An options contract gives a buyer the right to buy or sell an underlying asset at a chosen price over a certain period of time–but not an obligation. An option buyer is charged a premium by the seller for that right. For the option buyer, the return potential is unlimited, and the risk involved is limited to the premium paid only.
In contrast, the seller of the options contract is obligated to buy or sell the underlying asset. For the option seller, the return is limited to the premium received, and the risk involved is unlimited. You should note that options are contracts and not assets—you don't own the option as you do in equities.
Options are classified as call options or put options. A call option gives a buyer the right to buy an underlying asset at a predetermined price over a certain period of time. A put option gives a buyer the right to sell an underlying asset in the future at a chosen price. For options trading, Robinhood charges no commission, exercise fees, or per-contract fees. So, how can you buy a put option on Robinhood?
How to buy a put option on Robinhood
Buying a put option is a preferred strategy for investors who are bearish on a particular stock, but want less risk than in a short-selling strategy. Investors buy put options when they expect the price of the underlying stock to go down in the future.
Robinhood allows you to trade options both on its web and mobile versions. To buy an options contract, you need to navigate to the stock’s detail page and click "Trade Options." You then choose the options contract you'd like to purchase.
How do put options work on Robinhood?
To give an example, say that Microsoft stock is trading at $200, and a trader purchases a put option on the stock at a strike price of $190, with a premium of $6 per share. Then, the technology company reports disappointing earnings results, and its stock falls to $180. The put option buyer has the right to sell the Microsoft stock at $190. As a result, the trader earns $10 per share minus the premium of $6, resulting in $4 per share (without factoring in fees).
According to Robinhood, “With a put option, you bet that the value of a certain stock is going to go down. Buying a put option can give you the chance to make money off the stock’s loss. It's sort of like selling a car to a dealership that's only willing to buy your car from you at a specific price, similar to how a put option gives you the option to sell a stock at a certain price.”
Currently, you can’t directly short a stock on the Robinhood platform if you think that its value will decrease in the future, mainly because Robinhood views short-selling as a risky trading strategy. The discount broker is targeting Millennials and startup investors. Robinhood also allows customers to buy penny stocks and make fractional share purchases. Robinhood trades are instant.