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How to Short Stock on Robinhood: A Contrarian’s Guide

So, you’re eyeing a stock that looks ripe for a fall, and you’re curious about shorting it on Robinhood. The short answer: you can’t directly short individual stocks on Robinhood anymore. Robinhood disabled the ability to short individual stocks on its platform in January 2021. However, there are alternative strategies, primarily using options contracts, that allow you to profit from a stock’s decline on the platform.

Let’s dive into how to navigate the choppy waters of bearish strategies on Robinhood, and how you can still potentially benefit from a stock’s downturn, even without direct shorting.

Understanding the Shift: Why No Direct Shorting?

Robinhood’s decision to discontinue direct shorting stemmed from the immense volatility surrounding certain stocks in early 2021. The GameStop (GME) saga and similar events exposed the inherent risks of short selling, particularly for platforms like Robinhood that cater to a relatively inexperienced investing base. The potential for massive losses, coupled with margin calls, led to the platform restricting this feature.

While this might seem like a setback, it necessitates a more nuanced approach, forcing investors to consider options-based strategies, which, while potentially more complex, can offer greater control and defined risk.

Alternative Strategies: Profiting from a Decline with Options

Since directly shorting is off the table, let’s explore the viable alternatives that leverage options trading to express a bearish sentiment on Robinhood.

Buying Put Options: Your Bearish Weapon

The most straightforward way to profit from a stock’s decline is by buying put options. A put option gives you the right, but not the obligation, to sell a specific stock at a predetermined price (the strike price) on or before a specific date (the expiration date).

How it Works: You buy a put option anticipating the stock price will fall below the strike price before the expiration date. If it does, the option’s value increases, allowing you to sell the option for a profit. If the stock price stays above the strike price, the option expires worthless, and you lose the premium you paid for it.
Example: Suppose you believe Apple (AAPL) will decline from its current price of $180. You could buy an AAPL put option with a strike price of $170 expiring in one month. If AAPL falls to $160 within that month, your put option will significantly increase in value, allowing you to profit.

Selling Call Options (Covered Calls – In Reverse!): A Risky Game

While not strictly “shorting,” selling call options on a stock you don’t own (a “naked call”) can generate income if the stock price stays below the strike price. However, this strategy is inherently risky and generally not recommended for beginners due to its unlimited potential losses.

How it Works (Simplified): You sell a call option, obligating you to sell the stock at the strike price if the option buyer chooses to exercise it. You receive a premium for selling the option. If the stock price remains below the strike price at expiration, the option expires worthless, and you keep the premium. However, if the stock price rises above the strike price, you’re obligated to sell the stock at the strike price, potentially forcing you to buy it at a higher market price to fulfill the obligation.
Why It’s Risky: Your potential loss is theoretically unlimited because the stock price could rise indefinitely. Robinhood may also require substantial collateral to allow you to sell naked calls, further complicating the process.

Disclaimer: I strongly advise against selling naked calls unless you have a deep understanding of options trading and are comfortable with the associated risks. Begin with buying put options and thoroughly research options strategies before considering more advanced techniques.

Navigating Robinhood’s Options Interface

Robinhood provides a relatively user-friendly interface for options trading. Here’s a brief overview:

Enable Options Trading: Ensure you’ve enabled options trading in your Robinhood account settings. You may need to answer some questions about your trading experience.
Select a Stock: Search for the stock you want to trade options on (e.g., AAPL).
Go to the Options Chain: Look for the “Trade Options” button or tab. This will display the options chain for the selected stock.
Choose Puts or Calls: The options chain shows both call and put options. Select “Puts” to find options that profit from a price decline.
Select Strike Price and Expiration Date: Choose a strike price and expiration date that align with your bearish outlook.
Buy the Option: Review the details (price, contract size, etc.) and confirm your order.

Important Considerations and Risk Management

Time Decay (Theta): Options are decaying assets. Their value decreases as they approach their expiration date, even if the stock price doesn’t move.
Volatility (Vega): Changes in implied volatility can significantly impact option prices. Higher volatility generally increases option prices.
Defined Risk: Buying put options offers defined risk. Your maximum loss is limited to the premium you paid for the option.
Margin Requirements: Options trading may require margin, which can amplify both gains and losses.
Start Small: Begin with a small amount of capital and gradually increase your position size as you gain experience and confidence.
Continuous Monitoring: Regularly monitor your options positions and adjust your strategy as needed.
Education is Key: Devote time to understanding options trading strategies, risk management techniques, and market dynamics.

Frequently Asked Questions (FAQs)

1. Can I still short ETFs on Robinhood?

While direct shorting of individual stocks is no longer available, Robinhood may allow shorting of certain Exchange Traded Funds (ETFs), but this is subject to change and requires margin approval. Always check the availability of shorting for specific ETFs directly on the platform before initiating a trade.

2. What are the risks associated with buying put options?

The primary risk is that the stock price doesn’t decline as anticipated. If the stock price stays above the strike price until expiration, the put option will expire worthless, and you will lose the premium you paid for it.

3. What is the difference between a long put and a short put?

A long put (buying a put option) is a bearish strategy where you profit if the stock price declines. A short put (selling a put option) is a bullish strategy where you profit if the stock price stays above the strike price.

4. How do I choose the right strike price for a put option?

The choice of strike price depends on your risk tolerance and expectations. A put option with a strike price closer to the current stock price (an at-the-money or near-the-money put) will be more expensive but will offer greater potential profit if the stock price declines. A put option with a strike price further below the current stock price (an out-of-the-money put) will be cheaper but will only become profitable if the stock price declines significantly.

5. How do I choose the right expiration date for a put option?

The expiration date should align with your timeframe for the stock price to decline. A shorter expiration date will be cheaper but requires the stock to move quickly. A longer expiration date will be more expensive but gives the stock more time to move.

6. What is a “covered put”?

A covered put is not a standard or widely recognized options trading term. “Covered” usually applies to call options (covered call), where you own the underlying stock. Perhaps you’re thinking of a protective put?

7. What is a “protective put”?

A protective put involves buying a put option on a stock you already own. This acts like an insurance policy, limiting your potential losses if the stock price declines.

8. What are the margin requirements for options trading on Robinhood?

Margin requirements vary depending on the specific options strategy and the underlying stock. Robinhood will display the margin requirements before you execute a trade. Be sure to understand the margin implications before opening a position.

9. How can I manage the risk of time decay in options trading?

To mitigate the effects of time decay, avoid holding options until expiration. If your thesis is playing out, consider closing your position and taking profits before the option’s value erodes due to time decay.

10. What are the tax implications of options trading on Robinhood?

Options trading gains and losses are generally taxed as either short-term or long-term capital gains, depending on how long you held the option. Consult with a tax professional for personalized advice.

11. Are there any specific restrictions on trading options on Robinhood?

Robinhood has certain restrictions on options trading, including limitations on the types of options strategies you can use, depending on your account level and trading experience. They also may restrict trading on certain volatile stocks.

12. Where can I learn more about options trading strategies?

Numerous resources are available online, including websites, books, and courses. Reputable sources include the Options Clearing Corporation (OCC), Investopedia, and experienced financial professionals.

In Conclusion

While the ability to directly short individual stocks on Robinhood is currently unavailable, options strategies like buying put options provide viable alternatives for expressing a bearish outlook. Remember that options trading involves significant risks, and thorough research and a solid understanding of options mechanics are crucial for success. Start small, manage your risk, and continuously educate yourself to navigate the complexities of options trading on Robinhood. Good luck, and trade responsibly!