Robinhood is the cheapest and easiest way to invest in the stock market. But what if you want more than just stocks? You can trade options with Robinhood, even if you day trade or are a beginner on a small budget.
Since it’s commission-free, Robinhood is a great platform to buy calls on. With options, you can control more shares than you could otherwise afford. Many investors eventually explore options because of the returns and the ability to use leverage.
This article will teach you how to buy calls on Robinhood. When you buy a call option, you’re predicting the stock will appreciate and you’ll have access to shares at a lower price later. Options can be bought and sold on exchanges or exercised if the strike price is reached.
With options, the possibility of losing all or most of your investment is on the table. Be sure to understand the risks of derivatives-like options before buying them on Robinhood. Better yet, this guide will teach you everything else you need to know about options trading on Robinhood.
Table of Contents Hide
- What is a call option?
- How does it work?
- What is the difference between call option and the put option?
- What are the risks and rewards of the call option?
- How to buy calls option on Robinhood?
- Find the stock that will rise quickly
- How to place a call option on the Robinhood app?
- Good for day versus good till canceled orders
What is a call option?
Call options are exciting and versatile financial instruments that let you buy the stock of your favorite company at a fixed price, no matter what the current market price is.
It’s a way to make big gains from the stock market without actually owning the stock outright. Here we explain how to buy calls on Robinhood.
If you want to buy companies like Apple or Facebook, you need to know how to buy calls on Robinhood. This is a way to use your smartphone or computer in the palm of your hand to make better decisions in your everyday life.
How does it work?
Options are popular with investors because of their flexibility. Let’s say you’re an investor who believes that the price of a stock will increase soon but you’re not sure when. You can buy a call option that gives you the right to purchase the stock at a particular strike price when you choose to exercise your rights under the contract.
For example, let’s say you believe that the price of Apple will go up significantly within the next six months. You can buy a call option that gives you the right to purchase 100 shares of Apple at $200 per share by six months from today for a premium of $7 per share.
If the stock rises above the strike price, the call option you bought is in the money (ITM). In this case, you have the right to buy the stock for the strike price even though it’s worth more in the open market. If it doesn’t rise above the strike price by the time the option expires, or if it falls below, your option becomes worthless.
What is the difference between call option and the put option?
There are two kinds of options. One lets you buy a certain amount of a certain stock at a certain price. The other lets you sell a certain amount of a certain stock at a certain price. If you’re buying, you hope the price will go up but if you’re selling, you hope it goes down.
Put options give you the right to sell something at a specific price. Call options give you the right to buy something at a specific price. You can use them both to protect yourself from big changes in prices.
What are the risks and rewards of the call option?
- 1. When you buy Calls on Robinhood, the most you can lose on the trade is what you paid for it. If the stock doesn’t go above the strike price by the expiration date, the option will expire worthlessly, and you won’t lose any additional money. The tradeoff is that if the stock goes up, you won’t make as much money as if you simply bought 100 shares of the stock.
- 2. What is the potential reward of buying a call option on Robinhood? Technically, it is infinite. If you buy a call option, you could make money if the stock goes up (at times even if it doesn’t). As a result, your call option will continually increase in value until you sell it. Call options have a defined lifespan though, and depending on which call option you buy, different factors might put the odds against you.
- 3. Sellers of the call option will lose their stocks to buys when its price is above the strike price with their compensation being the premium the buyer paid for the stocks. (a price that is way below the market price).
How to buy calls option on Robinhood?
Do your research
Learning how to buy calls on Robinhood is a great way to diversify your investments. However, you must do your research first. During the researching process, you are likely to find stocks that are trending up. You will also uncover stocks that are about to release new products, have higher quarterly earnings reports, or news of significant mergers.
If you see this type of information, the stock is going to rise because you know it is becoming more valuable. Set a budget and figure out which stocks will fall within that budget and give you a high likelihood of success (at least a 50% increase).
When investing in stocks, stick to the ones you can afford and maximize your results by buying low and selling high.
Find the stock that will rise quickly
If you’re looking to buy call options on Robinhood, make sure you have a bullish outlook. You can find stocks with upcoming catalysts like earnings reports or drug trial results or sales growth and cash flow.
Options must be liquid and available
While Robinhood offers commission-free options trading, you should be aware that options aren’t 100% free. When you buy or sell an option, you will pay a bid-ask spread. The difference between the price you pay when you buy an option (your cost basis), and what you receive on a sale (your proceeds), is your maximum loss.
Select a strike and expiratory date
You can buy calls on Robinhood. You’ll need to pick a strike price and an expiration date. The strike price is your breakeven point. You’ll look for the stock to at least go up to that before the end of the contract (plus the premium paid to buy the option).
For example, if Apple is trading at $1244, you could choose the $1300 strike price since you think Apple is going up. The expiration date is how long you have until the trade expires.
Choose how many call options to buy
Once you’ve identified the call option you want to buy, you’ll need to decide how much capital you want to allocate to the trade. Robinhood allows you to control a larger position on a comfortable amount of money, but if the stock price doesn’t reach the option price at maturity, your money will disappear. Be careful and use a small percentage of your capital when buying options.
Execute your trades
It’s really in your best interests to use limit orders when purchasing options, as it helps you control your entry price. First of all, identify your ideal price and place a limit order to buy those options. This will guarantee that you won’t spend more money than you wanted to on the options contracts.
You can always buy or sell them any time before expiration and if your strike price is reached beforehand, you can exercise the options and force the writer of the option contract to deliver the shares at your desired purchase price.
How to place a call option on the Robinhood app?
- Tap the magnifying glass in the top right corner of your home page
- Search the stock you’d like to trade options for
- Tap the name of the security you’re looking for
- Tap Trade in the bottom right corner of the stocks or ETF’s Detail page
- Tap Trade Options
Good for day versus good till canceled orders
The most common order types are Good-til-Cancel and Good-for-Day. A Good-til-Cancel order remains open for 90 days until it’s filled, or you cancel it.
A Good-for-Day is automatically canceled at market close on the day it’s placed if it doesn’t execute.
How long does it take to get approved for options on Robinhood?
Approval on Robinhood takes around 24 hours, with the app verifying users via email within one trading day.
The verified user will need to link their bank account to begin trading, with micro-deposits being issued by Robinhood to do so.
These take up to 48 hours to arrive in the user’s bank.
The steps above should be all you need to get started with options trading on the Robinhood. Keep in mind that it can be risky business, so you have to follow your trading strategy to the letter and keep your emotions out of it.
Before you execute any options trade on Robinhood or any other brokerage platform, make sure you look closely at the spread between the bid and ask prices for an asset.
Like stocks, options trades are part of the commission-free trading program. However, they aren’t necessarily free, as they’re baked into the spread.
The larger the spread is, the higher your total cost will be. So, make sure to get a discounted asset by checking out brokerages with lower spreads.