter the amount you wish to transfer and follow the on-screen instructions to complete the transaction.

It is important to note that there may be limitations on instant deposits, especially for new accounts. Robinhood typically allows new accounts to make instant deposits of up to $1,000, but this limit can vary based on individual circumstances. Larger deposits may require a waiting period of a few business days.

Enabling Options Trading

After you have funded your Robinhood account, you will need to enable options trading. Here's how to do it:

1. Launch the Robinhood app and go to the "Account" tab. 2. Scroll down and select "Settings." 3. Under the "Approval" section, click on "Investment Profile." 4. Complete the investment profile questionnaire, which will assess your knowledge and experience with options trading. 5. Once the questionnaire is complete, Robinhood will review your application and determine your eligibility for options trading. 6. If approved, you will receive a notification that options trading has been enabled on your account.

It is important to note that enabling options trading may not be available for all users. Robinhood assesses each user's eligibility based on their investment profile, trading experience, and risk tolerance.

Placing Options Trades on Robinhood

Once options trading is enabled on your Robinhood account, you can start placing trades. Robinhood provides a user-friendly interface that allows you to easily search for options contracts and execute trades. Here's a step-by-step guide:

1. Open the Robinhood app and navigate to the stock or ETF that you are interested in trading options on. 2. Click on the stock or ETF and scroll down to the "Options" section. 3. Select the expiration date and strike price of the option contract you would like to trade. 4. Choose whether you want to buy a call option or a put option. 5. Enter the number of contracts you wish to trade and review the total cost of the trade. 6. If you are satisfied with the trade details, click on "Review." 7. Review the trade summary and click on "Place Order" to execute the trade.

It is important to note that options trading involves risks, and it is crucial to carefully consider the potential outcomes before placing a trade. It is recommended to research the underlying asset and conduct thorough analysis before making any decisions.

Managing Your Options Positions

Once you have entered into options trades on Robinhood, you will need to actively manage your positions. Robinhood provides various tools and features to help you monitor and track your options trades.

Here are some key features that can aid in managing your options positions on Robinhood:

1. Real-Time Price Quotes: Robinhood provides real-time price quotes for options contracts, allowing you to stay updated on the current market prices and make informed decisions.

2. Options Chain: The options chain is a table that displays all available options contracts for a specific stock or ETF. It provides information on the strike prices, expiration dates, and premiums of each contract.

3. Watchlist: You can create a watchlist of stocks and ETFs that you are interested in trading options on. This allows you to easily track the prices and volatility of these assets.

4. Notifications: Robinhood sends notifications for important events related to your options trades, such as expiration dates and upcoming earnings announcements.

5. Greeks: Robinhood provides information on the Greeks, which are mathematical measures that help assess the risk and potential profitability of options positions. The most commonly used Greeks are Delta, Gamma, Theta, Vega, and Rho.

Important Considerations

While Robinhood offers a user-friendly platform for options trading, there are a few important considerations to keep in mind:

1. Risks: Options trading involves risks and may not be suitable for all investors. It is important to understand the potential risks and rewards before engaging in options trading.

2. Limited Expiration Dates: Robinhood offers options contracts with limited expiration dates. It is crucial to carefully choose expiration dates that align with your trading objectives and strategies.

3. Limitations on Strategies: Robinhood may impose certain limitations on complex options strategies, such as spreads and straddles. Make sure to familiarize yourself with these limitations before executing trades.

4. Trading Hours: Options trading on Robinhood follows the same trading hours as the stock market. It is important to be aware of the market hours and any potential after-hours trading restrictions.

5. Taxes: Options trading may have tax implications, and it is advisable to consult with a tax professional to understand the tax consequences of your options trades.

Conclusion

Opening option trading on Robinhood can be a great way to diversify your investment portfolio and potentially generate profits. This guide has provided a comprehensive overview of everything you need to know about opening option trading on Robinhood.

From understanding the basics of options trading to funding your account, enabling options trading, and placing trades, we have covered all the essential steps to get started on Robinhood. It is important to educate yourself and carefully consider the risks involved before entering into any options trades.

Remember to continuously monitor your positions and stay informed about market trends and developments. With diligent research and careful risk management, you can navigate the world of options trading on Robinhood with confidence.


24 October 2023
Written by John Roche