Trading call or put options on Robinhood?
Does the “break-even” price listed confuse you slightly, or seem a bit inaccurate.
You’re not alone, and as you’ll soon see, it’s not right in all cases.
What Robinhood’s break-even price is based on
Robinhood’s break-even price for options bought on the platform is calculated with the assumption that a trader is going to not only hold the option through to its expiration date, but also exercise the option.
Yet in reality, while a (relatively small) percentage of options traders might hold their calls or puts nearly up to their expiration date, few if any option traders ever actually exercise their options.
That means Robinhood is calculating a break-even price based on two assumed criteria that almost no options trader will “meet.”
Will you profit before reaching ‘break-even’ on Robinhood?
Whether any options trade is profitable at all of course depends on the very unique variables of a specific trade, and how that trade is handled from buy to sell (or expiration).
But, assuming your specific trade is going to be profitable at all, the answer is yes, you may very well profit well before the “break-even” price as provided by Robinhood is ever met.
Even if “break-even” is never met, you can profit from a trade.
How Robinhood defines ‘break-even’
Robinhood says this about its break-even point: “The break-even point of an options contract is the point at which the contract would be cost-neutral if the owner were to exercise it. It’s important to consider the premium paid for the contract in addition to the strike price when calculating the break-even point.”
I’ve added emphasis to the portion in italics—”…if the owner were to exercise it.”
If. That “if” is what Robinhood’s break-even is based on, yet in reality very, very few options traders exercise their options.
They simply sell them back to the market.
So is ‘break-even’ wrong? Yes and No.
No, not necessarily. It may just be poorly defined or not very well presented and explained to Robinhood’s typical demographic audience: Mostly novice to intermediate traders who aren’t trading for a living.
It’s correct in that it is the price the underlying stock needs to reach for an exercised trade involving that option to be profitable.
It’s not correct in that a trader will profit well before break-even is ever reached. And—of course assuming a particular trade was ever going to be profitable—traders can reap some pretty handsome profits from options that never reach “break-even.”
Very few traders ever exercise their options
The fact is that very few options traders ever exercise their options, and, it can be assumed, that even fewer novice to intermediate options traders do so.
Whether a specific stock option should or shouldn’t be exercised is way beyond the point of this article.
Since we are on the topic, here is what a couple of expert traders and educators have written about whether to exercise an option:
- “Most investors sell the option if it’s in the money.” [i.e., they don’t exercise it.] – Understanding Options, 2nd Ed., by Michael Sincere (© 2014)
- “There is seldom any good reason to exercise….” – Understanding Options, 2nd Ed., by Michael Sincere
- “Hint: Once again, few call buyers exercise. If you really want the stock, however, then go ahead and exercise at expiration (but not earlier).” – Understanding Options, 2nd Ed., by Michael Sincere
- “There are solid reasons for not exercising an option before and into the expiration date. In fact, unless you want to own a position in the underlying stock, it is often wrong to exercise an option rather than selling it.” – Alan Farley, Author and trading expert in, “Should an Investor Hold or Exercise an Option?,” on Investopedia, updated June 6, 2021.
In summary
If an options trade done on Robinhood is ever going to be profitable, it will be so well before “break-even” is reached, providing a trader does not wait until the option’s expiration date in order to sell and realize his gains. In this scenario, the break-even price provided by Robinhood is “inaccurate.“
But if a trader plans to hold the option through its expiration date and plans to exercise the option, the break-even price as listed by Robinhood is correct.
