How to Buy Calls on Robinhood

Trading options has become a popular way to bet on your favorite stocks thanks to mobile brokers like Robinhood. It not only has commission-free trades on stock and ETF trades, but also zero-commission options trading. 

Options are derivatives which allow traders to control a 100-share position with a single security. When you buy an option, you buy a contract that grants you the choice (but not the obligation) to buy 100 shares of a certain stock if a specific price is reached within the contract’s duration. 

Call options are bullish bets on stocks. When you buy a call option, you’re predicting the stock will appreciate and you’ll have access to shares at a lower price later. Options can be bought and sold on exchanges or exercised if the strike price is reached. 

Leverage is great when the trade goes in your favor, but options are risky investments. If a call option doesn’t reach the strike price by the expiration date, it will expire worthless. 

With options, the possibility of losing all or most of your investment is on the table. Be sure to understand the risks of derivatives like options before buying them on Robinhood.

Do Your Research

Buying calls on Robinhood is an excellent way to diversify your investments. However, you must do your research before investing cash in any asset. During your research, you will likely uncover stocks that are trending up. You might find reports pointing to companies that will release new products, higher quarterly earnings reports, or news of significant mergers. This type of information indicates the stock will most likely rise in value.

Set your budget and determine which stocks fall within that budget. As you will see below, you are buying calls in sets of 100. If you cannot afford a certain stock at that level, choose a different stock that suits your budget and gives you a high likelihood of success.

How to Buy Calls on Robinhood

1. Find Stocks You Think Will Appreciate Quickly

Buying a call option is a bet that a stock will go up, so you’re looking for stocks with a bullish outlook. How you find stocks for options trading depends on the type of trader you are.

If you have a short-term mindset, you’ll want stocks with an upcoming catalyst like earnings reports or drug trial results. Long-term investors will care more about sales growth and cash flows.

Regardless of how you do your due diligence, find stocks that fit your bullish criteria and locate them on the Robinhood app.

2. Make Sure Options are Available and Liquid

Options trading is commission-free on Robinhood, but that doesn’t mean completely free. Just like stocks, options have a bid/ask spread that rewards the brokers for placing the trade.

The difference between the bid and the ask price is the highest price a buyer is willing to pay versus the lowest price a seller is willing to accept.

Spreads can be a killer in options trading, especially if the securities aren’t traded frequently. High spreads are a sign of illiquid markets, which could mean trouble if you need to exit the position in a hurry.

Options contracts with low spreads aren’t only more cost efficient, but less risky since the market is liquid.

3. Choose a Strike Price and Expiration Date

Making money with options is difficult because you need to do more than just guess the direction of the stock — you need to nail a fairly accurate price within a limited timeframe. When buying a call option, you’ll need to make decisions on both a strike price and an expiration date.

The strike price is your break even point, where you think the stock will at least reach before the end of the contract (plus the premium paid to buy the option).

For example, if Apple is trading at $124, we might choose the $130 strike price since we think Apple is going up. The expiration date is the maximum timeframe of the trade.

If Apple shares haven’t reached $130 by the time the contract expires, the investment will be lost as the options expire worthless. Let’s give our trade some time to work, so we’ll choose the $130 AAPL call option expiring on 5/21.

Call options with strike prices above the current share price are called “out of the money” (OTM). If they expired today, the contract will be worthless and the investment would be zero.

If we bought $120 calls, they would be “in the money” and have intrinsic value since they could be exercised for 100 shares of AAPL at any time.

4. Determine How Many Call Options to Buy

Once you’ve identified the call option you want to purchase, you’ll need to decide how much capital to devote to the trade. Options trades allow you to use leverage and control a larger position, but you’ll need to buy contracts in lots of 100.

The price you’ll see quoted on Robinhood’s screen is the price of one contract, which can be confusing if you’re new to options.

The $130 AAPL 5/21 calls are listed at $5.25, which actually means a minimum of $525 in capital will be needed to open a trade.

If AAPL reaches the breakeven point and the option is exercised, the trader will need $13,000 to take on the whole position.

Of course, if the stock doesn’t reach $130 by 5/21, the $525 will be lost. Options are risky bets, so only use a small percentage of your capital when trading with them.

5. Execute Your Trade

Once you have your trade outline, you’ll need to execute it. Options can be purchased with market and limit orders just like stocks, so use a limit order to gain better control of your entry price.

Options can be volatile and expensive, which means limit orders are a must. Identify your ideal price and place an order to buy your calls. Once your limit price is reached, the order will execute and the options contracts will be deposited into your brokerage account.

Options can be bought or sold at any time before expiration and if the strike price is reached beforehand, the option can be exercised and the option writer will need to deliver the shares.

Robinhood Alternatives

Robinhood isn’t the only broker offering free and easy options trading. It remains the No. 1 mobile trading app, but plenty of competitors exist who might be better suitable to your investment strategy and trading style.

Take a look at some of the best Robinhood alternatives.

Understand the Risks 

Options trading has made plenty of headlines lately thanks to Reddit traders and meme stocks like GameStop (NSDQ: GME). But derivatives like options are far more risky than this crowd will like to admit. 

Most of the time, out of the money call options are never executed and expire worthless. If you have a conviction on a particular stock though, options can be a way to juice your returns without heaping on tons of capital. 

Just be aware that call options can go to zero quickly if the stock moves in the opposite direction. Robinhood grants options permission regularly and makes it easy to buy and sell calls and puts. 

But to trade options is far from easy. Be sure to understand the risks before engaging with derivatives.

Frequently Asked Questions