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Robinhood 20yo trader with no income loses 700k on options, takes life
- mmm_grayons 6y agoThis is obviously tragic, but there's a reason options have a reputation as risky investments and probably not a great choice for most beginning investors. In any case, this market is incredibly risky and difficult for most any trader to predict. Most established brokerages have tighter rules around margin trading precisely for this reason, and I wonder how many 700k losses robin hood will eat before implementing similar restrictions. He probably didn't actually owe 700k in any case; I'm guessing it was just some delay or glitch.
- monksy 6y agoSchwab makes this based on levels you're allowed to do it at. Also it has limits based on what you're cleared to cover.
- hejja 6y agoI'm aware options are complicated, but is someone able to expand on how this is possible? I guess if you short calls you have unlimited downside, no? but it was my understanding that the entire point of options was to cap downside (don't exercise) and maintain upside
- formercoder 6y agoRH doesn’t let you short naked calls, you have to hold shares as collateral, I’m not sure what happened.
- AlEinstein 6y agoOptions spread.
- james412 6y agoRobin Hood has various tricks allowing your buying power to be inflated artificially, there have been a bunch of reports about it. It also appears RH users get margin accounts by default, at least from everything I've read. If that's true, it's probably the real problem. In the EU retail traders are permitted access to margin, but brokers are required to eat any loss exceeding the value of the account. It's not enough, because it still means new "traders" are exposed to amplified volatility, thus ensuring their accounts will blow out much faster than they may have otherwise, and positions that might have recovered in a cash account get margin called and closed out at the worst possible moment. Leverage/margin access should require similar levels of study as a private pilot's license
- X-Istence 6y ago> It also appears RH users get margin accounts by default, at least from everything I've read. If that's true, it's probably the real problem. No, you have to explicitly opt-in to it.
- mam2 6y agoNope
- X-Istence 6y agoYou have to upgrade to Robinhood Gold (which is free for the first month, then $5 a month thereafter). If and when you open a Robinhood account you have to opt-in to gold to be able to invest with margin. https://robinhood.com/us/en/support/articles/overview/ https://robinhood.com/us/en/support/articles/overview/
- cowmoo728 6y agoHe likely did a credit spread and one of the options exercised early. Robinhood shows that you owe $x, but if you look closer you have another option that guarantees that you'll get the stock to cover it, you just have to email robinhood support and tell them to exercise that option too. Very sad that he likely didn't even owe that $700k, just misunderstood the UI in his panic. https://www.reddit.com/r/RobinHood/comments/9guf3n/doh_some_calls_on_my_call_spread_got_assigned_and/ https://www.reddit.com/r/RobinHood/comments/9guf3n/doh_some_...
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- huac 6y agoah the follies of American-style options...
- whb07 6y agoThey probably ran up something like +$150k+ and then kept pushing it, used all margin to get multiples of this amount which went bad shortly thereby going deeply negative. Live by the sword, die by the sword.
- AlEinstein 6y agohttps://news.ycombinator.com/item?id=23523517 https://news.ycombinator.com/item?id=23523517
- caogecym 6y agoMight be due to margins - i.e. buy/sell options with money borrowed from Robinhood.
- grupthink 6y agoYou can't trade options on margins.
- redis_mlc 6y agoYoung folks: remember, you can always declare bk after a bad options investment. Unlike student loans.
- mrpopo 6y agoWhy should a bad options investment be better protected than studying?
- winrid 6y agoBecause lobbying! https://www.google.com/amp/s/www.politico.com/amp/story/2019/08/15/student-loan-devos-lobbying-1464926 https://www.google.com/amp/s/www.politico.com/amp/story/2019...
- redis_mlc 6y agoThanks for posting that. The idea that DeVos, whose family owns a school lending company, is in the administration is not just a conflict of interest, but an indictment of our entire political system.
- newguy1234 6y agoBecause you need to qualify for margin and the person who lent you the money agreed to lend it to you knowing that you could BK it. With student loans, the student usually doesn't have an income or assets so there needs to be more incentives to convince lenders to lend money.
- throwaway2048 6y agoI don't see how that reasoning applies to one, but not the other circumstance.
- jdminhbg 6y agoThe 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.
- Kednicma 6y agoFrom stories I heard growing up, a debt like $700k USD would get somebody killed by their bookies. But Robinhood isn't a bookie, I think, so what would have happened to this unfortunate soul instead? Bankruptcy and garnishing?
- nine_k 6y agoI can imagine the reason could be the insufferable feeling of guilt and shame, especially if the poor trader e.g. lent someone else's money and now would leave them broke.
- victor9000 6y agoHell if a kid owed me 700k, I would seriously consider putting them through college just to increase the chances of ever seeing that money again.
- wwweston 6y agoAs they say: you owe the bank $100, it's your problem. If you owe the bank $100mil, it's the bank's problem.
- loeg 6y agoThey had no income; nothing to garnish. They'd enter bankrupcy and discharge the debt. Their credit would suck for 7 years and they'd lose assets that can be taken in bankrupcy (if they had any).
- unishark 6y agoPresumably the debt would get sold to debt collectors for pennies on the dollar and they would try to get what they can, perhaps settling for some fraction of the amount. Bankruptcy would probably make it all go away.
- monksy 6y agoRobinhood is one of those Silicon valley companies that feels that the rules don't apply to them you. People have been yelling for years that "HEY THERE IS A REASON YOU SHOULDN"T BE DOING THAT." The tide has been coming in, and this is ABSOLUTELY no surprise.
- missedthecue 6y agoIs it really Robinhoods fault that someone made a poor decision? If the individual in question had paid $4 to execute that transaction would that have been fine?
- loeg 6y agoRobinhood is in the business of encouraging poor investment decisions among the less-informed. Even outside of leverage and options, trading single stocks is extremely foolish for most investors.
- quxpar 6y agoThat's what I say about drug dealers, aren't they just like pharmacists without all the flim-flam? And if people decide to make poor decisions with drugs, why stop them?
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- nine_k 6y agoImagine: "A 20 yo runs across highway in heavy truck traffic, dies". Well, yes. There is an obvious risk, and you either acknowledge this risk and act accordingly, or get struck. Fortunately, if you do a very bad investment, you can sell all your assets, go bankrupt, and keep your life. Too bad the poor guy chose to take his life. But this again looks like not doing enough homework. This is very sad. I wish these things were written in large red letters on the signup page for a trading account, and one would have to type them in first person, like "I realize that I can lose all my possessions as a result of a bad trade" (no copy-paste allowed) to even accept the terms of service. [Edited: spelling]
- loeg 6y agoThis is pretty tone-deaf.
- nine_k 6y agoPlease notice how highways are full of warning signs and barriers that prevent you from accidentally running across them. Same with construction sites, or heavy industrial plants. Maybe other risky places should have more warning signs, so that an optimistic 20-yo would have to stop and think before acting.
- JKCalhoun 6y agoSo if there are warning signs you're okay with allowing someone with no income to leverage to the tune of $700K? I think this is the basis for the accusation of tone-deafness.
- nine_k 6y agoPlease note that I did not even say anything about taking the leverage, only a about signing up. Power tools have safety feature; the leverage tool should, too. AFAIK Robinhood won't allow you to make a naked call, you have to show that you have enough to pay. Either their safety feature failed (very bad, needs fixing and constant checking), or the poor trader used something else as a collateral, and that could be an important part of the tragic outcome.
- Ghjklov 6y agoOn 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 on their game.
- bryananderson 6y agoThere is not an equal probability of a day trader making 700k and losing 700k trading options. Market makers won’t demonize day trading—the “new blood” are their best marks.
- smabie 6y agoThe 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.
- nine_k 6y agoThat could also be problematic: you mighth need to know what the average joe loser does instantly, or maybe even before the fact, to turn an actual profit. Though doing the contrarian move is sort of common wisdom: "sell when everyone is buying, buy when everyone is selling", of course if you understand what to sell/buy in either case.
- hetman 6y agoI think you're right. By the time you know what everyone is buying/selling with any certainty, the boat has already sailed.
- toast0 6y agoI mean, if you just want to be contrarian, watch your holdings for what's going up over whatever period, and sell that --- that's what everyone is buying. Look over the whole market for whst is going down, and buy that, that's what everyone is selling. Every finance information outlet ever tells you the day/month/year's biggest winners and losers, and most people aren't watching that and taking the contrarian position, or the winners and losers would be pretty boring.
- metrokoi 6y agoBeing able to trade with no experience and oversight is one of those things that seems like it should be illegal. I can't think of any way you can go so far in debt more quickly. Even if I tried to buy a bunch of cars or houses I can't afford I would just get rejected.
- MattGaiser 6y ago> Even if I tried to buy a bunch of cars or houses I can't afford I would just get rejected. Try one of the auto houses or any of the sketchy mortgage brokers. They will lend to you.
- nnoitra 6y agoAnd when he doesn't pay back?
- MattGaiser 6y agoThey charge such absurd interest that it doesn't matter as they can just repo it.
- metrokoi 6y agoThat would likely take much longer to default on a loan or loans and owe 700k worth in deficiency than it took this unfortunate kid to lose the same amount even if you were trying, and arguably much harder to find those sketchy mortgage brokers and auto houses than downloading an app and making a few bad trades. A loan on a car or house isn't the same as owing 700k to Robinhood, there's nothing to repossess.
- nnoitra 6y agoHow on earth wasn't he rejected going -700K?
- doctoboggan 6y agoDoes anyone know who this is and if there is a way to verify what he is saying is true? I don’t know much about Robin Hood but people here seem to be indicating that it’s not possible to end up owing money like that. The tweets also seem to advertise for two other twitter accounts that give investing advice.
- _binder 6y agoLet me just tell it is possible to make that kind of loss on Robinhood. Weather the tweets are real IDK.
- dx034 6y agoI'd be surprised if that's true. No other broker allows this simply for the reason that Robinhood would otherwise have to pay up if their client can't respond to a margin call.
- enilakla 6y agoSomething seems off here. The person would have had to have significant assets or collateral to end up negative; regardless of age and income. It just doesn’t work like that.
- meritt 6y agoYou're right, but due to Robinhood's terrible UI/UX, when you hold a spread and the short leg gets assigned, it shows your account as owing an astronomical amount. In reality, you have an opposite leg that gets exercised and you're only out the difference in the spread (which that risk is based on your account balance/margin/etc). This kid didn't lose $700k, his account just shows -$700k until Monday morning when it will update with the other leg being exercised and he probably lost a few grand instead. Here's a similar situation where someone thought they lost $172k, when in reality they lost $2k. [1]. It's a combination of a shitty UI and people not understanding option spreads. [1] https://old.reddit.com/r/wallstreetbets/comments/aohvow/hi_this_morning_i_lost_172k_trading_options_on_my/ https://old.reddit.com/r/wallstreetbets/comments/aohvow/hi_t...
- RIMR 6y agoThis is exactly right. This story just got a lot more tragic... He maybe lost $10k. Maybe nothing at all. Hell, he might have made money, but the RH UI just showed him this abysmal number. Or there's more to this story. I would be interested in knowing how long the issue had been going on, and if RH support had been contacted.
- manigandham 6y agoEvery broker shows the same thing. Sometimes the legs are exercised on different days leading to the large discrepancy until the other side is used to offset. It's ultimately up to the trader to understand their trades.
- imcoconut 6y agoIf the quoted $700k loss was a glitch, is robinhood in any way liable here?
- MattGaiser 6y agoMost stock data firms make you agree that the information displayed may be inaccurate. If you want guaranteed accuracy, they make you pay through the nose.
- dx034 6y agoEven for professional investors it frequently happens that you only know your exact PnL after markets close. With all automation there are still manual processes and software errors so manual trade reconciliation isn't that uncommon for high trading volumes. But professional investors also have their own bookkeeping and deeper pockets to pay for losses.
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- vmception 6y agoI had a $200,000 bill on AWS last week. I made a support query and got it removed. I could have written a suicide note, but then I didn't. It actually never crossed my mind. It was so inconsequential that I was prepared to just move my static website off of that S3 bucket into another AWS account bucket, and remove my credit card which prompts Amazon to just terminate the account. If it went to actual collections I would have been ready to discharge it and deal with the consequences of not being able to get airlines miles on a premium credit card for a few years. In 2020, this is considered tone deaf.
- gonzo41 6y agono it's totally fine. In fact I think that knowing that if you send a groveling email to aws support they'll generally give you a hand should be on their developer doco.
- dx034 6y agoThe difference is this money would've gone to AWS. They could wave it without much of an issue. The counterparty for the option wasn't Robinhood but some other trader. The loss (if it ever existed) has to be paid by either the client or Robinhood. You can't just remove it. And for $700k many companies will go to great length to recover at least some of the money.
- vmception 6y agoWhile the similarity is that the Robinhood and Amazon losses were UI novelties which were both promptly resolved. And you are missing that brokers routinely settle for much lower amounts in bad trades.
