Days after Charlie Munger called Robinhood 'a gambling parlor,' the free-trading app revealed options trading as its largest source of revenue

• Charlie Munger of Berkshire Hathaway called Robinhood "a gambling parlor" on Tuesday.
• The free-trading app said it derives a bulk of its revenue from options trading in its S-1 IPO filing.
• Options trading is often viewed as a risky way to leverage exposure to the stock market.
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Just two days after Charlie Munger of Berkshire Hathaway called Robinhood "a gambling parlor," the free-trading app said it derives a majority of its revenue from options trading.

The comments from Warren Buffett's right-hand man came in an interview with CNBC on Tuesday night, in which the billionaire investor said, "it's telling people they aren't paying commissions when the commissions are simply disguised in the trading."

On Thursday, Robinhood filed its S-1 with the SEC, a necessary step the company has to take prior to going public. The document revealed the underlying drivers of Robinhood's business, from options, equities, and crypto trading, to securities lending and payment for order flow.

In 2020, Robinhood generated $958 million in revenue, of which 46%, or $440 million, was derived from options trading. Robinhood's options trading revenue grew 298% in 2020, relative to 2019, as the pandemic and government stimulus checks led to a boom in stock market trading by retail investors.

Options trading is often viewed as a much riskier form of trading relative to stock trading, as it gives investors leverage to increase their exposure to short-term or long-term moves in the stock market.

While less risky option trading strategies exist, like selling covered calls on an underlying stock holding, a bulk of the options trading among Reddit "YOLO" investors tends to be buying directional put or call options with short-term expiration dates. Unless timed properly, these types of options trades can lead to a loss of nearly all invested capital.

"[Robinhood is] a gambling parlor masquerading as a respectable business," Munger said.

Robinhood probably disagrees with Munger. In the company's S-1 filing, it laid out how it's democratized stock market investing for 18 million users through $0 trading commissions, an easy-to-use app, and education initiatives.

The company said more than 50% of its customers say they are first-time investors.

A customer named Angelina was quoted in Robinhood's S-1 as saying, "The investor in my head was someone who wore a suit and a tie. Robinhood changed that for me."