How to Use Robinhood for Option Trading

  • August 27, 2020

Do you know how to use Robinhood option trading? I've learned a thing or two since I started trading options on Robinhood. There is some good, some bad, and some ugly.

If you know what you're doing already, or have a lot of money in a trading account, I'm guessing you are NOT using Robinhood. But wait! Don't jump to conclusions.

I'm not bashing Robinhood for option trading, or in general. Yes, you can use them Robinhood for options trading and yes it has some great advantages. 

How to Use Robinhood Option Trading

Regardless of what you have heard about trading options on Robinhood from random people on the internet this budget, user friendly broker is fairly decent for trading options.

I've been using them for over a year now to swing trade options. I have not tried Robinhood Gold, because I didn't feel I needed it. Not for what I am doing. I'm using Robinhood option trading for two things:

  • Day trading options on Robinhood (buying naked calls and puts)
  • Swing Trading Options on Robinhood (credit and debit spreads)

1. Why Am I Using Robinhood? 

I'm not only using them for Robinghood option trading, I felt they were worth giving them a try. Especially after they'd been out awhile (since 2014) and have since become the fastest growing broker in history. 

People in our trading community and on Stocktwits were constantly talking about them in 2016. In fact, there were about 10 people a day in our free Facebook group sharing Robinhood referral links.

You know the ones where you get a free share of Google, Apple or Amazon?! It was everywhere you looked.

So, I gave Robinhood a shot. And I wasn't disappointed as long as I only traded options under certain criteria. Again, I used the free version of RH, so there was no level 2 trading and no market orders.

Limit orders only! However sometimes my fills were BETTER than what my limit order was set at. The key to trading this way was sticking to these rules for what I traded:

  • High volume option strikes (500+ volume on the day, 1000+ was better)
  • Tight bid ask spreads, between $1-$3.
  • Open interest for the strike needs to be over 1,000

The reason I did this was because I found Robinhood executions for day trading options fairly slow. The less liquid the options the worse it got. To avoid that, if you're going to day trade options on Robinhood, I suggest you stick to the rules above.

When I look at Robinhood for day trading options since TDA and Fidelity started offering commission free trades...it's gotten slower. Not quite sure why that is.

I'm imagining that because the broker wars are hotter than ever due to commission free trading being offered almost everywhere you look, that performance has been slipping. It's not just Robinhood, its brokers that have been around awhile. 

Robinhood Option Trading

2. Robinhood Option Trading for Swings

I'm completely convinced the safest way for Robinhood option trading or trading options anywhere else for that matter is to trade credit or debit spread options. 

The cold hard truth is, all those people posting and screen capping their long option position with ridiculous gains are risking a lot by trading long options without a spread. 

The probability game is stacked against them by trading long options, which is why I swing trade spreads. I want a higher probability of profit on every swing trade I take.

That makes sense doesn't it? Read on to understand why selling options is a safer strategy than buying them.

Now, whether or not I sell options as bear call spreads or bull put spreads depends on whether I believe the trade is bearish or bullish. 

Specifically, my goal is to keep the premium get from selling the short call or short put. I like Robinhood to sell options because there are no fee's, (truly free options trading) and the user interface makes it incredibly simple to sell a spread. 

However, selling options can still be quite risky. Although, since 80% of options expire worthless, the seller is the one that benefits.

3. How to Use Moving Averages to Trade Trends and Are SMA's or EMA's Better?

Moving average for Robinhood option trading can be a big help. So which are better? Even though there are clear differences between SMAs and EMA, one is not necessarily better than the other.

Because exponential moving averages have less lag they are more sensitive to recent prices and price changes.

Another subtle feature by using EMAs is that you’ll see the chart turn quicker when a price reverses direction. 

On the other hand, simple moving averages represent a true average of prices for the entire time period. So if you want to identify support or resistance levels, simple moving averages may be a better choice. 

