No, Robinhood does not allow you to sell options on stocks you down not own as naked short put/call positions can result in significant loss. If you want to write naked option puts or calls you need a more professional options brokerage like Interactive Brokers. However, keep in mind there are significant risks that you should be aware of.
Why can’t you trade naked options on Robinhood?
Writing naked options positions is a trading strategy where you buy or sell options contracts without having an offsetting position in the underlying asset. These positions are often used for speculative purposes but come with significant risks.
For example, a traditional hedge with options may be buying some puts because you think the price of some Apple shares you own may go down. You can do this with Robinhood because the put is hedged against your Apple shares.
However, if you were to sell some call options without having Apple shares as a hedge, if the market was to fall, your exposure would be multiplied significantly. This is because the risk in a naked call position is theoretically unlimited as the underlying asset’s price can rise indefinitely. If the stock your call position is in rises significantly, you may have to buy the stock at a higher price to cover their short call position.
Why would you want to trade naked options with Robinhood?
Selling options result in you receiving the premium. So if the options are worthless you make money. It is a very high-risk, low-reward investment strategy. However, some people would say it is low risk because usually naked options sellers take positions that are so far out of the money there is no chance of them not expiring worthless. However, there is a reason that people buy OTM options. This is because if you buy an OTM option, the premium will be very low, the closer the options come to being in-the-money the more it is worth.
When can you sell options on Robinhood?
There are two scenarios when you can sell options on Robinhood.
- When you are long and you are closing off an existing positions
- When you are entering into a covered call contract
Selling covered calls are allowed on Robinhood
For example: You can sell call options on shares you already own at Robinhood because a covered call strategy is bullish and involves two key components: owning 100 shares of the underlying stock or ETF and concurrently selling a call option, which is also known as a short call. To engage in this strategy on Robinhood, you must already possess 100 shares of the underlying stock or ETF.
Selling short a call obligates you to potentially sell 100 shares of the underlying asset at the strike price if the option is assigned. Importantly, it’s worth noting that as the seller, you have no say in whether the call is exercised or not—the decision rests with the buyer.