Robinhood is one of the best platforms for beginners because of how easy the interface and platform is to use! It was one of my first brokers when I got started in the stock market world. Now, I am using Robinhood to show how anyone can grow a small account using credit spreads. However, there is something that you must know about before trading credit spreads on Robinhood because it could easily cost you thousands of dollars.

In order to fully explain the issue with Robinhood, I have to give a quick explanation of what credit spreads and expiration dates are.

Credit spreads are an options strategy with a directional bias. This means if you are trading put credit spreads, you are assuming the market will move higher. If you are trading call credit spreads, you are assuming the market will move lower. These trades are created by selling one option then buying another that is cheaper price in order to collect a credit.

Options also have expirations dates associated with them. Since options are essentially contracts on the underlying stock or asset, it is natural to assume that the contracts have an execution date. We refer to these execute dates as the expiration date. Our goal is for the options to be profitable by the expiration. For instance, if the stock is above our put credit spread by expiration, then we make money. If the stock is below our put credit spread by expiration, then we lose money.

The issue with Robinhood

The issue with Robinhood comes into play when the stock closes between the two strike prices for our credit spread. This is an issue for any broker; however, it is handled prematurely by Robinhood. It is an issue because your short strike price can get executed while the strike you bought expires worthless. When you sell to open an option, you are entitled to do something (buy or sell 100 shares at a certain price). Typically, the contract you buy will cover the obligation from the contract you sold. When it expires in the middle, you have the risk of no protection from the other option.

What does Robinhood do?

Robinhood addresses this concern by manually closing out the trade without notice. There is no set time or heads up. On expiration, it will sell your position without your permission at any time Robinhood considers the trade too risky. This could even happen if the stock is one percent or more above your credit spread. Instead of Robinhood letting the spread expire worthless, it will buy it back. This could be at a significant loss to depending on where you bought the spread.

This happened with some of my Inner Circle Members recently which is why I am writing this blog post. Even though their credit spreads were out of the money and would have ended up expiring worthless, they were automatically bought back at a higher price. This resulted in hundreds of dollars of potential profits missed out on. Thankfully, most of them didn’t experience a loss because of where they bought it.

Long story short, if you are trading credit spreads on Robinhood, make sure you understand how they handle expiration. If you want a better alternative, check out WeBull because they handle this risk better than Robinhood. Regardless, I hope you are now aware of the downside risks associated with using brokers that don’t specialize in options.

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer