Robinhood Options Trading: Is It Right For You?
How would you like to trade options without paying even a single penny in commissions? If that sounds appealing to you, check out the brokerage firm Robinhood.
You might think that the idea of trading options for free is an unrealistic concept. In this case, it isn’t.
You pay $0 for stock, options, exchange-traded fund (ETF), and even cryptocurrency trades on Robinhood. But this deep discount brokerage comes with serious caveats. Robinhood isn’t for everyone.
Want to learn more? Read on.
How Does Robinhood Make Money?
You’ve decided to jump into the world of options. Good for you. But first, make sure you’re suited for this type of trading.
Since Robinhood offers commission-free trades, how does the company make money?
Robinhood isn’t running a charity. There are two ways that the brokerage takes in revenue.
The first is that Robinhood offers a Gold program that charges a monthly subscription fee. You’ll need to join that program if you want to trade on margin.
The second way that Robinhood makes money is with something called payment for order flow (PFOF).
Here’s how PFOF works: when you place an order, Robinhood sells the right to fill your order to wholesale market makers. Then, the market makers earn a small profit when they fulfill your order. They split that profit with Robinhood.
It’s Not All Good News
Still, you do get what you pay for. Since you pay nothing for trades on Robinhood, don’t expect a whole lot of extras or personalized customer service.
Specifically, you won’t have access to no-transaction fee mutual funds. If you’re a long-term investor who likes to stuff some cash into a reputable mutual fund on a monthly basis, you’ll have to look elsewhere.
Robinhood also doesn’t allow you to set up a retirement account.
Want to speak with a human being in customer service? You’re out of luck. The company only offers email support. Many of the other well-known brokerages offer phone support as well as email support.
In fact, when it comes to customer service, Robinhood frequently gets poor reviews. The system simply isn’t designed for people who need a lot of hand-holding.
Finally, your quote data might be delayed by as much as 20 minutes. That simply won’t work for you if you’re an active trader.
So What’s the Attraction?
With all of those strikes against it, why do people flock to Robinhood?
Two words: free trades.
Some investors don’t mind the fact that Robin Hood lacks certain features, if they can place their trades for free. They’re saving money by using a no-frills trading platform.
Robinhood is the Southwest Airlines of online brokerages.
If you’re looking for a full-service platform with plenty of state-of-the-art bells and whistles, Robinhood isn’t for you.
On the other hand, if you know which securities you want to trade and you’d like to save money on commissions, Robinhood offers a bare-bones tool that will help you generate a positive return on your capital.
Once your Robinhood account is approved, you can move money around easily.
The company uses an instant verification system with many of the major banks. That means you won’t have to go through the hassle of reporting on micro-deposits as you would with some other financial platforms.
You can transfer up to $1,000 and use it for trading right away. If you decide to deposit a larger amount of money, you’ll have to wait for four or five business days before you can trade with all of it.
Robinhood allows you to schedule automatic cash transfers to your account on a weekly, bi-weekly, monthly, or quarterly basis.
As of this writing, Robinhood doesn’t have an account minimum. That means you can get started trading with a limited amount of cash.
Keep in mind, if you want to trade on margin, you’ll need a portfolio value of at least $2,000. That’s because of a regulation from the Financial Industry Regulatory Authority (FINRA).
Also, a margin account will cost you a monthly fee. More on that below.
Finally, you’ll get instant access to your cash (under $1,000) when you sell stocks. You won’t have to wait for the settlement period (typically three days) to finish.
Robinhood supports trading stocks, options, ETFs, and cryptocurrency.
If that cryptocurrency part tickles your fancy, you’ll be happy to learn that you can trade in Bitcoin, Bitcoin Cash, Litecoin, Dogecoin, Ethereum, and Ethereum Classic.
Robinhood also supports advanced trading. The platform allows you to place limit orders, stop orders, and stop limit orders.
Additionally, you can place orders that are good for the day or good until cancelled (GTC).
If you’re a day-trader, Robinhood will allow you to track up to three trades in a rolling, five-day period.
Easy to Use
Robinhood doesn’t have many of the features you’d find on other trading platforms. That’s one of the reasons why it’s easy to use.
The whole process of signing up for an account is a breeze. According to Robinhood, approved customers are notified in less than an hour.
You can sign in to your account on your smartphone by entering a password or with a fingerprint. Of course, you’ll need a smartphone that supports fingerprinting ID if you want to use that feature.
The only aspect of the user interface that you might find confusing is its lack of a “trade” button. Instead of trading a stock (or other security) right out of the gate, you first search for it. Then, you can trade it.
What about options trading? Is that easy as well?
With Robinhood, you can place trades with no commissions and no per-contract fee. There’s also no exercise fee and no assignment fee.
In other words, it’s free.
Robinhood also supports multi-leg orders. If you’re interested in complex options trading like spreads and strangles, you’re in good shape.
If you’re an active options trader, you’ll probably want to trade on margin. That means you should be aware of Robinhood’s fee structure.
It’s not cheap.
That’s because the company charges you for your entire monthly balance, even if you don’t place any trades on margin.
The other brokerages tend to only charge you for your active margin balance. But Robinhood charges you just for the benefit of trading on margin.
That’s a distinction that could amount to a pretty big difference. Be sure to run the numbers before you sign on with Robinhood.
Right now, the monthly fee amounts to a roughly 5% charge per year. That will add up to quite a bit if you have a high balance.
Should You or Shouldn’t You?
If you’re a sophisticated investor who knows how to place trades without assistance from a customer support rep and you’d like to save money on commissions, you should absolutely check out Robinhood.
On the other hand, if you’re looking for more in terms of service from your online brokerage, you should consider signing on with some of the more expensive platforms.
To underscore a familiar truism: you do get what you pay for.