How to Trade Options on Robinhood in 2024

Learning how to trade options on Robinhood is a great way to get into the options market because Robinhood offers commission-free options trades and no contract fees.

Options can give investors a lot of leverage, which makes them an appealing new asset to explore. There’s also a considerable risk, especially if you don’t know what you’re doing.

Below you’re going to learn everything you need to know about option trading on Robinhood, from how to enable options trading, the exact steps for specific options trades, and how to understand the risks.

First, How To Enable Options On Robinhood

Before you can start trading options on Robinhood, you need to enable options on the trading platform. This takes just a few minutes and is required.

How to enable options on Robinhood:

1. Log into Robinhood and click “Account”

You can find the “Account” link on the home screen of the desktop version of Robinhood. Mobile users can access the “Account” section by clicking on the person icon on the bottom right corner of the screen.

2. Go to your Settings

On the desktop version, you can find a link to your settings at the bottom of the Account drop-down menu. On mobile, click on the icon with three horizontal bars in the upper righthand corner of your screen and choose the settings option.

3. See if options are available

Your account must be fairly active to trade options on Robinhood, and you’ll also need proven trident experience. Eligible traders will see an “Options Trading” link in their settings. For desktop, this link will be at the bottom of the menu on the left hand side of the screen. For mobile, the link will be at the bottom of your screen. Click the “Options Trading” link.

4. Enable options

You can now click the “Enable” button, and you may be asked a series of questions to verify your day trading experience. You’ll need to complete the questions to complete your request and get started.

How To Trade Options On Robinhood

Once you’ve enabled options trading, here’s how you place any kind of options trade on Robinhood:

1. Tap the magnifying glass icon in the top right hand corner of your home page
2. Search the name or ticker symbol of the stock you want to trade options for
3. Tap on the name of the stock you want to trade
4. Tap “Trade” in the bottom right hand corner of the stock’s info page
5. Tap “Trade Options”

Things To Consider About Trading Options On Robinhood

Options trading is more complex than stock trading, and here are some terms and key concepts you should consider before getting started:

• Premium: The price of buying or selling an option contract, and Robinhood lists these on the right of their options trading platform
• Strike price: This is the price when the options contract becomes beneficial to you. It’s the agreed upon price of the security as outlined by the option contract — Robinhood lists these high to low, and you can scroll through the platform to see different strike prices.
• Expiration date: Date and time when the contract ends, and it’s displayed below the strategy and underlying security on Robinhood’s options trading platform
• Call option: Kind of option that gives you the ability (not obligation) to buy an underlying asset at a specific price. Robinhood allows long calls and covered calls.
• Put option: Type of option that gives you the ability (not obligation) to sell an underlying asset at a specific price.
• Good-til-Canceled orders: These orders stay open for 90 days or until you cancel it
• Good-for-Day orders: This order type is automatically canceled at market closed on the day it’s executed.

Options Trading Strategies Available On Robinhood

Robinhood has two levels of options trading: Level 2 and Level 3. Level 2 trades are where new options traders will start, while Level 3 trades are much more advanced and have considerable risk.

Let’s dive in and explore the different basic options strategies available to Level 2 options traders on Robinhood:

Buying a call option

Buying a call option (or a “long call” as it’s sometimes called) means you’re opening a contract that gives you the right, not the obligation, to buy shares of a stock at a certain price (the strike price) up until the expiration date. You pay the premium, which is an upfront cost, for the ability to exercise your right.

Many consider buying a call when they want to benefit from upward momentum, and ideally the stock price would increase. Your potential gain is theoretically infinite, while the risk of loss is limited to what you paid for the premium.

How to buy a call option on Robinhood:

1. Click the “Buy” and “Call” buttons. These are at the top of your screen in a horizontal line of buttons.
2. Choose a Strike Price. When you’re buying a all the strike price will always be higher that the current stock price, and this is the price when buying an option becomes beneficial for you. However, if the strike price isn’t met by the expiration date, the contract will expire.
3. Choose an Expiration Date. To the right of the “Buy” and “Call” buttons, you will see a drop down menu that lets you select an expiration date. Keep in mind that options with a longer time to expire generally do better, but they are more expensive to buy.
4. Determine how many options contracts you want to buy. Each option you buy gives you the right to buy 100 shares at the strike price.
5. Execute your trade. Once you’ve set your parameters, look them over, and click the button to execute your trade. Your order will go on the open market for Robinhood to fill.

Selling a covered call

This is when you open a contract that gives you the obligation to sell shares of a stock you already own at a certain price up until a set date. You receive a premium for selling this contract. It’s called “covered” because you already own the shares you’re going to sell.

Selling a covered call is beneficial if the stock price stays mostly flat or increases slightly. Both profits and losses are limited with this type of options trade.

How to sell a covered call option on Robinhood:

1. Click the “Sell” and “Call” buttons. You can find these buttons at the top of your screen in a horizontal line of buttons.
2. Choose a Strike Price. When you’re selling a call option on Robinhood, the goal is for the equity to not hit the strike price before the contract expires. The further the strike price, the safer the options contract is for the seller.
3. Choose an Expiration Date. With call options, the further out you set the date, the more risk you’re accepting when you sell, but it also means you collect more of a premium.
4. Determine how many options contracts you want to buy. For each call option you sell, you will be obligated to sell 100 shares at the predetermined price of the contract.
5. Execute your trade. Once you’ve set your parameters, look them over, and click the button to execute your trade. Your order will go on the open market for Robinhood to fill.

