Robinhood recently released options trading as part of their marketing strategy, but there are a few very important things you need to know about Robinhood options trading before you use it. Read the full Robinhood review for 2018.
Robinhood Options Trading is VERY Limited
We have compiled a helpful page that lists the twelve most popular options trading strategies with profit/loss charts. In general, there are two types of options trades: risk-defined and risk-undefined.
Risk-defined options trades are strategies like credit and debit spreads and long options positions, i.e. a long call or a put credit spread.
Risk-undefined options trades are where the money is to be made. These are your short puts and short calls, short strangles, etc. And guess what? Robinhood doesn’t permit these strategies. Short out of the money puts mathematically have a much higher probability of expiring worthless than they do expiring with intrinsic value, i.e. in the money.
Remember, at expiration, if an option is out of the money, it will be totally worthless. So if you think you can buy put options on your least favorite stocks commission free with Robinhood, and strike it rich when the market crashes, think again. Sure, you won’t pay a commission to Robinhood, but you’ll most likely lose all your money. Robinhood doesn’t care, because they can still show to their VC investors that their clients are trading options and business is growing.
Robinhood is for Losers, Really
Current Robinhood users and potential new clients need to be aware of the fact that Robinhood is indeed for losers. Actually, when you think about it, this fact is congruent with the idea of “Robinhood”… the guy who steals from the rich and gives to the poor. In this case, the “poor” are Robinhood’s clientele.
Because Robinhood only allows clients to trade entry-level options trading strategies, clients are unwittingly doomed from the beginning. This is not a joke. Institutional investors seldom use options to begin with (because they have ample amounts of capital and don’t need the added leverage that options provide).
How Professionals Trade Options
When institutional investors and professional traders do use options, it’s often to take advantage of something known as “premium decay.” Options are decaying instruments. This means, overtime, the value of any given options contract that is out of the money asymptotically approaches zero.
Therefore, if traders sell these options while there is some value, and the value is proven to go to zero after a specific amount of time, this can be a lucrative trading strategy. It is known as selling options. Read more about selling call options and selling put options.
Short options positions present a way to make money that stocks to not present. It is that simple. Since Robinhood doesn’t permit short options trading, there is no opportunity to make money trading options with Robinhood.
Robinhood Options Trading Review
Overall, our Robinhood options trading review is to stay away. In the long run, losing all of your money by buying call or put options is far worse than spending $0.50 per options contract.
With tastyworks, all options trades are only $1.00 and all closing trades are completely free. This means you only have to pay $0.50 per contract.
For options traders looking to sell options, tastyworks is the cheapest online broker.
The $0.50 per contract is beyond worth it. You’ll be able to sell options with only $2,000 in an account, and you’ll get options analytics software that can give you an edge over the rest of the market.
Trading Options the Right Way
We have made $20K in a few days by buying call options, but we don’t recommend this as trading strategy. We got lucky.
In general, buying options is dangerous. It’s not like buying a stock. An options contract is a derivative, whose price is based off of a stock, but an option’s price will decay overtime, especially if it is out of the money. Only allowing clients to buy options and sell risk-defined options spreads is just not right.
We would love to see the number of profitable Robinhood options traders; our guess is that it isn’t pretty. All Robinhood has done is made it faster for novice traders to lose all of their initial capital.