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Should You Trade Options on Robinhood?

Should You Trade Options on Robinhood?

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Robinhood is a very popular trading platform that completely disrupted the brokerage market. The company’s product came to market with the focus of making the financial world more accessible to the general population, especially for those who are younger or newer to the markets, and for traditionally underserved populations. 

Most notably, the platform offers commission-free trading, a feature that forced other large brokerage firms to lower or stop charging a commission for trades. 

But Robinhood has had its issues and has run into problems with regulators like the SEC. The platform has also been blamed for helping develop poor financial habits and behaviors— including creating or incentivizing behavior that goes against rational financial decision-making. But that’s largely the company’s business model: Get new traders trading and reap the benefits.

And one way that Robinhood has been luring in new users? Options trading.

Robinhood earnings leave it with “options”

Robinhood’s most recent earnings announcement (Q4 and FY 2021) did not, however, meet Wall Street’s expectations. That’s only added to the fact that Robinhood’s leadership has been feeling the pressure lately, as other brokerages have adapted to compete better with the company for younger users, and some bad press related to, well, a number of things.

In an effort to boost earnings and get back on track, Robinhood’s launched an options contract watchlist. This gives users more insight into options contract trading—a fairly advanced segment of the market that can lead to big returns (or big losses). Options trading, in short, is mostly reserved for professional traders.

But Robinhood has brought options trading to the masses. But options are a speculative investment, and when options trading goes badly, it can go very badly. For instance, a couple of years back, a 20-year-old trader committed suicide after mistakenly thinking that he had lost $730,000 trading options. His family sued Robinhood, and the company settled in 2021.

While there may be demand out there for options trading, it begs the question: Should Robinhood have opened the floodgates for inexperienced traders to start swapping options?

Why is Robinhood allowing options trading?

The company is like any other: It’s trying to make money. And options trading is lucrative for Robinhood. Options trading alone brought in 61% of the firms trading revenue for their third-quarter trading revenue. As such, options trading is a new product that can drive revenue. As a publicly-traded company, it only makes sense to delve into it.

And, in the company’s eyes, it’s really up to individual users to make sure they know what they’re doing when it comes to trading—be it stocks, options, or anything else. 

However, options trading is probably something that inexperienced or younger traders should avoid—the risks are too high, and some advanced knowledge of the markets and trading is needed. Sure, you could luck into some big returns, but generally, it’s probably best to learn the ropes by trading stocks (or better yet, sticking to a buy-and-hold strategy!) before jumping into options. 

Also, check out potential alternatives to Robinhood if you’d like some more guard rails—there are many out there. And most financial professionals will tell you, too, that investing shouldn’t be looked at as a short-term or speculative thing. Instead, you should look to be average—stick to low-cost index funds that follow major indices. 

Over time, this strategy is much more likely to yield higher returns, rather than chasing the new hot stock, or trying your hand at options trading when you don’t quite know what you’re doing.

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