- prithvi24 6y agoThis is super unfortunate, really sorry to hear about it Robinhood, is like any tool, and can be used in a positive or negative way. I've been telling my friends using Robinhood to check out https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338 https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/03933... Commission free ETFs and blue chip stocks are great ways to start building wealth (especially for novice traders who are not interested in specific tax advantages). Everyone should really read the book before trading
- binarysolo 6y agoRead a bit and wasn't sure of the exact nature of the 700k loss, but if he somehow got access to all that credit without the assets to back it it, it would seem like people can form a pact, where person A gets credit and bets X on a thing, person B bets the counterparty -X, have X be comically large, one person gets the payoff while the other declares bankrupcty, and basically "gain X/2 for enduring bankruptcy". (We can have some variation to sweeten the pot, where the losing person gains X/2+C, winner gains X/2-C, where C= some additional money to deal with bankruptcy hassles.) Presumably this doesn't actually happen since it's doable, so I'd be curious what -700k losses practically means.
- jboydyhacker 6y agoThis bargain exists already- it's called a hedge fund.
- gizmo686 6y agoThis sounds like fraud. Person A would have an asset worth X/2, in the form of his contract with person B. When A declares bankruptcy, his X/2 would be used to partially pay his debtors. This only way this scheme works is if A conceals this during the bancrupty. For comically large X, you can expect to have a team of lawyers and forensic accountants look through your books. If they catch on, you get nothing except a potential fraud conviction.
- binarysolo 6y agoYeah, that makes sense - for a simple scheme like this I'm sure there's some expectation you can't just go around abusing bankruptcy like this.
- AlEinstein 6y agohttps://news.ycombinator.com/item?id=23523517 https://news.ycombinator.com/item?id=23523517
- alpineidyll3 6y agoThis is going to make it less fun for me to go to work tomorrow and sell /r/wsb financial derivatives whose value they couldn't begin to understand.
- imnotlost 6y agoAmerica is a business. Get rid of regulation and let people fend for themselves. https://en.wikipedia.org/wiki/Bucket_shop_(stock_market) https://en.wikipedia.org/wiki/Bucket_shop_(stock_market)
- abiogenesis 6y agoWait, 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.
- nknealk 6y agoI think that’s the default for any brokerage product. However, when you apply for options trading, you have the option to add margin to your account. It’s essentially just a tick box. It appears from the twitter thread that this user unknowingly added margin to his account, traded on margin, then had a really big margin call.
- asdff 6y agoYou owe your broker if you trade on margin
- ohyes 6y agoThis is a huge fuck-up on Robinhood's part, they should have never given him that sort of leverage. Any relatively new investor trading options is also a huge mistake, it is surprising he was approved for an account where he can even use options.
- downerending 6y agoThis is a horrible story, no doubt. Broadly, unless you have a million dollars to lose, you have no business putting your money in anything but mutual funds. Even there, only low-overhead index funds are a good call. For most people, buying individual symbols is very foolish. And options, etc., is simply insane.
- ehsync 6y agoThis 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. The account immediately reflected the loss but not the win, displaying a -$10 balance. When the $9 payout from the win would have settled, the account balance would have become -$1 instead of -$10. The individual didn't realize the $9 payout was coming, and took his life in reaction to the -$10 balance.
- Traster 6y agoThis feels a bit like the tide pod challenge. It isn't necessarily RH's fault that a group of bored teenagers have decided to spend their spare time lying on the internet about options trading. It starts with a small group of trolls thinking it would be funny to bullshit about something and before you know it you've got a community that's a wonderful mix of people in on the joke and people actually burning their life savings (and more) on complex financial instruments without even the bare understanding of their mathematical properties. Tide never advertised their laundry detergent as edible, but they still had to deal with it and come out and actually advertise that you shouldn't eat tide pods. Similarly, I think, with Robinhood I think they actually have a responsibility to actually inform their customers the real risks associated with what they're doing.
- throwawaygh 6y agonb other trading platforms do try to educate their consumers. rh makes it very easy to trade options.
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- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- mam2 6y agoHe didnt actually lose 700k it was a UI problem.
- smkellat 6y agoAll I have done is looked for somewhat stable dividend payers, bought those, and held them until various unpleasant circumstances forced me to liquidate. The service I am using now has good guardrails, nice screeners, very responsive customer service, and I am pretty happy with them. The first one tried to look like it was out of Trading Places and was so confusing that I didn’t manage to make a trade on it before dumping it. At the least I know I don’t know everything in stocks. I know enough to ask questions when I don’t understand. My account is still set to zero margin and will stay there for the time being.