How to Buy Calls on Robinhood

Buy calls on Robinhood by selecting a stock, tapping "Trade," choosing "Options," picking a strike price and expiration date, then executing your purchase.

Trading options has become a popular way to bet on your favorite stocks thanks to mobile brokers like Robinhood. It not only has commission-free trades on stock and ETF trades, but also zero-commission options trading. 

Options are derivatives which allow traders to control a 100-share position with a single security. When you buy an option, you buy a contract that grants you the choice (but not the obligation) to buy 100 shares of a certain stock if a specific price is reached within the contract’s duration. 

Call options are bullish bets on stocks. When you buy a call option, you’re predicting the stock will appreciate and you’ll have access to shares at a lower price later. Options can be bought and sold on exchanges or exercised if the strike price is reached. 

Leverage is great when the trade goes in your favor, but options are risky investments. If a call option doesn’t reach the strike price by the expiration date, it will expire worthless. 

With options, the possibility of losing all or most of your investment is on the table. Be sure to understand the risks of derivatives like options before buying them on Robinhood.

Do Your Research First

Buying calls on Robinhood is an excellent way to diversify your investments. However, you must do your research before investing cash in any asset. During your research, you will likely uncover stocks that are trending up. You might find reports pointing to companies that will release new products, higher quarterly earnings reports, or news of significant mergers. This type of information indicates the stock will most likely rise in value.

Set your budget and determine which stocks fall within that budget. As you will see below, you are buying calls in sets of 100. If you cannot afford a certain stock at that level, choose a different stock that suits your budget and gives you a high likelihood of success.

How to Buy Calls on Robinhood

Investing in options can help you potentially gain in the stock market. Buying call options is a popular strategy among traders. Robinhood offers a user-friendly interface and commission-free trading. It is suitable for both novice and experienced investors. This guide will explain the steps to buy call options on Robinhood. You will learn the key concepts and processes involved. Whether you want to hedge your investments or speculate on stock increases, understanding call options can improve your investment strategy. Let's explore how to use Robinhood's features and make informed decisions when buying call options.

1. Find Stocks You Think Will Appreciate Quickly

Buying a call option is a bet that a stock will go up, so you’re looking for stocks with a bullish outlook. How you find stocks for options trading depends on the type of trader you are.

If you have a short-term mindset, you’ll want stocks with an upcoming catalyst like earnings reports or drug trial results. Long-term investors will care more about sales growth and cash flows.

Regardless of how you do your due diligence, find stocks that fit your bullish criteria and locate them on the Robinhood app.

2. Make Sure Options are Available and Liquid

Options trading is commission-free on Robinhood, but that doesn’t mean completely free. Just like stocks, options have a bid/ask spread that rewards the brokers for placing the trade.

The difference between the bid and the ask price is the highest price a buyer is willing to pay versus the lowest price a seller is willing to accept.

Spreads can be a killer in options trading, especially if the securities aren’t traded frequently. High spreads are a sign of illiquid markets, which could mean trouble if you need to exit the position in a hurry.

Options contracts with low spreads aren’t only more cost efficient, but less risky since the market is liquid.

3. Choose a Strike Price and Expiration Date

Making money with options is difficult because you need to do more than just guess the direction of the stock — you need to nail a fairly accurate price within a limited timeframe. When buying a call option, you’ll need to make decisions on both a strike price and an expiration date.

The strike price is your break even point, where you think the stock will at least reach before the end of the contract (plus the premium paid to buy the option).

For example, if Apple is trading at $124, we might choose the $130 strike price since we think Apple is going up. The expiration date is the maximum timeframe of the trade.

If Apple shares haven’t reached $130 by the time the contract expires, the investment will be lost as the options expire worthless. Let’s give our trade some time to work, so we’ll choose the $130 AAPL call option expiring on 5/21.

Call options with strike prices above the current share price are called “out of the money” (OTM). If they expired today, the contract will be worthless and the investment would be zero.

If we bought $120 calls, they would be “in the money” and have intrinsic value since they could be exercised for 100 shares of AAPL at any time.

4. Determine How Many Call Options to Buy

Once you’ve identified the call option you want to purchase, you’ll need to decide how much capital to devote to the trade. Options trades allow you to use leverage and control a larger position, but you’ll need to buy contracts in lots of 100.

The price you’ll see quoted on Robinhood’s screen is the price of one contract, which can be confusing if you’re new to options.

The $130 AAPL 5/21 calls are listed at $5.25, which actually means a minimum of $525 in capital will be needed to open a trade.

If AAPL reaches the breakeven point and the option is exercised, the trader will need $13,000 to take on the whole position.

