Robinhood Multi Leg Options Overview
If you trade stocks or options at Robinhood, you likely already know that the broker offers free trading for all available securities. Commission-free options trading is quite rare within the investment industry, and it is a considerable benefit for multi-leg options trading strategies.
Creating multi-leg options positions at Robinhood allows you to take more control over your investment strategy. You can lower your cost basis on expensive stock options, attempt to profit from directional moves, or use time to your advantage.
Whether you are trading credit spreads, debit spreads, butterflies, condors, or calendars, you can use the power of spreads to fine-tune your investment approach.
Fees and Commissions
Before getting into the types of options strategies you can trade at Robinhood, it is good to point out that Robinhood is one of only a few brokers to offer commission-free spread trading. It is a pricing model that is very advantageous to investors creating options positions with multiple ‘legs.’
Types of Multi Leg Options at Robinhood
Robinhood allows you to create several types of multi-leg options positions. Depending on your options trading permission level, you may or may not have multi-leg options strategies available to you.
Multi-leg options trading is unlocked at Level 3.
These are the multi-leg strategies that you can trade at Robinhood:
- Credit Spreads
- Debit Spreads
- Calendar Spreads
- Diagonals
- Iron Condors
- Iron Butterflies
- Butterflies
- Unbalanced Butterflies
- Broken Wing Butterflies
An important note about trading multi-leg options positions at Robinhood is that you must build them yourself.
Let’s look at how to put on and manage multi-leg option positions.
Open Robinhood Account
1% IRA match and up to $200 FREE stock at Robinhood.
Visit Robinhood Website
Placing a Multi Leg Options Trade
Depending on the type of multi-leg options trade you want to make, you’ll select two to four ‘legs.’ Your selection can be virtually any combination of ‘buys,’ ‘sells,’ ‘calls,’ and ‘puts.’ You can also modify the expiration date for each leg as you see fit.
The colors you see are dynamic (switching from red to green and vice versa) and change based on the rising or falling value of calls vs. puts.
Using the Multi-leg options strategy building blocks of ‘buys,’ ‘sells,’ ‘calls,’ and ‘puts,’ you can create the strategy of your choice.
Here is an example showing how you can create a Put Butterfly on a popular tech stock.
The first step is to select the contracts (along with their expiration dates) that you want to include. Toggling between the buy and sell side, you can combine your position’s short and long legs.
You’ll likely notice quickly that you cannot yet select the number of contracts for each leg. No worries, that step is next.
With your contracts selected, you can modify contract quantity for the individual legs by navigating to ‘Custom.’ From there, you can ‘set a unique ratio’ for any of the legs making up your position.
For our example, we are adding one short put to create a butterfly. As you can see, the profit/loss calculator also updates to reflect the theoretical risk profile of the trade.
Once you are satisfied with the parameters of your multi-leg options trade idea, you can ‘Continue’ (green button) to advance to the order confirmation screen.
Free Robinhood Account
1% IRA match and up to $200 FREE stock at Robinhood.
Visit Robinhood Website
Managing Multi Leg Positions
Managing multi-leg options positions is a straightforward process, but there are some things that you’ll need to know.
Managing can mean many things. You might be adding to a position, closing a position, legging into or out of an advanced options strategy, or anything in between.
The primary consideration is how your management steps impact the margin (risk) parameters of the position. Sometimes, adding or taking away legs can significantly change how much margin is required to hold the position.
That said, Robinhood does not allow ‘naked’ options positions for any trading level. If you want to remove a leg from your strategy, the remaining legs must be ‘covered’ somehow.
Legging In and Out
One popular strategy Robinhood options traders use is legging in and out to ‘lock in’ profits and create new spreads. This is done without closing the current positions.
For instance, say you buy a call, and your purchase results in a profit. Instead of selling your call (closing your position), it is possible to sell another call against your long call to create a debit spread.
If the price falls, your new debit spread will lose value much slower than the single call would.
In addition, your new debit spread can still see more upside.
Closing the Position
As mentioned, closing out portions of multi-leg options strategies is a bit limited. It is easiest to close out the entire position. Alternatively, you can close any short legs, which would not add margin risk to the position.
Robinhood Multi Leg Options Pros and Cons
Robinhood has come a long way in how it handles options trading. The broker currently offers investors many advanced, multi-leg options strategies. This allows traders to take a more self-directed approach to their investment strategies, allowing for profit potential in various market conditions.
There is still some room for improvement, however. Here are a few of the pros and cons as we see them.
Pros
- Option chains are clear and simple
- Contract selection is straightforward
- Profit/loss graphic is useful
- Good selection of multi-leg options strategies
Cons
- Fills for advanced positions can be on the slow side
- No naked options
- Manual leg selection can take a long time
- Contract (leg) quantity adjustment requires an extra step
Robinhood Alternative
For a better broker to trade options, see Webull multi leg options.
Robinhood Multi Leg Options Summary
All in all, Robinhood is an excellent place to trade multi-leg options. Robinhood’s spread trading capabilities allow investors to get involved with expensive stocks, control risk, take advantage of various market states, and much more. While there is room for improvement, most options traders will find the tools they need to create positions suitable for their strategies and expectations.
Visit Robinhood Website
1% IRA match and up to $200 FREE stock at Robinhood.
Visit Robinhood Website
Updated on 7/16/2024.
I work in investment analytics and have been investing in the market since I was in high school. I enjoy anything that involves lots of strategy (i.e. a good game of chess), which is why I was naturally drawn to investing and researching companies. Outside of investing, I’m a big fan of the outdoors. In summer, you’re most likely to find me kayaking, camping, and hiking in the mountains.
|