Investing or owning a part of a business is always a great feeling and when you don’t have to do anything, and the money grows by itself is beyond amazing. Putting money in stocks or any other investing medium is nothing new to anyone in the world. Though it has come and transitioned through different methods and means throughout the time but the end goal is still the same.
Make me money $$$$$$$$$
Today i am going to talk about robinhood (an online broker), the broker that changed the shape of trading in USA.
Robinhood lets you trade for free, which means you don’t have to pay any trading commissions. When Robinhood started all the online brokers used to charge minimum of $4 up to $15 or more for a trade. so KUDOS to Robinhood to start a revolution in investing world.
Before Robinhood it was not easy for everyone to open an investing or trading account. You must have a valid VISA or residency status along with Social Security number, if not us citizen.
When Robinhood started it opened its floor for everyone legal or who have a valid US ID card and SSN. So, all the us residents with F1 Visa, H1 Visa were eligible to open an account. That was one of the big reasons for the popularity of Robinhood. It’s nice and very good opportunity for everyone in USA who can leverage their knowledge and money to tap in some of the country financial rally.
The process for buying a stock in Robinhood is as simple as any other brokerage. You open an account transfer your money in. Then pick a stock and click on buy. I do like to utilize some features available in the app though.
Limit order lets you pick the price you want to pay for the stock. Let’s say UBER (UBER) is trading at $39.68 but you want to buy it when it drops to $38 then you put your limit order with $38 price target. So, until UBER hits less than $38 your trade won’t execute.
That is one the thing I noticed in robinhood until the stock price is little less than the price you put (Buying) or stock price is little more than the price you put (Selling) the trade never gets executed. I am not sure if that happens to other brokerage too, haven’t paid that much of attention though. The reason it is better to use Limit order is, if you buy at market price, you never know how much you are paying for the stock. Trust me on that. 🙂
This is another way of smart trading :). Use this to limit your loss or cap your gain. You can place an order on existing holdings to sell if it drops below a target price. Let’s say you hold stock of $AAPL which is $325 you want to sell all your holdings if the stock drops below $320. So you can put a stop sell on $320 so that you can either keeps your gains or limit your loss.
Limit Order and Stop loss are the key to discipline trade where you don’t let your greed and emotions ruin your hard earned money. As of today there are more options of trading like Trailing Stop Order, Stop Order, Stop Limit Order. I have not used them so won’t be able to talk about them. But you can use any of these methods to trade wise.
Day Trading in Robinhood
Day trading means when you buy and sell a stock or options the same day. So, you buy $AAPL at 11 am and sold it 3 pm same day. That is 1-day trade. If you have a gold account, then you can reuse the proceedings from the sale immediately else you have to wait until the trading is closed. Normally it takes 1-2 business days to finalize the trading and the money available for trading. That is the reason they have the day trading lock placed and if you do more than 3 times then they will lock your account for 90 days and you won’t be able to do day trade. Robinhood is letting you use their cash to do the trading until your trade is closed. Its $5 for gold, I find it useful because I trade a lot. If you don’t do daily trades, then not worth of using it much.
As seen in above image I have 2-day trades and 1 left for next 5 business days. A day when the US Stock market is open is called a business day here.
Option Trading in Robinhood
Options are a bet that you place on a stock that it will reach a price in a certain time, which can be upside or downside. Upside bet are called calls whereas downside bets are called puts.
If you look at the above image 1, you will see different prices with a value next to it. The prices are called the strike price and the amount on your right is called premium. So you pay the premium to buy a bet for the stock on the strike price. Among all the strike call let’s talk about the $40.5 call, the current uber price is $39.68.
So if you buy the Feb 28 $40.5 call that will cost you $156. This means that you think uber will be at least $ 41.21 (Strike price ($40.5)+ Premium Paid ($1.56)) or more by Feb 28. For you to be break even it has to reach the target price plus the premium you paid. So as seen in image your break even is $41.21. So if you are bullish or you think UBER is going to go high then you buy a call like this.
Same goes for put but in opposite direction. When you think the current stock is going down that’s when you buy the put. If you look at the second image the put options for $UBER Feb 28 $39.5 costs you $1. So for you to break even UBER has to be at least $38.5 or less than $38.5 before Feb 28.
But the catch with option is as it’s price is dependent on time. You might hit more than break even before the expiry date for either case. Not to confuse with the break even, the break even will be reached if the stock hit that price at least before or at the expiration date which is Feb 28.
