Is Options Trading on Robinhood Easy (& Profitable)

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Robinhood, the stock trading app that lets people buy and sell stocks without paying any commission fees, has opened the floodgates of retail users hungry to try their hand at trading options.

But is it a good and easy app to use and will you lose money or make money? That’s the million dollar question!

What Are Options? (The Basics)

First, let’s cover the basics on options.

Options are a type of financial contract that gives the holder the right to buy or sell an underlying asset at a specific price within a certain timeframe.

Options trading is generally considered to be a more risky investment than buying stocks, but it can also lead to higher potential profits.

For example, let’s say you think that ABC stock is going to go up in price. You could buy shares of ABC stock outright, or you could purchase a call option on ABC stock. If the stock price does increase, you would make a profit on your investment.

However, if the stock price goes down, you would lose money. In a nutshell, that’s what options are. Now if you want to learn more, keep reading!

What Are Options (More Detailed Explanation)

Options are contracts and derivatives of stocks that you can use to leverage stocks. What that means is you can bet a stock will go up or down using less money than you would if you just bought or sold stocks.

Every option contract is equivalent to 100 shares of a company. There are well over 5000 and growing companies that have listed options for trading. Most large companies are optionable.

The Options market these days have exceeded the total daily stock market volume trading itself of 405 billion. Every day the value of options traded publicly is over 450 billion dollars.

You can trade options with almost any brokerage when you apply for an options level account with your brokerage.

Buying and Selling Options

Essentially, you can either buy or sell options.

At the most basic level, there are two types of options — a call option and a put option. This is way oversimplified, but basically a call option is betting a stock will go up or down. A put option is like an insurance for if a stock goes up or down. When you buy or sell an option, you are buying the right to buy or sell shares at a set price and you pay a price (called the “Premium”) for that option.

You can learn more about options through my channel but let me get straight to the strategy that will help you retire early.

Options can be risky if you’re buying options. But when you sell options, you actually reduce risk while also limiting your upside. In other words, you’re not trying to get rich quick. In the case where we want to retire early, we’re going to go the safest route I know with options and a strategy Warren Buffet often utilizes himself.

Warren Buffet’s Preferred Strategy: Selling Put Options

We’re going to simply sell put options. Particularly put options far out to collect more Premium upfront. What that means is if the stocks falls to a certain price, we’ll be forced to buy 100 shares of that company. But because we collected so much premium already, if the stock falls — we get both a discount on the stock AND the high premium we collected. So the stock would really have to fall a lot before we have unrealized loss on the trade.

And the worst case scenario if we’re forced to buy 100 shares is we hold onto those shares and wait until it eventually rides back up. We can also sell calls with those shares to collect more money.

If the stock doesn’t fall and goes up, we simply collect the premiums, which can usually amount to 20–40% of the collateral you need.

This essentially hedges our stock picks against volatile and even bear markets.

Okay, if all that doesn’t make sense, rewind a bit and read through again or comment below and I’ll answer your questions.

I cover how to retire trading options with less than you think in a video here!

So, options trading is definitely not for everyone. But if you’re willing to take on some additional risk, it could be a great way to boost your investment returns.

I cover more on Trading with Options on My Channel:

https://www.youtube.com/c/InvestwithDan123