How to Buy Options on Robinhood

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Contributor, Benzinga
September 20, 2021

Robinhood, which popularized the concept of "gamified" investing, accomplished what financial advisors have tried to do for years: get younger Americans excited about investing and planning for the future. 

As a commission-free service that also extends to the options market, Robinhood encourages beginners to ramp up their risk profile. Many investors eventually explore options because they use leverage. You can control more shares than you could otherwise afford by buying them directly with options.

The options market can have potential downsides with leverage and other intricacies. We’ll review more on options, and you can even learn how to buy calls on Robinhood. Read our Robinhood app review for more information. With Robinhood options explained, you can expand your portfolio and partake in an investment tool that can be quite lucrative.

  1. Understand the Basics

    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.

  2. Recognize Your Risks

    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.

  3. Know Key Concepts

    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.

  4. Click “Trade Options” on Robinhood

    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."

  5. Learn Robinhood’s Platform

    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.

  6. Place the Right Type of Order

    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.

Disclosure: *To earn interest, a cash balance is needed. If you have a margin balance, there is no cash balance to earn interest. Interest rates for cash sweep and margin investing can change at any time. Margin investing is an optional feature. Not all investors will be eligible to invest on margin. Bigger Instant Deposits are only available if your Instant Deposits status is in good standing.

Robinhood Alternatives

Although Robinhood is arguably the most convenient platform to trade stocks and options, this convenience has a price tag of its own. For instance, you don’t have the full breadth of investing selections as you would in more advanced offerings, thereby limiting you to what options contracts are available.

As previously mentioned, Robinhood limits your ultimate designation to Level 3. At a broader level, this limitation protects the company from potential legal and financial liability issues. In addition, it prevents rookie traders from taking on more risk than they should handle. However, if you really want to take your trading game to the next level, you should consider Robinhood alternatives.

Below is a list of potential offerings that may be better suited for your options trading ambitions.

  • securely through Tradier's website
    securely through Tradier's website
    Best For:
    Inexpensive Options Trading
    Read Review
  • Securely through Interactive Brokers’ website
    Securely through Interactive Brokers’ website
    Best For:
    Active and Global Traders
    Read Review
  • securely through AvaTrade's website
    securely through AvaTrade's website
    Best For:
    Non US Forex Trading
    Read Review
  • securely through Plus500's website
    securely through Plus500's website
    Best For:
    Mobile Users
    Read Review

    86% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

  • securely through Webull's app
    securely through Webull's app
    Best For:
    Intermediate Traders and Investors
    Read Review
  • securely through TradeZero's website
    securely through TradeZero's website
    Best For:
    Overall Global Broker for Short Selling
    Read Review

A Convenient and Powerful Platform for Options

You may recognize Robinhood as a convenient way to buy stocks. But if you want to climb the ladder of trading vehicles, Robinhood also provides an easy, intuitive way to purchase options contracts.

Options are a powerful tool for investors. However, education is key. You’ve got to know what you’re doing to maximize profit potential and minimize risk. After you have Robinhood options explained, you can try this investment tool and determine how well it works for you.

Though Robinhood’s offers an unbeatable platform in terms of ease of use, it does have limitations, particularly if you wish to adopt more advanced options trading strategies and tactics or want to open up the full spectrum of investing selections. Do your research and choose the platform that best suits your needs.

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