If the stock hits the target price before Feb 28 then the premium value will be higher. Let’s say Uber went high crazy like $42 at Feb 18. Now the call for $40.5 can be valued as much as $3 or $300 for 1 contract. So, if you paid $156 that is close to 100% increase in your investment. That’s the opportunity with options. If the stock rises by 3% your option can rise by 300%.
Options are always sold in 100s so when you buy 1 options contract that is usually a contract to buy 100 stocks of that company. So if you are buying $UBER $40.5 1 call option that means you have options to buy 100 stocks of uber at Feb 28 with $40.5 price no matter what is the price of $UBER at Feb 28. Which is also called exercising your option. Similarly if you are buying a $UBER $38.5 1 put option, you have the right to exercise to sell 100 shares of $UBER at $38.5 at Feb 28.
I would guess normally people who are using Robinhood would rather sell their option rather then exercising it to buy or sell the underlying stock.
Lets’s say if the $uber calls or puts with strike price of $40.5 and $38.5 can be zero if the stock doesn’t move proportionally to your target. That is the risk and reward with options and you need to be very careful with your trades.
If you look at above all the $TSLA calls for Feb 21 expiry date are at least down by 20% whereas the stock is down less than 1%. This is because $TSLA is one of the high volatile stocks and the options price reflects the volatility of the stock. Depending on the stock and its volatility the options price is moved in either direction.
Also, when any of the company is coming close to earnings their options price is always elevated because of the uncertainty of the movement after the earnings report. So, it can be a wise move to buy option before 2 weeks for these volatile companies and sell it before earnings. Don’t take my word but it might work I have done it couple of times this season, it worked well for me.
Trading options is very risky and you really have to be extra careful about exiting your positions. Greed and Emotions do ruin your winning and investment. So be very careful with it.
There are two other way of trading options, which i use sometime called spreads and strangles.
A spread or calendar spread is a trade where you buy a range of a stocks option. So let’g go back to the $uber Feb 28 image again
Uber call spread for Feb 28 2020 $43/$40
As seen in above image I am selling the $43 UBER call and buying $40 UBER call. My total cost is $71 and if the stars line up correctly, I can make up to maximum $300 of the 1 spread. This way I am limiting my risk (paying only $70) and it limits my wining but if you can make 300% on an investment hey, that’s a good ROI.
Now let’s talk about the strangle. I won’t recommend strangle that much because your stock really have to move either side significantly for you to make money.
What we do in strangle is we buy both calls and puts for the stock.
Let’s look at $UBER again
As seen in above image I am buying an UBER call of $40.5 for Feb 28 and uber put of $38.5 for Feb 28. I am paying $130 for 1 strangle and for me to break even money $uber must go up at least $42 or fall to $37.20 before or at Feb 28.
If it doesn’t happen then I am losing my money. I don’t use it myself that much because it’s very risky and you are putting double the money than a normal option.
While trading option I usually like to take some risk. So, sometimes I gamble. I buy options on Thursday that expires on Friday. It is very risky but lot of time it is very cheap and if there is a movement then your profit will be a lot. Also I like to buy way out of the money long options just to gamble.
Let’s take an example of $TSLA the stock has gone parabolic recently. Not sure whether it deserves what it is getting but it seriously some ruckus happening in the market. So, I bought $125 put options of $TSLA that expires in JAN 21, 2021.
As seen in above image I am paying $159 for $125 put option. Now I don’t have to wait till Jan 2021 or $TSLA to hit below $100 to make money. Since I am 10 more months to the expiration, if $TSLA falls like 5% or more any day before the price might go high. It’s pure gamble and I know what I am losing most but i am 10 more months of time. You can dig opportunities like that in any other stock as well. Not that it always work but it does work sometime.
Finally there are few features with robinhood which i don’t like.
Last year their option trading was halted multiple times which cost me $$$$$ but they will never refund or give you anything. The most compensation I received was $5. Also, they will automatically close your option trade on the expiration date, after 3 pm if it meets or above the strike price. So, you lose 1 hours of extra trading.
So if you are trading with robinhood know all these things.
Lastly, I like robinhood because of the UI, which is very friendly and mobile focused. I haven’t seen any other brokerage with that kind of friendly UI. Now they have robinhood snacks, the debit card and they are bringing the fraction buys as well. All these things make them more desirable then other brokers. But they are still new in the field and they must improve more to give you more efficient and effective trading.
At last, do your research and know before you do trading and putting your money on the line. If you don’t have a Robinhood account use this link you and i both get free stock 🙂
Happy Trading and Money Making.
You can find me https://twitter.com/mytwits_fornon