Search

Options Trading On Robinhood - 7 Deadly Mistakes To Avoid [2021]

Chances are, you are trading options on Robinhood right now.

Robinhood
Robinhood Portfolio

Introduction


Since 2017, Robinhood has been gaining over 3 million sign ups per year from traders in the USA.


Currently, they have 13 million users on the platform, equaling 3.9% of the US Population.

Robinhood Userbase
Robinhood Users

Projected for 2021 would be 16 - 17 million total users, or 5.2% of the US population.


With the rise of user growth, options trading on Robinhood has also skyrocketed.


After answering a few questions, Robinhood then decides if you're suitable for this riskier trading instrument.


And congrats! You are now approved for buying and selling stock options right from your phone!


What fate lies for you ahead after this?


Well, according to Barrons.com, 90% of all options traders are at a net-loss.


If you don't treat options trading on Robinhood seriously, you will just be a part of this statistic.



Here are 5 Deadly Mistakes to Avoid Trading Options On Robinhood



Mistake #1. Buying Put Options on Robinhood


A very colossal mistake beginner Robinhood options traders make is buying puts.


Since the year 1825, the US stock market has been rising 8.25% year over year.


When you buy put options or sell call options on Robinhood, you are betting against this 200 year uptrend in stocks.


Do you believe the market will stop this 200 year uptrend just because you bought a put?


The answer is usually no. Prices rise over time and thats a fact.


On average, the markets are trending up 85% of the time and downtrending 15% of the time.


You will sooner or later find out that buying puts is not profitable for long term.


In fact, more money is lost shorting the market than any other type of mistake.


Furthermore, when you buy a put, you are betting against the smartest people of the United States.


These people work everyday of their lives to make sure their business goes up in value over time.


Another reason you don't want to buy put options on Robinhood (or any other brokerage) is because it's very easy to get short squeezed.


A short squeeze is created when there is too many sellers for one asset and not enough buyers. Then, one or many big buyers comes in and creates upwards movement in the price.


This upwards movement causes a cascade and avalanche of all those sellers' stop losses.


These stop losses force the sellers to close their position by buying up the shares at market price, causing further upwards price movement. A noticeable short squeeze happened in $GME stock in January of 2021.


You do not want to be stuck in a short squeeze. We can easily prevent being stuck in one by not buying puts or shorting the market in any other way, i.e shorting futures or selling call options.


How to Avoid This Deadly Mistake: Do not buy puts or short the market in any way, ensuring your portfolio rises with the market over time.


Robinhood Options

Mistake #2. Buying Too Little Theta


Options trading on Robinhood is not easy even if you think it is.


One of the biggest mistake options traders make is not buying enough time (theta) til expiration.


You are playing a losing battle if you believe you can time the market with 100% accuracy.


Instead, your strategy should incorporate guaranteed short term loss into it, meaning you should plan for losses in your long term options trading strategy.


One way you can incorporate short term loss but still be profitable in your trading is by buying more time til expiration in your Robinhood options trade.


As a general rule, you should have at least 3 months of theta in your options trade to avoid getting squeezed out of your position early.


The more theta you have, the more time you give yourself for the trade set up to play out.


Time is the most valuable thing in the world, this is true for your options trades as well.


If you are playing weeklies with options on Robinhood, you are playing with fire.


Weeklies are options contracts that expire within 7 days or less.


These contracts are very short term and do not allow for any short term volatility in the markets that may happen, and usually does happen.


You can win short term with weeklies, but long term you are destined to fail 90% of the time with them.


It is not advised to buy weeklies.


How to Avoid This Deadly Mistake: Always have at least 3 months of expiration in your options contacts. This ensures you will survive short term price volatility and can stick around in the markets long term.



Mistake #3. Trading Options On Robinhood With No Trade Volume Or Spread.

Example of an options contract on Robinhood with little trade volume and a very loose spread.


Only 79 contracts traded for an average of $23 per contract, only $1817 in daily trade volume for these options contracts, and they have a 100% spread between the big and ask, these contracts are terrible to buy.


If you bought these, you'd have to pay a 50% premium to sell them right away- that's terrible.


Compare that to these:

8,845 contracts traded for an average of $184 per contract, about $1,627,480 in trade volume, better yet, the spread between bid price and ask price is only $0.04.


These contracts would be very liquid to buy for the average options trader, meaning you can buy these and exit right away for only a 2% haircut, compared with the 50% haircut from trading the low volume and terrible spread contracts in the previous image.


As you can see, the high volume, tight spread options contracts are exponentially much safer and easier to enter or exit, leading to a much more pleasant trading experience.


