Let’s start by understanding what call options are. Call options give the holder the right, but not the obligation, to buy an underlying asset at a specified price, called the strike price, before a specified expiration date.
Why Trade Call Options?
There are various reasons why investors trade call options. Some of the most common reasons include:
- Speculation: Investors can profit from a rise in the underlying asset’s price without buying the actual asset.
- Hedging: Call options can be used to protect a portfolio from losses in case of a market downturn.
- Leverage: Call options can provide significant leverage, allowing investors to control a larger position with a smaller investment.
What is Robinhood?
Robinhood is a commission-free trading platform that allows users to trade stocks, ETFs, and options. The platform has gained popularity for its user-friendly interface and its mission to “democratize finance for all.”
How to Buy Calls on Robinhood: A Step-by-Step Guide
Step 1: Create a Robinhood Account
Before you can start trading call options on Robinhood, you need to create an account. To do so, visit the Robinhood website or download the app, and follow the prompts to sign up.
Step 2: Apply for Options Trading
Once you have a Robinhood account, you need to apply for options trading. Go to your account settings and find the “Options Trading” section. Follow the prompts to complete the application.
Step 3: Fund Your Account
To start trading, you need to deposit funds into your Robinhood account. You can do this by linking your bank account and transferring funds directly.
Step 4: Select the Stock or ETF
After funding your account, you’re ready to start trading call options. First, search for the stock or ETF you want to trade options on. You can use the search bar at the top of the screen.
Step 5: Access the Options Chain
Once you’ve selected the stock or ETF, scroll down to the “Trade” button and click on “Trade Options.” This will bring up the options chain, where you can see all available call and put options.
Step 6: Choose the Expiration Date
Options have expiration dates, after which they become worthless. Choose the expiration date for your call option by tapping on the date at the top of the options chain.
Step 7: Select the Strike Price
The strike price is the price at which you can buy the underlying asset if you exercise the call option. Choose the strike price that best aligns with your investment strategy.
Step 8: Choose the Call Option
After selecting the strike price, you’ll see two options – calls and puts. To buy a call option, click on the “Buy” button under the “Calls” column.
Step 9: Review and Submit Your Order
Before submitting your order, review the details, including the premium, break-even price, and max loss. If everything looks correct, click on “Review” and then “Submit.”
Step 10: Monitor Your Investment
Congratulations, you’ve successfully bought a call option on Robinhood! Now it’s essential to monitor your investment and decide whether to exercise, sell, or let the option expire.
Key Terms to Know When Trading Call Options
Here are some important terms to understand when trading call options:
- Premium: The price you pay to buy a call option.
- Break-even price: The price at which your option trade becomes profitable.
- Max loss: The maximum amount you can lose on the option trade (the premium paid).
Managing Your Call Options
Once you’ve bought a call option, there are three possible actions you can take:
- Exercise the option: If the stock price is above the strike price, you can exercise the option and buy the underlying asset at the strike price. This can be profitable if the current market price is higher than the strike price plus the premium paid.
- Sell the option: You can sell the option before the expiration date if you believe the stock price will not rise further or you want to lock in profits. Selling the option allows you to recoup some or all of the premium you paid.
- Let the option expire: If the stock price remains below the strike price, it’s generally not profitable to exercise the option. In this case, you can let the option expire and lose the premium paid.
Tips for Success in Call Option Trading
To increase your chances of success when trading call options, consider these tips:
1. Develop a Clear Strategy
Having a clear strategy is essential when trading call options. Determine your investment goals, risk tolerance, and time horizon before entering a trade. This will help you choose the right options and manage your positions effectively.
2. Educate Yourself
The more you know about call options and the underlying assets, the better your chances of success. Educate yourself on the basics of options trading, as well as the stocks or ETFs you’re interested in.
3. Diversify Your Trades
Diversification is crucial for managing risk in options trading. Spread your trades across different stocks, sectors, and expiration dates to minimize the impact of a single trade on your overall portfolio.
4. Keep an Eye on Market News
Stay up-to-date on market news and events that could affect your call options. This will help you make informed decisions about when to enter or exit a trade.
5. Practice with a Virtual Account
If you’re new to options trading, consider practicing with a virtual account before risking real money. This can help you become familiar with the platform and develop your trading skills.
Risks of Trading Call Options on Robinhood
While trading call options on Robinhood can be profitable, there are risks involved. Here are some potential risks:
- Loss of premium: If the stock price doesn’t rise above the strike price before the expiration date, you could lose the entire premium paid for the option.
- Limited upside potential: When you buy a call option, your potential profit is limited by the stock’s price movement. If the stock price doesn’t increase significantly, your gains may be minimal.
- Market volatility: The value of call options can be affected by market volatility, which can lead to sudden price fluctuations and increased risk.
The Bottom Line
Trading call options on Robinhood can be an exciting and potentially profitable endeavor. By following the step-by-step guide provided above, educating yourself on the basics of options trading, and implementing a clear strategy, you can increase your chances of success. Remember to always be aware of the risks involved and manage your trades accordingly. Happy trading!
FAQs | How to Buy Calls on Robinhood?
Q1: Why can’t I buy calls on Robinhood?
A: There could be several reasons for not being able to buy calls on Robinhood, such as not having options trading approval, insufficient funds in your account, or trading restrictions on certain stocks. Ensure you have options trading enabled and sufficient funds to cover the trade.
Q2: How do I run a call option on Robinhood?
A: To run a call option on Robinhood, simply follow the step-by-step guide provided earlier in this article. It covers selecting the stock, accessing the options chain, choosing the expiration date and strike price, and placing the order.
Q3: How does buying a call option work on Robinhood?
A: Buying a call option on Robinhood involves paying a premium for the right to buy an underlying asset at a specified strike price before the expiration date. If the asset’s price rises above the strike price plus the premium paid, the option can be exercised for a profit or sold before expiration.
Q4: How do I unlock call options on Robinhood?
A: To unlock call options on Robinhood, go to your account settings and apply for options trading. Complete the application process, which includes answering questions about your investment experience and risk tolerance. Once approved, you can start trading call options.
