2022 Robinhood covered calls: options trading fees, platform review. Instructions on how to set up, buy, and sell covered calls on Robinhood.

Overview of Covered Call Trading at Robinhood

If you are interested in an options trading strategy designed for generating an income stream, covered calls might be what you’re looking for. Covered calls are commonly considered to be low risk, high probability, and reliable.

If you want to learn more about writing covered calls at Robinhood, please review the information we’ve collected for you here.

Trading covered calls at Robinhood is easy, and there are a few ways to do it. You can write your covered call on Robinhood’s main website or the mobile application.

To trade covered calls at Robinhood, you will need the ‘basic’ options trading permission (Level 2). You will also need to have at least 100 shares of the underlying stock sitting in your account to act as protection (cover) for your short call option.

If you are unsure which options trading permission you currently have, navigate to ‘Settings,’ then ‘Investing,’ then ‘Options Trading.’

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Here’s how you can establish a covered call position.

Writing Covered Calls at Robinhood

As we already mentioned, you’ll need at least 100 shares of the stock you want to write a covered call for. If you already have the shares, simply go to the stock’s options chain, and select a call to sell.

If you do not already have the shares, you’ll need to purchase them first. Then, when you sell a call against them, Robinhood will automatically group the shares and the option into one position.

Robinhood Covered Calls Buy Shares

Once you have the shares, you will select the Strike Price, the Expiration Date, and the Premium you hope to collect from your option.

Remember to check the ‘Sell’ button on the top to make you are on the sell side.

Robinhood Sell Covered Call

Once your sale is confirmed, you can track the progress of the position from the main page of your brokerage account.

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Covered Call Details and Advice

A popular idea about covered calls is that they impose little risk. While there is some truth to that, successfully creating a ‘risk-free’ covered call depends on how you set it up. Consider the following to minimize risk and optimize your earning potential while writing covered calls.

Cost Basis

You’ll first need to determine the average cost of the 100 shares you will use to cover your short call option. When you create a covered call position, you agree to sell your 100 shares at a set price. The agreed-upon sale price for your shares is the option’s strike price.

You should never sell a call option against your shares if the option strike price is lower than the average cost basis of your stock position.

That said, the further out of the money you go, the less you can earn from your covered call position. It is good to try to find a balance between the premium earned and the risk of losing your 100 shares.

The Greeks

Options contracts are priced based on several variables. As an options seller, it is wise to know these variables well. Learning about the Greeks and how they impact the amount of money you can make is always a good idea.

Another good thing to understand is that none of the Greeks exist in a silo. They each play a role in an option contract’s value, but you’ll need to consider the Greeks' combined effects for each contract you sell.

There are several price variables to consider, but here is the first set of Greeks you should understand.

The Role of Probabilities (Delta)

Newer investors often overlook the role of probabilities in covered call transactions. Understanding how probabilities impact options trading – including selling covered calls – can mean the difference between a successful strategy and its opposite.

In short, you want to know the probability that your short call will expire without value. Whether you want a 60% probability of success with a higher earning potential or a 90% chance of success with less premium earned, there is an easy way to choose the best call for your strategy.

To see the market maker’s probability prediction for the options contract you are selling, look at the Delta. An option with a Delta of 0.30 has a probability of expiring out of the money (Prob. OTM) of approximately 70%. That’s a 70% chance that you will keep your premium and stocks.

The Role of Time (Theta)

The role of time is another crucial piece of the puzzle. Theta is the time decay model that is built into options. Selling options with 30+ days to expiration will have a relatively slow time decay effect on price.

On the other hand, selling an option that expires in a couple of weeks will lead to a much faster time-price decay.

The closer an option’s expiration date is, the faster theta decays the contract’s price.

The Role of Volatility (Vega)

Another consideration is volatility. Higher volatility leads to higher options contract pricing. As an option seller, Vega can be a benefit for you.

Selling covered calls during times of high volatility means you will bring in a higher premium for your contract. When volatility decreases, so too does the price of the call.

Taking advantage of volatility pricing has its benefits. High volatility also means there is a greater risk of your short call getting exercised should prices rise enough to put your short call at or in the money.

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