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There were some people claiming that RH erroneously exercised their options on r/wallstreetbets. Could be a hoax, but if it isn't, then that seems like grounds

There were some people claiming that RH erroneously exercised their options on r/wallstreetbets. Could be a hoax, but if it isn't, then that seems like grounds for compensation. Of course, no one complains when RH makes a mistake in the client's favor.

ivalm 7y ago
Those people don’t know what is pin risk. Basically their long puts got exercised because automatic execution is determine at 4pm and they didn’t object (creating a short position in equity), their short puts didn’t get exercised because the stock rallied by 5pm and their counterparty was diligent and prevented auto execution (thus no long equities position to compensate the short equities position). Robinhood couldn’t rebuy the short equity position because the actual price rose above the put price leading to a net loss.
- speedplane 7y ago
  > Those people don’t know what is pin risk. Is it just me, or does it feel like the only people using Robinhood are college students gambling with their parent's money? Given that many extremely smart people who have devoted their lives to the stock market cannot beat average returns, the lack of Robinhood user's knowledge of "pin risk" seems to miss the greater point.
  - ivalm 7y ago
    There are two things: 1) Somewhat pedantic: A big reason why performance is-what-it-is is that at any real $$$ liquidity/volume becomes an issue. Lots of option markets are just not that liquid. If you play with only a few $k and robinhood pays for much of market friction then you can potentially outperform market at risk parity. 2) More real: For most people active trading is not about investing, it is about easy and legal gambling. There is a thrill of throwing you money into high risk options or skyrocketing meme-stocks. Because markets are (relatively) efficient the prices of these assets usually reflect their risk profile, so on average you should gain money (flip side of it being hard to beat market is that it is hard to severely underperform, on average, as long as you don't all-in; normally friction cost makes these kind of strategies not work but RH reduces that significantly). It ends up like going to a casino where on average you make a bit of money (but with high volatility means some people lose a lot, some people gain a lot).

ivalm 7y ago

Those people don’t know what is pin risk. Basically their long puts got exercised because automatic execution is determine at 4pm and they didn’t object (creating a short position in equity), their short puts didn’t get exercised because the stock rallied by 5pm and their counterparty was diligent and prevented auto execution (thus no long equities position to compensate the short equities position). Robinhood couldn’t rebuy the short equity position because the actual price rose above the put price leading to a net loss.

speedplane 7y ago
> Those people don’t know what is pin risk. Is it just me, or does it feel like the only people using Robinhood are college students gambling with their parent's money? Given that many extremely smart people who have devoted their lives to the stock market cannot beat average returns, the lack of Robinhood user's knowledge of "pin risk" seems to miss the greater point.
- ivalm 7y ago
  There are two things: 1) Somewhat pedantic: A big reason why performance is-what-it-is is that at any real $$$ liquidity/volume becomes an issue. Lots of option markets are just not that liquid. If you play with only a few $k and robinhood pays for much of market friction then you can potentially outperform market at risk parity. 2) More real: For most people active trading is not about investing, it is about easy and legal gambling. There is a thrill of throwing you money into high risk options or skyrocketing meme-stocks. Because markets are (relatively) efficient the prices of these assets usually reflect their risk profile, so on average you should gain money (flip side of it being hard to beat market is that it is hard to severely underperform, on average, as long as you don't all-in; normally friction cost makes these kind of strategies not work but RH reduces that significantly). It ends up like going to a casino where on average you make a bit of money (but with high volatility means some people lose a lot, some people gain a lot).