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Robinhood 20yo trader with no income loses 700k on options, takes life

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Re: Robinhood 20yo trader with no income loses 700k on options, takes life

#191

Post by wpietri »

chii wrote: post #130
wpietri wrote: post #64

Earlier quoted context omitted.

Yeah, I think fees and externalities mean that speculation is a negative-sum game. I used to work for financial traders, but I quit that industry because I decided it was, however lucrative, a net societal negative.

speculating is not a net societal negative - it allows one party to trade the risk away. But of course, the same instrument can be abused by gamblers. But it's not the instrument itself that's the problem - it's that there are people gambling with money they can't lose.

Market-makers are sufficient to allow one party to trade the risk away.

I agree gamblers are also a problem, although I'm not sure it's really a distinct group from speculators. But if you look at the amount of resources spent to in effect lower insurance premiums, I think you'll find it's much larger. So yes, the lowered insurance premiums are good, but the costs are so high that on net it's negative for society.

Re: Robinhood 20yo trader with no income loses 700k on options, takes life

#192

Post by sdinsn »

lukevdp wrote: post #173
ehsync wrote: post #156

This is tragic. The consensus I've gathered is that this was a result of a stock option credit spread's short leg being assigned combined with a misunderstanding of the trading platform's reporting. If this is true, an analogy for the situation would be: The individual bet on a coin flip, wagering $10 (representing the $700k) on heads and $9 (figurative amount representing the spread) on tails. The outcome was tails.…

How do you know this?

It's a known RH bug

Re: Robinhood 20yo trader with no income loses 700k on options, takes life

#193

Post by tedmiston »

nugget wrote: post #44
redis_mlc wrote: post #4

Young folks: remember, you can always declare bk after a bad options investment. Unlike student loans.

If you read down into the Twitter thread, it seems like the -$700k net balance ("debt") may have simply been a display "error" within Robinhood's system: "The unfortunate thing is there are certain situations where RH will show this kind of amount due, but it is an anomaly for 24 to 48 hours as things process when selling calls and puts. Uneducated traders think they actually owe these amounts which is not close to a…

This glitch showing a massively incorrect balance sounds absurd. Is there a logical explanation? Is it a bug?

Re: Robinhood 20yo trader with no income loses 700k on options, takes life

#194

Post by anthony_barker »

nostrademons wrote: post #102
smabie wrote: post #65

Earlier quoted context omitted.

The efficient market hypothesis says otherwise. If it was easier to lose money (ignoring trading costs and spreads) than it was to make money, I could easily beat the market by doing the opposite of the average joe loser.

There are firms that do exactly this. Robinhood's business model is to sell the order-flow data of its users to HFT hedge funds, who then take the opposite side of the trade. It's proven very profitable both for Robinhood and for funds that do this.

Its quite competitive citadel makes money. But Citi bought a company and then sold it. KCG went bust ...

The big money is trading options, etfs, equities,cme futures against each other and against swaps. But for swaps you need an otc desk.

Re: Robinhood 20yo trader with no income loses 700k on options, takes life

#195

Post by asdff »

AlchemistCamp wrote: post #104
smabie wrote: post #65

Earlier quoted context omitted.

The efficient market hypothesis says otherwise. If it was easier to lose money (ignoring trading costs and spreads) than it was to make money, I could easily beat the market by doing the opposite of the average joe loser.

The efficient market hypothesis says nothing of the sort. Upside and downside with options aren't symmetrical. Unlike when purchasing long positions in stocks, when trading options it's possible to lose many times more money than you initially put in. You also really can't ignore the spreads. Market makers win pretty consistently and everyone else is playing a worse than zero-sum game.

With options your gains are infinite but your loss is limited to the premium. I don't think you can loose more than you put in, only exactly however much you've put in.

Re: Robinhood 20yo trader with no income loses 700k on options, takes life

#196

Post by asdff »

abiogenesis wrote: post #110

Wait, is it possible to "owe" money to Robinhood? I have never used them but I was under the assumption that you can only lose the money you deposited, because of the leverage, but you can not go negative. The tweet seems to imply that too, but a lot of the comments here look misinformed.

You owe your broker if you trade on margin

Re: Robinhood 20yo trader with no income loses 700k on options, takes life

#197

Post by wcoenen »

asdff wrote: post #195
AlchemistCamp wrote: post #104

Earlier quoted context omitted.

The efficient market hypothesis says nothing of the sort. Upside and downside with options aren't symmetrical. Unlike when purchasing long positions in stocks, when trading options it's possible to lose many times more money than you initially put in. You also really can't ignore the spreads. Market makers win pretty consistently and everyone else is playing a worse than zero-sum game.

With options your gains are infinite but your loss is limited to the premium. I don't think you can loose more than you put in, only exactly however much you've put in.

Someone needs to pay out the "infinite gains", that's the option trader on the other side of the contract.

Re: Robinhood 20yo trader with no income loses 700k on options, takes life

#198

Post by smabie »

AlchemistCamp wrote: post #104
smabie wrote: post #65

Earlier quoted context omitted.

The efficient market hypothesis says otherwise. If it was easier to lose money (ignoring trading costs and spreads) than it was to make money, I could easily beat the market by doing the opposite of the average joe loser.

The efficient market hypothesis says nothing of the sort. Upside and downside with options aren't symmetrical. Unlike when purchasing long positions in stocks, when trading options it's possible to lose many times more money than you initially put in. You also really can't ignore the spreads. Market makers win pretty consistently and everyone else is playing a worse than zero-sum game.

Most brokers aren't allowing regular people to sell tons naked of puts or calls. For almost all retail option traders, their losses are fixed.

Re: Robinhood 20yo trader with no income loses 700k on options, takes life

#199

Post by BoorishBears »

wdr1 wrote: post #115
Ghjklov wrote: post #17

On the flip side, if this trader instead made 700k on options, he'd be celebrated as a hero who beat the market at such a young age and Robinhood would be an empowering role in elevating the young and disenfranchised. That is just the reality of the market. I hope this is not setting up so that the powers that be, and the market makers can demonize trading and then regulate away all the new blood who wants to get in…

He wasn't a professional trader or anything like that. He was a kid with no income. Was they did they allow him access to so much leverage?

It's now coming out that he didn't have access to that kind of leverage.

Robinhood will show one leg of a multi-leg options strategy as your balance in certain cases.

So you have theoretically sold 700k in calls, but it's covered by a near equal amount of options being bought, there is no scenario in which you could actually owe 700k

Yet Robinhood's engineers didn't properly implement the feature, so their account balance showed the calls as if they had been sold naked, resulting in -700k as a balance.

Re: Robinhood 20yo trader with no income loses 700k on options, takes life

#200

Post by jdminhbg »

tttp wrote: post #59
jdminhbg wrote: post #24

Earlier quoted context omitted.

The answer is right there. Bankruptcy is legally a recourse of the credit extended by Robinhood, and it is legally not one of student loans. That may or may not be morally correct or good policy, but it's certainly the current state of the world.

Please don't drag the rest of the world in it, this student loan construction is certainly the current state of the USA

The article is about something that happened in the US, so the situation in US law is relevant.
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