It has happened.
My investing buddy shared with me the tragic story of a Millennial who recently committed suicide after he thought he had lost more than seven hundred thousand dollars through options trading. You can read the article [here].
20-year-old Alexander E. Kearns was a University of Nebraska student home from college and staying at his parents' place. In the midst of the pandemic, he started to learn stock investing. He had opened an account with the popular brokerage firm Robinhood Markets.
Alexander proceeded on to trade stock options in the market. According to Forbes, Alexander fell into a despair late Thursday night after he looked at his Robinhood app and found he had a negative cash balance of US$730,165.72.
There was not much details on how the huge deficit came about, but it was suspected that Alexander was trading bull put spreads.
This option strategy means you sell put options at one strike price. You then buy a balanced number of put options at a lower strike price. This is to limit your losses, in the event the underlying stock price drops far below at option expiry. If the stock price remains above the upper strike level, you get to pocket the difference between the option premiums paid and received.
In other words, you're betting on the stock to rally higher in price, and your options expire worthless.
The danger comes when the stock price is directionless and hovers in-between the two strikes. You will have to cough up money and take receipt of the underlying shares (due to the exercise of the put options sold at the upper strike price).
But then, you will NOT suffer an absolute loss, because the underlying shares received will still command SOME value in the market. (That is, provided the company is not a bankrupt entity like Hertz Global Holdings.)
In Alexander's case, the negative cash balance was probably due to the exercise of the higher strike put options, but before the underlying shares were settled into his account.
In his final note, Alexander insisted he never authorized margin trading and was shocked to find his small account could rack up such an apparent loss.
No doubt the crave for excitement during lockdown, rock-bottom commissions and slick interface on Robinhood might have attracted Millennials like Alexander to use the app for investing. (The app was known to pop green confetti whenever users make their first trade [advertisement]. In Reddit, you can find user screenshots of snowflakes falling, which means your account balance is going down.)
Throw in human greed and jealousy into the mix, and this toxic combination can produce youthful speculative fervour with little regard for caution.
So intense that the life of a promising young man was lost.
Much as this was a tragedy for Alexander's family, it would be a stretch to blame Robinhood solely for his death.
Robinhood didn't kill him. Ignorance did.
Ignorance of how option assignment works.
Ignorance of proper risk management.
Ignorance of the fact that the market is chock-full of survivorship bias. (You don't hear pep talk from the millions who lost their fortunes in the crash.)
Ignorance of the reality that most people only share envious stuff on social media. (Few will rant about their embarrassing trading blunders on Facebook.)
Unfortunately, Alexander may not be the last victim in this 'financial pandemic'. My buddy recounted how some of his friends, whom had never touched investing before, recently started asking him for stock recommendations.
And I am seeing the same in my own social circle too.
The appearance of a media mogul-turned-day trader who boasted to be better than Buffett at stock picking doesn't help things either [news].
I sense a stock mania in the making.
I just hope there won't be a similar grievous ending on our shores.
My investing buddy shared with me the tragic story of a Millennial who recently committed suicide after he thought he had lost more than seven hundred thousand dollars through options trading. You can read the article [here].
20-year-old Alexander E. Kearns was a University of Nebraska student home from college and staying at his parents' place. In the midst of the pandemic, he started to learn stock investing. He had opened an account with the popular brokerage firm Robinhood Markets.
Alexander proceeded on to trade stock options in the market. According to Forbes, Alexander fell into a despair late Thursday night after he looked at his Robinhood app and found he had a negative cash balance of US$730,165.72.
 |
| Image by Bill Brewster in Twitter |
There was not much details on how the huge deficit came about, but it was suspected that Alexander was trading bull put spreads.
This option strategy means you sell put options at one strike price. You then buy a balanced number of put options at a lower strike price. This is to limit your losses, in the event the underlying stock price drops far below at option expiry. If the stock price remains above the upper strike level, you get to pocket the difference between the option premiums paid and received.
In other words, you're betting on the stock to rally higher in price, and your options expire worthless.
 |
| Payoff chart of a bull put spread versus underlying price. |
The danger comes when the stock price is directionless and hovers in-between the two strikes. You will have to cough up money and take receipt of the underlying shares (due to the exercise of the put options sold at the upper strike price).
But then, you will NOT suffer an absolute loss, because the underlying shares received will still command SOME value in the market. (That is, provided the company is not a bankrupt entity like Hertz Global Holdings.)
In Alexander's case, the negative cash balance was probably due to the exercise of the higher strike put options, but before the underlying shares were settled into his account.
In his final note, Alexander insisted he never authorized margin trading and was shocked to find his small account could rack up such an apparent loss.
No doubt the crave for excitement during lockdown, rock-bottom commissions and slick interface on Robinhood might have attracted Millennials like Alexander to use the app for investing. (The app was known to pop green confetti whenever users make their first trade [advertisement]. In Reddit, you can find user screenshots of snowflakes falling, which means your account balance is going down.)
 |
| Image by MyThrowaway404 in Reddit |
Throw in human greed and jealousy into the mix, and this toxic combination can produce youthful speculative fervour with little regard for caution.
So intense that the life of a promising young man was lost.
Much as this was a tragedy for Alexander's family, it would be a stretch to blame Robinhood solely for his death.
Robinhood didn't kill him. Ignorance did.
Ignorance of how option assignment works.
Ignorance of proper risk management.
Ignorance of the fact that the market is chock-full of survivorship bias. (You don't hear pep talk from the millions who lost their fortunes in the crash.)
Ignorance of the reality that most people only share envious stuff on social media. (Few will rant about their embarrassing trading blunders on Facebook.)
Unfortunately, Alexander may not be the last victim in this 'financial pandemic'. My buddy recounted how some of his friends, whom had never touched investing before, recently started asking him for stock recommendations.
And I am seeing the same in my own social circle too.
The appearance of a media mogul-turned-day trader who boasted to be better than Buffett at stock picking doesn't help things either [news].
I sense a stock mania in the making.
I just hope there won't be a similar grievous ending on our shores.
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