It’s easy to feel excited about financial services firm Robinhood Markets (HOOD), which is best known for its namesake trading app. Since the start of the year, HOOD stock has gained almost 84%. The primary catalyst for the business is growth in investor count from the millennial and Generation Z demographics.
It’s also quite possible that much — if not most — of the bullishness has been baked into the share price. Furthermore, economic challenges, especially stemming from the weakening labor market, could present some headwinds for HOOD stock. In such a scenario, the business may not grow as much as bulls would like.
Given the possibility that HOOD stock may inch forward rather than jump ahead, a credit-based options strategy looks appealing. It’s not the most exciting position, but for a slightly bullish sentiment such as mine, it could be quite lucrative.
Credit Versus Debit Strategies for HOOD Stock
Generally speaking, investors have two ways of approaching options strategies: a net debit approach, which involves a payment of premium for the right to buy (or sell in the case of put options) an underlying security, and a net credit approach, which involves receiving payment for granting the aforementioned rights to other investors. Given my cautiously bullish view of Robinhood Markets at this point, I’m eyeing the credit approach presented below.
With a slightly optimistic outlook, a credit approach — which basically involves event-based speculation — may be the right one. For HOOD stock, a credit approach called a bull put spread might interest investors based on market realities. Robinhood shares have been on a tear, up almost 84% so far this year and more than 14% over the past 30 days. I believe that HOOD shares may rise but at a much slower pace.
Setting Up the Bull Put for Robinhood
Structurally, the bull put spread involves transacting two put options of the same expiration date. First, the trader sells a put at a higher strike price to receive a premium (credit). Second, they buy a put at a lower strike to cap off the contractual liability of the sold put.
By receiving a premium from the sold put, we’re gambling that the underlying security — in this case, HOOD stock — will not fall. However, if it does, we limit our losses by buying a lower-priced put as insurance. The strike price of this bought put essentially represents the point of maximum loss on the trade.
The Details of a Specific Robinhood Options Spread
Now that you understand the fundamentals of the bull put options spread, let’s tackle one possible idea for derivatives expiring Oct. 4, 2024. Those seeking a conservative approach — which perfectly matches a lean bullish sentiment — may sell the $22 put and buy the $21 put. At time of writing, the bid on the short (sold) put was 49 cents per contract and the ask on the long (bought) put was 29 cents.
The net premium or credit received on this trade would be 20 cents per contract (or $20 after multiplying by 100 shares). That’s also the most net profit the combination can earn. On the other hand, the maximum loss is 80 cents. Upon assignment, we would be obligated to fulfill the contractual requirement of the short put. However, the bought put cancels out most of the obligation, limiting the potential loss to the difference in strike prices minus the net premium received.
The break-even for this trade is $21.80, below last Friday’s close of $22.73. Further, HOOD stock only needs to close above $22 at expiration for bull put speculators to keep the maximum income.
Adding a Little More Spice to the Robinhood Trade
To be sure, there are plenty of other bull put spread option ideas for HOOD stock. To add a little spice to the lean bullish sentiment, a trader can dial up their risk-reward profile if they wish. For example, an investor could sell the $23 put and buy the $20 put. At time of writing, the premium-per-contract lands at 94 cents and 13 cents, respectively. Therefore, with this combination, the maximum net profit would be 81 cents, with losses capped at $2.19 should HOOD stock drop to $20 or lower. The break-even price is a stock level of $22.19.
For an aggressive bull put, you may sell the $24 put and buy the $21 put. On Friday, the bid on the short put was $1.59 and the ask on the long put was 29 cents. With this setup, the max profit would be $1.30 while the max risk would be $1.70. However, the break-even price would rise to $22.70, meaning that HOOD would have to make forward progress for meaningful profitability.
For investors comfortable with options strategies, there are conservative, moderate or aggressive ones to choose from here. The decision comes down to personal risk tolerance. For example, while the aggressive approach sounds appealing, HOOD stock would have to rise by 5.6% in about two weeks’ time to receive max profit. With the conservative approach, the security would just need to avoid falling below $22.
Wall Street’s Take on Robinhood Markets
Turning to Wall Street, HOOD stock has a Moderate Buy consensus rating based on eight Buys, seven Holds, and one Sell rating. The average price target is $23.65 for HOOD, implying a few percentage points of upside potential.
The Takeaway: A Possible Bet on HOOD Stock That Limits Risk
On the surface, financial services firm Robinhood appears to be a solid investment. With the equity value soaring amid sustained interest among young investors participating in the market, HOOD stock appears to be standing firm ground. However, that ground has also been subject to shifts due to various challenges, and Robinhood stock trades below its IPO level of $38. At the current juncture, a bull put spread trade could be appealing, and can be structured as a wager that HOOD shares will hold steady, at a minimum.
