Things to Consider When Trading Options on Robinhood

Dividend Investing

The opportunity for a higher return is why investors trade options on Robinhood.

For example, if you were offered the choice between a 2% gain from a stock and a 71% gain from an option, which would you choose?

robinhood trading platform

Let me ask that another way: If you had an opportunity to make $20 on every $1,000 risked on a stock, or about $710 for every $1,000 risked with an option, which would you choose?

This seems like a no-brainer, right?

Look at Apple (AAPL), for example.

Since bottoming out around $123 a share on June 3, Apple rocketed to a high of $145 in weeks for a return of 18% on the stock. However, if I instead bought the Apple July 16, 2021 125 call option on June 3, I could have banked a return of about 519% as the call option ran from $3.23 to $20. That’s the key reason traders are using options.

Unbelievably, though, some traders would opt for the 18% gain—all because they believe options are too difficult to understand.

But that couldn’t be further from the truth. In fact, let’s uncover just how easy it is to trade options, by looking at some bare-bones basics.

Options 101: The Bare Bones Basics

An option is a contract (a call and a put) that gives you the right—but never the obligation—to buy or sell a stock at a set price over a set time frame. A call option, also known as a derivative, gives you the right to buy an asset at a set price over a set period. You would buy a call if you are bullish. A put option gives you the right to sell an asset at a set price over a set period. You would buy a put if you are bearish. Puts are similar to shorting a stock, because you are betting on the short side of stock.

Next time, we’ll look at the expiration date, strike prices, and premium, and start digging into how to place an options trade.

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