Robinhood is a free-trading app that allows investors to trade stocks, options, exchange-traded funds, ADRs, and cryptocurrency at $0 commissions or fees. It was founded in 2013 by Vladimir Tenev and Baiju Bhatt. It has launched a mobile app in 2015. Its mobile app is easy to use. In 2017, Robinhood also launched its website.
As of 2020, Its valuation stands out to be $ 11.2 billion and has 13 million users account. Most of its customers are young and inexperienced traders. In December 2017, it disrupted the online whole brokerage industry by providing free options trading at the mobile app. Since then, many online brokers such as Fidelity, Charles Schwab, TD Ameritrade, etc., offer $0 fees and commission.
Pros and cons of trading in Robinhood
- Simple and easy-to-use interface.
- Zero commission and fees charges on the options trading and ETFs.
- The minimum account requirement is $0.
- Fractional trading in the shares and ETFs is allowed.
- The Recurring Investments feature is recently added, enabling the customer to regularly schedule automatic investments in various stocks and ETFs.
- You can trade with a small capital account.
- You cannot trade Mutual funds, bonds, Futures on the Robinhood.
- Non-taxable securities like IRAs, 401(k) are not available on the Robinhood platform.
- You cannot trade OTC Bulletin Board (Penny Stocks) financial instruments.
- There are fewer trading tools available when compared to other online brokers.
- Compared to other online brokers, Research and analysis tools are not up to the mark.
- Quote Provided may be delayed up to several seconds.
Lets us see the steps how to trade the options on the Robinhood platform
Step – 1: Type the stock name you want to trade in the search box, for example, Tesla.
Step – 2: You will see the interface like this. The current price of the stock you searched shows in the top left, and the price chart appears. You can analyze the price trend ranging from 1 day to 5 years. If you scroll down, you will find information about the company.
Step – 3: For trading options, you have to click the trade tesla options.
Step – 4: Then, you will see the various strike prices of the call options. You can click on Buy/Sell and Call/Put and select the Expiration date from the drop-down list. You can see the current price of the underlying stock is in the middle of the option chain. Call Options below the current price are said to be in-the-money(ITM) and above the current price are said to be out-of-the-money(OTM).
Step – 5: Choose the strike price you expect Tesla to move until the contract’s expiration.
Let’s assume we are currently bullish on Tesla, trading at $693.40 and expecting the stock to go up. So we are buying a Call Option of the Strike price of $700, Expiring on 8th January 2021.
Lets us understand some important terms of the contract
- Strike-Price: It is the price we are betting. We expect Tesla will go beyond $700 on or before 8th January 2021.
- Break-even: There will be no profit and no loss at this point.
Break-even= Strike Price +/- Premium paid [$(700 + 21.45)].
- Price: The amount we have to pay for buying the right to buy/sell the contract. If we buy a call option, we get the right but not an obligation to buy the underlying security at the predefined strike on or before the expiration.
Step – 6: Click on the plus sign near the price to activate the review order box.
Step – 7: Type the number of the contracts you want to trade and then click on the review order button to place the order. By default, Robinhood takes the limit order price, i.e., the bid and ask price average.
While trading options, you should always consider some important factors that affect your trade success rate and options prices
- Volume: It is the number of trades that happen in the period, says in a day.
- Open interest (OI): OI is the number of derivatives contracts (futures and options) open in the market. We can judge the liquidity of the contract from the OI.
- Implied Volatility (IV): IV tells the expected range the stock can move up or down. Say, for example, XYZ stock is trading at $100, and its implied volatility is 20%. It implies that there are 68% chances that stock will move in the range of $80 to $100
Option Greeks play a vital role in the option prices
- Delta: Delta measures the change in the options price with a 1 unit change in the underlying asset.
- Gamma: Gamma measures the change in the delta with the change in the underlying stock price.
- Theta: Theta measures the time decay. It means how much the option loses its value every day until the expiration.
- Vega: Vega is the sensitivity of the IV. It tells how much the options price change with the 1 % change in the IV.
- Rho: Rho measures the change in the contract price with a change in the risk-free rate.
You can track the performance of your position with many of our MarketXLS templates and research tools. Various built-in functions such as Analytical, Historical, and Streaming help you do Analytical Research and fundamental Research. Various utility functions, Stock Screener, Charts, research tools, options chains, OTC stocks (penny stocks), Financial statements, etc., help in analysis and comparison, which increases the trade’s success rate.
None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.
The article is written to help users collect the required information from various sources deemed an authority in their content. The trademarks, if any, are the property of their owners, and no representations are made.
To know more about the Robinhood trading platform, click here.
To know more about options trading, click here.
To know more about option greeks, click here.