Of course, if the stock doesn’t reach $130 by 5/21, the $525 will be lost. Options are risky bets, so only use a small percentage of your capital when trading with them.

5. Execute Your Trade

Once you have your trade outline, you’ll need to execute it. Options can be purchased with market and limit orders just like stocks, so use a limit order to gain better control of your entry price.

Options can be volatile and expensive, which means limit orders are a must. Identify your ideal price and place an order to buy your calls. Once your limit price is reached, the order will execute and the options contracts will be deposited into your brokerage account.

Options can be bought or sold at any time before expiration and if the strike price is reached beforehand, the option can be exercised and the option writer will need to deliver the shares.

Why Should You Buy Calls on Robinhood?

Investing in options can enhance your portfolio. Buying call options on Robinhood is a good opportunity for both beginners and experienced traders. Robinhood offers commission-free trading, which means no hefty fees. Call options allow you to profit from stock price increases. You can control more shares with a smaller investment. Understanding call options can help you manage risk while taking advantage of market movements. In the next sections, we will discuss why purchasing call options on Robinhood is a smart investment choice.

Leverage and Potential for High Returns

Call options allow investors to control more shares with a smaller initial investment. This leverage means that if the underlying stock price rises above the strike price before the option expires, investors can see significant returns. A slight increase in the stock price can lead to percentage gains that exceed those from direct stock purchases. This potential for high returns makes call options appealing for those seeking to enhance their investment impact.

Flexibility in Strategies

Buying call options can have different roles in your trading strategy. You might use them to bet on price increases or to protect against possible losses in your current portfolio. Call options provide a flexible way to adapt your investment approach according to different market conditions. This adaptability is particularly useful in volatile markets, where you may need to make quick changes to manage risk effectively.

Commission-Free Trading

Robinhood is known for its commission-free trading model. This approach applies to options trading as well. You can buy and sell call options without paying extra fees. This cost-saving feature allows for more frequent trading activities. Traders can experiment with different strategies and positions without worrying about commission costs. As a result, both novice and experienced traders can take advantage of trading opportunities on Robinhood.

Considerations Before Buying Calls on Robinhood

Investing in call options can be an attractive strategy for traders. However, it is important to understand the risks before buying calls on platforms like Robinhood. Call options give the right to buy an asset at a set price within a certain time. This can lead to profit if the asset's value goes up. Buyers should consider factors like market conditions and their own risk tolerance. Time decay is also a critical factor. Knowing how options work and understanding Robinhood’s fees and tools is vital. This knowledge helps investors make better decisions. With a clear strategy, traders can successfully navigate call options.

Market Volatility

Market volatility significantly affects options prices. Higher volatility can cause larger price swings for the underlying stock. This directly impacts the value of call options. When market conditions are unstable, the potential for big fluctuations increases. This can lead to both greater gains and losses. Understanding current volatility trends helps you make informed decisions about options trading. It allows you to assess whether the market is favorable for buying call options.

Expiration Dates and Time Decay

Options contracts have specific expiration dates. It is important to know that their value decreases as these dates approach. This decrease is known as time decay. The decay speeds up as the expiration date gets closer. If the stock does not reach your target price in time, your call options might expire worthless. When considering a call option, think about the time left until expiration. Also consider the likelihood of the stock reaching your target price within that time. Balancing the expiration timeline with your market outlook is necessary for optimizing potential returns.

Understanding the Underlying Asset

Before exploring call options, you need to understand the underlying stock. Analyze the company’s financial health and recent performance. Look at broader market trends that may affect its price. Earnings reports, economic indicators, and industry developments can all impact the stock's movement. Research thoroughly and stay informed about news related to the company and its sector. This knowledge will help you predict potential price changes and make strategic decisions when buying call options. Being informed reduces risk and increases the likelihood of successful trading outcomes.

Robinhood Alternatives

Robinhood isn’t the only broker offering free and easy options trading. It remains the No. 1 mobile trading app, but plenty of competitors exist who might be better suitable to your investment strategy and trading style.

Take a look at some of the best Robinhood alternatives.

Understand the Risks 

Options trading has made plenty of headlines lately thanks to Reddit traders and meme stocks like GameStop (NSDQ: GME). But derivatives like options are far more risky than this crowd will like to admit. 

Most of the time, out of the money call options are never executed and expire worthless. If you have a conviction on a particular stock though, options can be a way to juice your returns without heaping on tons of capital. 

Just be aware that call options can go to zero quickly if the stock moves in the opposite direction. Robinhood grants options permission regularly and makes it easy to buy and sell calls and puts. 

But to trade options is far from easy. Be sure to understand the risks before engaging with derivatives.

Frequently Asked Questions