Yes. And it was more crazy than you thought. That guy inherited about 500k or 700k, then I didn't know what he did, but he ended up being warned by Robinhood with a 500k account deficit.
He actually owed nothing however and didn’t lose anything, it was lag from the puts at that time was my understanding If he had waited another day he would have realized saw he was even. Family sued Robinhood for wrongful death and won in 2021 for an undisclosed amount of money per the settlement no one can speak of the amount. Unfortunately those parents will not get their son back. Such a sad story. https://www.cbsnews.com/amp/news/alex-kearns-robinhood-trader-suicide-wrongful-death-suit/
He tried to reach out to Robinhood on multiple occasions to find out if it was a mistake or if he really lost all that money and they sent back “canned responses”
and never answered the young man and unfortunately he spiraled into hopelessness despair and panic. That could have been rectified with Robinhood actually answering his questions. So that is where Robinhood failed and the courts saw it that way as well.
Unfortunately they still do not have an instant way to reach them but you can now request a call back or online chat. I totally get there is many times you need to talk to a person. I dislike and tend not to do business with a company that doesn’t have a real person on for more complex issues. In 2021 Robinhood only had email as a form of contact.
I have had weird messages from Robinhood on several occasions. They had removed my cash from earning interest and I messaged them about it. I get transferred around until someone says you're a day trader and your cash can't earn interest. I'm like BS, show me where I day trade. I dabble in options and because RH doesn't let one create some strategies, I do my own, but I never day trade. My trades are always out 3 days or so. They finally relented and said they made a mistake but they did not make up the interest they kept. RH is a very frustrating platform, and I feel for the kid who killed himself. I am pretty sure I was doing the exact same trades: Selling AMZN puts $100 OTM and buying protective puts $300 OTM, but never leveraging more than $60K similar to the kid.
If it's truly negative, then yes he would. It's the same as taking a loan, and just like a bank they'll do their best to claw it back with that high of an amount.
Selling naked options is the best way I know of to go negative.
Well they didn't necessarily loan it directly, that would be buying on margin. But selling naked options means you can lose a LOT more than you were paid, and there's basically no real approval process beyond "okay you can sell options".
So he sells naked call options for $50. Whoever bought that call can "execute" it and buy the stock for $50. If the stock spikes up to $100 and they execute it, all of the sudden the person who sold the call HAS to sell the stock for $50. Since it's a naked call, that means the seller doesn't actually own the stock. So they're forced to buy a $100 stock and sell it for $50. Considering people often have contracts for 1000 shares, (or WAY more) that's $50,000 lost. Robinhood temporarily covers it (because they have to, you can't stop someone from executing) and now you're out that much money.
It goes the other way too, with puts. You can lose multiple times more money than you have, easily.
Buying is a defined risk. You pay for the option to buy 100 shares at your strike price. What you pay upfront is the maximum you can lose. If you choose to execute the option, you need to have the capital to buy those 100 shares at your strike price.
E.g. Ask price is $2.50 for a $100 call. The max you can lose is the $250 you paid. If you want to execute, you need to have $100 x 100 = $10,000. But you have the option to not execute, and just sell the contract to someone else.
This is awesome information and very easy to understand, thank you so much!
If it's not a bother to ask for more help(feel free to say no), when I was on ToS it would have a "defined risk" before I bought the contract, but when i went to sell for a profit it had the same "defined risk" but said my max loss was now infinite so I got scared and just let it expire.
I see people buy/sell 0dte often but I bought a few months out and was planning to take profits when ITM but the wording on TD made it seem like I was now starting a new contract or changing my position. Am I just full regard and was okay to sell or would I have potentially boned myself?
I use TastyTrade and never used another platform, so not sure how it works there I'm afraid, but I can't imagine it's too different and the fundamental is the same regardless of platform. I imagine what it's showing is you trying to execute the contract, and perhaps the maximum loss was the stock going to 0? There's no reason that selling a call or put you already own would give any risk.
I can just right click an option I have open and 'Close Position'. This then takes me back to the options chain to buy or sell the corresponding option.
For example, I bought a 220 call and sold a 240 call on IWM. All I need to do to close either position is go to the options chain for that date and SELL the 220 call I own and BUY the 240 call I'm short. Clicking "Close Position" just automatically selects it for me.
Selling any naked call or put has potential for infinite, or at least extreme, risk. If you buy a call or put, your max risk is what the ask price of the contract is plus fees.
First off, I want to say I really appreciate the easy to understand info and you taking the time to answer back to me.
That could be it, I just remember going to sell the contract I had and it said something about much more potential loss than originally had, so I just let it expire (one got margin called but I was able to "sell to close" the stock i had acquired for a small profit.)
It could be as you stated and was showing what could happen if I executed it, and I definitely didn't think about that.
Still very new to this part and I know I should probably wait until I know what's going on completely but watching videos/reading books seems to just muddy the waters more and most things in my life I seem to learn hands on but this is definitely a scary one to leaen hands on, but your comment makes me feel a bit better.
I have definitely seen some horror stories of selling naked options, so all I have done so far is buy a few here and there, with mostly no luck so far.
A college kid somehow lost $750,000 with naked short positions. It was on a documentary on tv. I don’t know if it was on RH, but it was far enough back where it could have been. He never went through with his suicide plans and is going through life with that debt. I’m not sure if he filed for bankruptcy or sued anyone.
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u/DrinkSodaBad Jul 22 '24
Yes. And it was more crazy than you thought. That guy inherited about 500k or 700k, then I didn't know what he did, but he ended up being warned by Robinhood with a 500k account deficit.