How to Use Moving Averages to Trade Trends

I use the 9 EMa (blue), 20 EMA (red), 50 SMA (purple) and the 200 SMA (black) on my charts. Moving averages are great for entries and exits. Click here to check out our live trade room to see us discuss this during market hours. 

Can You Trade Options on Robinhood?

  • Good news is that there's Robinhood options trading available now. There was a time when you couldn't trade options on Robinhood. My how things have changed. Options are a fantastic way to grow a small account. As a result, Robinhood got on board and made it possible to trade them. 

1. Three Ways to Trade Moving Averages

Identifying the Strength of a Trend. One thing I know to be true in the Robinhood option trading world is this: the farther the price is away from the moving average, the weaker the trend. A weak trend translates into a trading opportunity - a potential reversal is on the horizon. Armed with this information, combined with other indicators like volume, you're well on your way to executing a winning trade.

Identifying the Direction of a Trend. The direction of the moving average tells us important information about a stock price. A rising moving average means prices are rising. Likewise, a falling moving average indicates prices, on average, are falling. A long-term uptrend is characterized by a  rising long-term moving average. Hence, a long-term downtrend is characterized by a falling long-term moving average.

Identifying Trend Reversals with Crossovers. Like I mentioned above, typically a weak trend means a reversal is coming and crossovers help to confirm. After an uptrend, for example, if the nine-day MA crosses below the 50 day MA, then the bullish trend may be reversing, signalling the start of a bearish trend. Be advised though, there tends to be frequent fake-outs with crossovers that catch new traders off guard. For these reasons, you should always confirm reversals using other methods and tools.

Identify Entry and Exit Points. Not only are moving averages used to identify trends, but they are powerful buy or sell indicators. One of the simplest strategies out there utilizes the crossing of two or more moving averages as an entry/exit trigger. Your basic signal is when the short-term average crosses above or below the longer-term moving average. 

2. How to Use Moving Averages to Trade Trends That I Use

For Robinhood option trading I use the 9 and 20 exponential moving average indicators on my charts. The crossing of these lines signifies a shift in price direction; it's as simple as that.

Now you have the option to use the 13 EMA as well. It all depends on what you're comfortable with. Personally, I'm using the 9/20 EMA crossover to verify my entry and exit points.

I highly suggest having multiple MA lines with differentiating time frames displayed on your chart. Personally, I use the 9, 50, and the 100-day MA as it gives me a birds-eye view of the market, which helps me to identify stronger trends and possible reversals.

When I'm going long on a stock, I want the candlesticks to be above the 50 SMA (simple moving average). Likewise, when I'm going short on a stock, I want the candlesticks to be below the 50 SMA.

3. Tips I Picked up Along the Way

As you know, or soon will, people are always eager to help out a new trader; which can be nice when learning how to use moving averages to trade trends.

I have the habit of writing down tips I’ve received along the way. I thought I’d share them with you. Now it’s up to you whether or not you want to follow them but they may help.

  • Buy stocks when the 15 EMA crosses over/goes above the 50 EMA as this indicates an upward price movement in the near future; this is good for frequent short term trades.
  • Buy stocks when the 50 EMA crosses over/goes above the 200 EMA.
  • The further the stock is away from the 13 EMA, the higher the chance for it to snap back.
  • Buy as close as possible to the moving average line.
  • Ride the trend until the break of the moving average.
  •  Trading off MAs usually works best during the mid-day and closing session as it takes time for the trend to play out. At the market open, it's generally too volatile and hard to identify a moving average trend play. 

Robinhood Option Trading Final Thoughts

Do you know how to use moving averages to trade trends? Moving averages are powerful trading tools every trader should have in their toolbox.

Their greatest strength is its ability to help a trader identify a current trend or spot a possible trend reversal.

And they can also define a stock’s level of support or resistance, or act as a simple entry or exit signal. 

Having said that, how you choose to use moving averages is entirely up to you. But all things considered, you’d be wise to incorporate them into your trading strategy.

For further information on moving averages and how to trade them, check out our free online trading courses.

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