How to Buy Options on Robinhood

While options are traded like stocks, stocks and options are not interchangeable. While some overlap exists, they are separate concepts, each with a different end purpose.

Primarily, options represent a type of derivative security. This is to say that options do not have intrinsic value of their own. First, their price is derived from the stock with which they are associated.

Second, options are contractual agreements that give the buyer the right to purchase the underlying stock at a specified price at a predetermined date. In contrast, the seller is obligated to follow through on those terms. Depending on market conditions, certain options present themselves as either very valuable or worthless.

One of the biggest risk factors involving options is that they have expiration dates. Unlike publicly traded securities that only go to $0 in the case of underlying business failure, options have a predefined timeline.

You might think this sounds quite dangerous for your portfolio, and that’s correct! Typically, buying options tends to be a binary affair, meaning you either make money or lose everything you put into them.

But to be fair, this dramatically increased risk profile relative to bread-and-butter stock buying strategies offer tremendous reward potential. Therefore, you should understand your personal risk tolerance before engaging options.

Not only do purchasing options contracts give you leverage if you have a bullish take on a particular stock, but you can also advantage the opposite side of the trade — benefitting on bearish price action. You want Robinhood options explained before you continue, especially regarding bearish trading.

To go long (bullish), you buy call options, which give you the right to buy shares of the underlying stock (always sold in 100-share lots) at a specific price (called the strike price) at a predetermined time (expiration date).

To go short (bearish), you buy put options, which give you the right to sell shares of the underlying stock (again, in 100-share lots) at the strike price, no matter the market price.

Keep in mind that you don't need to wait till the expiration date to exercise options. Once your options are "in the money" (that is, the strike price is favorable to your position), you may be able to sell your options at a premium above what you paid for them.

Conversely, if your options are "out of the money," their value will usually have a discount against the price you paid for them. Options in which the strike price matches that of the underlying security are "at the money."

If you learn how to buy calls on Robinhood instead of buying brand new options, you can purchase the option at a low price from someone else, wait for the option to mature and collect the profits. Buying calls reduces your overhead and potentially increases profits. For example, if you buy calls for $3 a share (the premium on the option) instead of $50 a share, you’ve already saved money.

Now that you have some of the basics under your belt, here are the specific steps to take to trade options on Robinhood:

- At the top right corner of the homepage, hit the magnifying glass icon.
- Search for the stock for which you would like to purchase options.
- If the stock is available, go ahead and tap it.
- At the bottom right corner in the target stock's "Detail" page, you'll see a green "Trade" button which you can click.
- Next tap "Trade Options."

As with every platform, Robinhood has its own intricacies. For instance, if you want to know how to sell stock on Robinhood, it may differ from other platforms. Here's where to look for critical information on your options trading.

Expiration date: Easily the most important factor to consider, the expiration date is presented below the strategy and underlying stock. You can also scroll right to see the expiration schedule of future dates. While a longer expiration date gives you greater time for your options to become profitable, they are sold at a higher premium, all other factors being equal.

Strike prices: Strike prices are listed from high to low and you can scroll vertically to see the full range of available choices.

Premium: The premium represents the mark price of the option — the option's value. The percent change is how much that particular contract moved during the session. These figures are located on the right of your screen.

When using Robinhood for trading options, you have the ability to place good-til-canceled or good-for-day orders.

Good-til-canceled orders remain open for 90 days until they are filled or you cancel them prior to filling.

Good-for-day orders are exactly like they sound — they will either be filled or canceled at the close of the trading session.
As you progress in your options trading journey, you will have the option to advance to higher levels. In Robinhood, the maximum designation you can achieve is Level 3. In Level 4, traders can sell short calls and short puts, which are incredibly risky strategies where the potential loss is unlimited.

Obviously, such access is limited to the most advanced traders. Someday, you may wish to learn how to transfer your stocks off Robinhood and play with the alpha wolves on a more sophisticated platform.