Overview
This lecture provides a step-by-step guide to trading options on the Robinhood app, covering setup, key terms, process to buy/sell contracts, and practical tips for risk management.
Setting Up for Options Trading
- Ensure your Robinhood account is approved for options trading by navigating to account settings and applying if needed.
- Options trading requires at least a moderate risk tolerance; it's not advised for those with a very low risk tolerance.
- There are different options trading levels; higher levels often require a margin account.
Navigating the Robinhood App
- Use the search function to find a specific stock by its ticker symbol (e.g., AAPL for Apple).
- Access the options trading interface by selecting a stock and tapping "Trade" > "Trade Options."
- Options contracts display available expiration dates at the top; these determine when a contract expires.
Understanding Option Contracts
- Two main types: Calls (profit if price rises) and Puts (profit if price falls).
- "Out of the money" contracts (strike price above current price for calls, below for puts) are cheaper and riskier.
- The option price shown must be multiplied by 100 to get the total contract cost.
- "Zero DTE" (Zero Day to Expiration) contracts carry high risk as they expire the same day.
Buying and Selling Options
- To buy, select a contract, enter the quantity, set a limit price (maximum you're willing to pay), and submit.
- Bid price: best for sellers (quick sale); Ask price: best for buyers (quick purchase).
- Maximum loss when buying options is the amount paid for the contract.
- Selling before expiration is possible and often advised to manage risk.
- Adding contracts to a watchlist helps track their performance without risking money.
Practical Example & Risk Management
- Example shown using Apple and Netflix options for live trading, highlighting real-time decision-making.
- Use stops and targets to manage risk and potential reward.
- Demonstration included both a purchase and a sale, showing profit/loss mechanics in action.
Key Terms & Definitions
- Options Contract — A financial contract giving the right, but not obligation, to buy/sell stock at a specific price by a certain date.
- Call Option — Profits if the stock price goes up.
- Put Option — Profits if the stock price goes down.
- Strike Price — The set price at which the option can be exercised.
- In the Money — Option with intrinsic value (profitable if exercised now).
- Out of the Money — Option with no intrinsic value (not profitable if exercised now).
- Expiration Date — The last day an option can be exercised.
- Bid Price — The highest price a buyer is willing to pay for an option.
- Ask Price — The lowest price a seller is willing to accept for an option.
- Zero DTE — Options contracts expiring the same day.
Action Items / Next Steps
- Set up and verify options trading access in Robinhood.
- Practice tracking options by adding contracts to your watchlist.
- Review key terms and concepts before trading real money.