Fintech startup Robinhood launched its platform with a mission: to disrupt the financial services industry and make trading accessible for everyone. Its vision is the “democratization” of investing, and it gives particular attention to potential investors in the Millennial generation.
As a group, Millennials are struggling with unprecedented financial challenges, such as staggering student loan debt. Robinhood aims to open wealth-building opportunities to inexperienced investors through inexpensive access to the stock market.
For those considering a Robinhood account, the question is whether the platform’s sleek, no-frills tools are a good fit. Aside from buying and selling stock, does Robinhood offer enough access to take advantage of other popular investment strategies?
The good news is that as of early 2018, Robinhood offers opportunities to trade options. In addition, it is moving into cryptocurrency and cash management. It’s an exciting time to be an investor, and Robinhood wants to ensure that everyone can participate.
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A Brief History of Robinhood
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When it rolled out in 2014, Robinhood offered commission-free trades on stocks and ETFs through an exclusive Apple app.
In 2015, the service expanded to include an Android app, and by 2018, Robinhood added a website. Along with these enhancements, Robinhood increased the types of trades and transactions available to account holders, making it a more appealing choice for those just starting out in the market.
One of the most exciting 2018 additions to Robinhood’s menu of services was options trading. Investors gained the opportunity to buy and sell options without paying excessive fees.
In fact, unlike the competition, Robinhood charges no commission or per-contract fees, and no exercise or assignment fees. That’s a big deal for small traders.
Trading Robinhood Options Explained
If you are getting started in options trading and you plan to stick with basic strategies, Robinhood’s website and app make the process simple.
The brokerage platform allows you to buy single leg calls and puts, and you can sell covered calls if you open a long stock position. You can also sell cash covered puts, and you can exercise in-the-money options.
The mobile app gives you an opportunity to experiment with additional multi-leg options strategies. Examples include call and put credit spreads, call and put debit spreads, iron condors, straddles, and strangles.
Just keep in mind that there is limited advice available on whether and how to use these strategies, so its important to do additional research before making an investment.
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Can You Day Trade Options On Robinhood?
When you buy and sell the same options contract on the same day, you make a day trade.
Some investors make a career out of trying to capitalize on small changes in the market by making many rapid transactions throughout the day. If you have a cash account with Robinhood, you can make as many same-day transactions as you wish.
However, if you have one of Robinhood’s Instant or Gold accounts, there may be some restrictions.
If the following criteria are met, these investors are referred to as Pattern Day Traders:
- Executes four or more day trades within a five-business-day period
- Number of day trades is greater than six percent of total trading activity during that period
- Uses a margin account to fund the trades
It’s easy to get into financial trouble through day trading when the transactions typically rely on a large amount of credit – referred to as a margin account in the investment world.
To prevent inexperienced investors from getting in over their heads, FINRA (Financial Industry Regulatory Authority, Inc.) created some safeguards. Robinhood allows you to buy and sell options same-day, but if you qualify as a Pattern Day Trader, you must meet FINRA requirements.
The Pros and Cons of Trading Options On Robinhood
Robinhood’s simple, streamlined design is part of the reason it can continue to support commission-free trading.
Unlike most online trading platforms, Robinhood doesn’t offer users extensive data and analysis on individual securities. The expectation is that investors will find this research elsewhere.
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The strategy is a sound one – there is no shortage of free investment information online – and by skipping this step, Robinhood cuts its own expenses considerably.
When using Robinhood, you may give up some of the more sophisticated features offered by competitors like Charles Schwab, TD Ameritrade, and e-Trade Financial. For example, your dashboard can’t be customized, and you are unable to run extensive analysis and reporting on your portfolio.
Perhaps the biggest obstacle for beginners is that there is no live customer support. If you have trouble, the answers to your technical questions may be listed in the site’s FAQ section – otherwise, you could be in for a long wait.
Is Robinhood a Good Choice for Options Trading?
Before committing to any low-fee/no-fee trading platform, consider this: Robinhood and its industry peers are for-profit companies. If you aren’t paying fees, how do they make money?
Robinhood facilitates your trade orders by sending them to market makers. These are the firms that hold the securities you are buying and selling.
You can think of it like a shop for stocks, options, and other investment products. Market makers pay services like Robinhood to send over your orders. However, there is some question as to whether trades from commission-free platforms get the same high-priority treatment as their more expensive competitors.
When you trade through Robinhood, you can rely on your order being executed precisely. What you can’t count on is high-quality execution. In a fast-moving market, that means your order might not be first in line. The downside to this is that you could miss out on price improvement.
Depending on how an order is routed, some investors may get a higher price for sales and a lower price for purchases than expected.
Analysts have determined that Robinhood clients don’t tend to enjoy as much price improvement as investors with other firms. It’s a minor issue when you aren’t trading large quantities, but as you invest more of your money, you could be missing out.