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He had a spread. The short leg was assigned, the long leg cancels it out but it doesn't happen instantaneously. So he temporarily was on the hook for -300 $AMZN
by meritt 6y ago
He had a spread. The short leg was assigned, the long leg cancels it out but it doesn't happen instantaneously. So he temporarily was on the hook for -300 $AMZN shares or whatever, which made his buying power massively negative. Then the long leg gets executed and it all evens out in the end for a relatively small profit or loss (the delta of the strikes), but that can be a nerve-wracking weekend if you don't understand the process.
Robinhood's UI is not particularly informative in this process either.
- birdyrooster 6y agoThe article says the account was not authorized for margin trading so how in the world could this even happen?
- meritt 6y agoYou don't need margin, you only need enough cash to cover the maximum loss, which is can be very small. e.g. right now if I wanted 3 put spreads on AMZN at 2640/2635 expiring this Friday, it would give me a net credit of about $2 per contract, or $600 credited to my account. My maximum loss would be 3 * 100 * (2640-2635) = $1500 minus the credit ($600) received, or $900. As long as I had a mere $900 in my account, this trade would be allowed. If I held through expiration and the short leg (AMZN $2640) was assigned, I would be contractually obligated to buy 300 shares of Amazon at $2640 a piece. This would briefly reduce my buying power by -$792,000. But as I also hold a contract to sell 300 shares of Amazon at $2635 ($790,500), it would have a net cost of only $1,500. And since I already received $600 up front, it would be just $900 additional out of pocket. But for a period of time, my account balance would have displayed -$792k.