Buying a put

Buying a put option (or a “long put”) means you’re opening a contract that gives you the right, not the obligation, to sell shares of a stock at a certain price up until a set date. Robinhood only allows you to exercise a put option if you own shares of the underlying asset.

Put options are profitable when the price of the underlying stock falls in value. You can potentially experience a significant gain, but both your gains and losses are limited with a put option.

How to buy puts on Robinhood:

1. Click the “Buy” and “Put” buttons. You can find these buttons at the top of your screen in a horizontal line of buttons.
2. Choose a Strike Price. Your options trade won’t become profitable unless the price of the underlying asset falls below the strike price. The closer the strike price is to the current price, the safer the trade.
3. Choose an Expiration Date. The general rule is that the further out you set the expiration date, the better your chances are.
4. Determine how many options contracts you want to buy. For each contract you buy, you’ll have the right (not the obligation) to sell 100 shares of the underlying asset.
5. Execute your trade. Check your parameters once again and execute your options trade.

Selling a cash covered put

This strategy is also called “writing a cash-secured short put” meaning you open a contract where you have the obligation to buy shares at a certain price up until a set date. You also must have cash to cover your obligation, and you receive the premium upfront for selling this type of options contract.

Cash covered puts are generally beneficial if the price stays mostly flat or increases in the future. Your maximum profit potential is limited, while the maximum potential loss is significant.

How to sell cash covered puts on Robinhood:

1. Click the “Sell” and “Put” buttons. You can find these buttons at the top of your screen in a horizontal line of buttons.
2. Choose a Strike Price. The goal is for the price of the underlying asset to increase, which is when this options trade is really beneficial. So the farther the strike price is from the current price, the better.
3. Choose an Expiration Date. The general rule with this options trading strategy is the closer the expiration date is to the current date, the safer it is for you.
4. Determine how many options contracts you want to buy. For each contract you buy, you’ll be obligated to buy 100 shares.
5. Execute your trade. Verify the parameters you’ve set and trade.

Robinhood Options Trading Fees

Robinhood was one of the first brokerages to offer commission-free trading, and this includes $0 commissions for options trades. Robinhood doesn’t even charge option contract fees, which is pretty incredible considering brokerages typically charge anywhere from $0.40 to $1.50.

Like other brokerages, though, Robinhood is required to charge regulatory trading fees. These fees are set by law and the same for every brokerage.

• Regulatory: $5.10 per $1.000,000 of principal (sells only) and rounded up to the nearest penny.
• TAF: $0.000130 per share (equity sells) and $0.00218 per contract (options sells). This fee is rounded up to the nearest penny and no greater than $6.49.

M$M tip: If you’re wondering how Robinhood is able to offer zero commission trades, we highly recommend reading How Robinhood Makes Money.

Robinhood’s Options Trading Tiers

You can not trade options on Robinhood until you are a Level 2 trader.

Robinhood looks at your trading experience, investment objectives, and financial situation to assess what level you can trade at. Depending on the parameters you meet, you’re given a Level 1, Level 2, or Level 3 designation. Robinhood and other brokerages use these levels to mitigate some risk.

Here are the options trading strategies Robinhood offers Level 2 and Level 3 options traders:

• Level 2: Long calls, long puts, covered calls, and cash-covered puts
• Level 3: Call credit spreads, put credit spreads, call debit spreads, put debit spreads, iron condors, calendar spreads, iron butterflies, and box spreads.

It’s worth mentioning here that Robinhood only allows for three day trades within a 5 business day trading window before you’re considered a pattern day trader. You’ll need at least $25,000 in your margin account to trade more than 3 trades in that 5-day window.

Understand The Risk Before You Trade

Options trading has inherently more risk than basic stock trading, and different options trading strategies carry even more risk. Let’s take a look at one type of options trade available on Robinhood and the associated risk:

Long call example

A long call is pretty straightforward, and it’s betting on the fact that the strike price of the underlying value of the asset will increase by the expiration date.

For example, if you bought a long call option on stock XYZ which is trading at $40 a share with a strike price of $50, you are betting that the stock price will increase to $50 a share or more. You pay a premium for the option, and we’ll say it’s $10 for a block of 100 shares of XYZ, making the premium $10 x 100 = $1,000 premium.

The premium you pay gives you the right to buy the stock at $50 even if the price goes up. If the price of stock XYZ goes up to $60 a share, then you can exercise your option and buy the shares for $50 apiece. You can even trade your option to another investor and earn income there.

The risk comes in if the price of the underlying asset does not meet the strike price. If stock XYZ decreases to $30 a share, it doesn’t make sense to buy it for $50 a share. Your option contract gives you the ability not to buy XYZ, but you’ve still paid the premium and now you’re out $1,000.

Different types of Robinhood options trades have different risks, and you need to understand your potential losses before you start trading.

How To Trade Options on Robinhood: The Final Word

The steps outlined in this article explain how to trade different types of options strategies on Robinhood. But first, you need to enable options trading, which you can do by going into your Account Settings.

Before you start buying options or executing other strategies, make sure you understand the complexities and risks. Options trading can offer serious benefits if you play it smart and focus on the long-term. They add leverage to your portfolio because there’s the potential to control more shares than you could afford to own if you had to buy them directly.

Because it’s commission-free and has $0 contract fees, Robinhood’s user-friendly app is a great place to learn how to start trading options. It still lacks some of the most complex types of options trades, so when you’re ready to flex your abilities, research your options thoroughly and keep playing it smart.