Usually low market capitalization stocks and options contracts with low amount of time til expiration will have terrible spreads.


How to Avoid This Deadly Mistake: Make sure there is a tight spread of at least 5% and under between the bid and ask price of your options contract. This ensures a highly liquid trade, as long as there is a few hundred thousand dollars worth of trade volume in the option contract as well. You'll be able to enter and exit trades safely.



Mistake #4. Going All In On 1 Trade.

Robinhood Options trading

The number 1 sure-fire way to blow up your account while options trading on Robinhood is to go all in on 1 trade.


You may believe you have the best trade idea ever, you're about to make loads of money you think to yourself, then you open up Robinhood and go all in on your highly confident trade idea. Your heart races as you wait.


What happens next?


More often than not, you just blew up your portfolio with that one big giant trade.


Why did you do that?


Greed. Greed is a powerful emotion that drives us to take higher risk than normal. By being greedy, you went all in on 1 trade hoping for a sweet payday.


Greed causes more destruction in options trading on Robinhood than you would expect.


It is one of the main reasons new options traders lose all their capital early on and never learn the real secrets of the markets.


How to Avoid This Deadly Mistake: Proper diversification is key to long term success.

You will have losing trades, you must plan for them. A winning strategy involves the winning options trades overpaying for the losing ones.


When you are properly diversified, your winners will pay more than enough for your losing trades. Remember, you will have losing trades, it's more lucrative to prepare an options trading strategy that incorporates losing trades.



Mistake #5. Buying Cheap, Far Out of the Money Options


When you first begin options trading on Robinhood, you might not have that much capital to begin with.


In fact, the average Robinhood account size is only $1,000 - $5,000.


This causes many options traders on Robinhood to buy cheap, far out of the money options.


This is a major deadly mistake.


Cheaper options trades tend to have lower delta, the amount the value moves by for every $1 movement in stock price.


The lower the delta of an option, the lower chance the option will expire in profits for you.


More expensive options have higher deltas, which means they are more likely to become profitable at expiration.


It is advisable that you stick with options contracts that have a delta of 0.40 and above. This indicates the options contract value will go up by $0.40 for every 1 dollar in stock price movement.


How to Avoid This Deadly Mistake: Paying more premium for an options trade with a higher delta is the way to go when you are options trading on Robinhood long term.


Higher premiums options usually have bigger players involved in them versus low value contracts. Follow the big money and buy higher value contracts.



Mistake #6. Adding to Losing Options Trades


You enter an options trade on Robinhood, then bam! Prices crash against you and your options are now deep in loss.


"Oh I'll dollar cost average my position" you think.


You add to your losing position, then BOOM!


Prices crash even further, leaving you in a higher volume loss than before.


You just committed another deadly mistake while options trading on Robinhood.


You added to a losing trade and a losing price direction.


Generally, when you enter a trade and it goes into profits right away, it is a great indication that you chose the right direction.


When you are in profits, you may safely add to an options position as it is more likely you chose the right price direction.


How to Avoid This Deadly Mistake: Only add to a winning position. When you are in a loss, let prices come up into profits before you add to your position. When you add to a winning position, you are giving yourself a higher edge of being correct in the trade.



Mistake #7. Not Buying Options Flow Data


Options flow is all the data stream from all of the options trades through out the whole day from all market participants.


Before 2015, this options flow data was not available to the general public.


Options flow data was used by hedge funds and big options traders to identify big options trades during the day.


The big funds would follow the million dollar options trades and make profits along side their fellow whales.


When someone or an institution puts millions into an options trade, they know something. They have the time and resources to analyze that trade at a higher level than you ever could.


What if I told you that now you can follow those same million dollar trades?


Now you can! Companies like SmartOptions®Ai now alert to million dollar options trades, you too can follow in the coat- tails of the big options players.


You can not afford not to have options flow in your arsenal while options trading on Robinhood.


How to Avoid This Deadly Mistake: Buy options flow data. By having the options flow data, you will be hyperaware of all the big options trades for the day, you can find hidden gems in the market that you would have otherwise missed.



Conclusion


Options trading on Robinhood is not easy in any way.


Only through time, loss and regret will you truly learn to become a net profitable options trader.


There are many things to learn with options, some secrets you'll have to learn by yourself.


By avoiding the above 7 deadly mistakes, we can save thousands of dollars in trade losses and have a much more pleasant experience.

Robinhood Options

What do you think about Options Trading On Robinhood? Leave your comments below!

4,250 views0 comments

Recent Posts

See All