Buying options doesn’t receive much praise from the trading community. In fact, I’m certain as I write this that you’ve heard the common quip about buying options, “most options expire worthless”. That phrase has been tossed around more times than a beach ball in July. Thus, you’ve probably avoided long options at any cost. However, let’s conduct some due diligence here and consider them more completely.

In today’s post I’d like to discuss some of the pros and cons to buying options. Specifically, buying options on Robinhood. Like every options strategy, a sound plan and the execution of that plan make the difference in winning or losing.

Long Options vs. Short Options

While neither is considered truly “better” than the other, each have their place. Consider the short option. Typically, a trader sells an option to capitalize on a higher than normal implied volatility, thus, a larger premium. That coupled with theta decay and a more volatile underlying can certainly become an enticing proposition. However, its important to remember that for every option sold, someone has to accept the other side.

The other side of course being, the purchase of that option. But why purchase the option when short options seem to offer an easier path to profit? One primary reason, long options offer a unique feature not easily found elsewhere, limited risk and unlimited upside. The allure of 1000% gains or even higher is attractive to the gambler in us all. The downside is we don’t know when implied volatility may collapse or a larger than expected move may derail the position. Additionally, coming back from a long option that has lost significant value is not probable. Think, “most options expire worthless”.

Robinhood – Behind the Hood

Robinhood was created to be a commission-free stock trading phone application. Easy enough a toddler could start trading stocks. Nothing more and nothing less. They identified a niche and they created a product to capitalize on that niche. They didn’t realize, in my opinion, their product would ultimately revolutionize the entire financial investment industry. Once they shook the apple tree, users naturally wanted more from the company. We wanted everything; stocks, options, crypto, etf’s… we wanted it free and we wanted it simple. To which they kindly obliged.

It’s only in knowing that you might understand why short options on Robinhood could present a problem. Simply, Robinhood wasn’t designed to be a full service brokerage. I don’t believe they possess the industry IQ nor the capability of larger brokerages, with regard to options or alternative investment products. Of course, this could change or I could be wrong but in my opinion duct taping a rocket booster to a donkey doesn’t mean that donkey will win the Kentucky derby. He merely receives consideration for the race.

Buying options on Robinhood
I can win!

What am I saying? I’m saying that Robinhood is a great place to buy and sell. This is easy and its in the fabric of the product they’ve created, from the first line of written code. Now, don’t misunderstand what I’m saying. Robinhood can and certainly does make good on each of their offerings. I wonder though, do they have the acumen of, lets say, Charles Schwab? I would hope not, because if they do, Charles may want to get back to work.

Why Buying Options on Robinhood is the Easy Choice for Me

With that out of the way, I’ll share my experience trading options on Robinhood. Not ideal. That’s it. It works but it doesn’t work great. I’ve traded, iron condors, calendars, diagonals, spreads, custom spreads, and just about any other strategy you could imagine and I feel about the same for each of them. What I’ve found is that for a position to fill the strategy has to be more favorable to the opposing party.

For instance, suppose I wanted to close a bull put spread at a 50% profit target. In my experience, the only way that’s happening is if I accept a 40% profit. Additionally, I cannot begin to state how many times I’ve cancelled and re-entered orders at increasingly unfavorable prices just to get filled. I can vividly remember a trade on SPY that was about $100 dollars in profit that I was eventually able to have filled for $75. The contracts were liquid and that was way less than the natural price but that’s what it took to exit the position. And while $25 dollars doesn’t sound like much, $25 dollars times 1000 trades certainly does.

For more on this concept, have a look at this reddit string. Might be eye-opening!

That being said, I never experienced the same headaches just buying options on Robinhood. The fills were generally instant unless the price I set was unreasonable. For this reason and this reason alone, I stopped trading different options strategies on Robinhood and limited myself solely to buying and selling single options.

Greed and Long Options don’t Mix

This brings me to the final topic. Greed. That nasty word that topples even the best of economies. When buying long options on Robinhood, just avoid the greediness of unlimited upside. Hoping for long options to earn 1000% isn’t realistic over the course of a trading career. Sure, we’ll all have the occasional home run but it could never come close to the number of losing trades we’re certain to endure.

To be successful trading long options means setting a realistic goal, and exiting at that goal. Consider this, which is better, one contract that earned 1000% or 50 contracts that earned 20%? Neither, they both total to 1000%. The only difference is its much easier to reach a 20% profit target. I would argue that with the appropriate amount of time virtually every trade has the potential to hit that mark. Additionally, if only a 10% target we’re achieved I don’t know one person that would remain disappointed with a 500% return. Now, there’s much more to consider but I think it makes my point.

Focus on small, consistent returns, then look back at the much larger percentage return. You’ll be glad you did.

God bless,

Jeff