- The note found on his computer by his parents on June 12, 2020, asked a simple question. “How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?” The tragic message was written by Alexander E. Kearns, a 20-year-old student at the University of Nebraska, home from college and living with his parents in Naperville, Illinois. Earlier that day, Kearns took his own life.
- In fact, a screenshot from Kearns’ mobile phone reveals that while his account had a negative $730,165 cash balance displayed in red, it may not have represented uncollateralized indebtedness at all, but rather his temporary balance until the stocks underlying his assigned options actually settled into his account.
Saw that last night, was going to post it. Let's highlight something: In Kearns’ note, he says that the puts he bought and sold “should have cancelled out,” because normally a bull put spread involves selling put options at a higher strike price, and buying puts at a lower strike price, both with the same expiration. The trade generates a net credit, which the options trader keeps if the stock price stays above the higher strike price through expiration. It’s generally considered a limited risk strategy because the simultaneous purchase and sale of put options means the maximum loss on a per-share basis is the difference between the strike prices, less the amount earned when the puts are sold initiating the trade. As ahosai can attest, "options" are the black spot in the macular degeneration of my investment understanding. But I mean, I'm not an abject moron and I try real hard to understand this stuff and it's... non-intuitive. So here's a kid, who has probably been doing this for not very long, being told by the slot machine that he owes it a couple Ferraris. What kind of money management do you think he was taught in high school? I'll bet none. We have laws that require credit cards to put "if you pay the minimum on this balance you will take 76 years to pay it off at which point you will have paid $322,000 in interest fees" but RobinHood has nothing in their software that says "whoa hold on that six figure debt will magically vanish tomorrow" or even "hey you don't actually owe us three quarters of a million dollars" because the SEC assumes people trading options aren't 20-year-old neophytes. I don't trade options because I don't know what the fuck I'm doing. But then, I grew up in the Charles Schwab universe where once a year you call some disinterested business major who throws five mutual funds at you and tells you to fuck off. I didn't know that "knowing what the fuck you're doing" is an option. I don't think it should be.Although Robinhood won’t release the details of his account, it‘s possible that Kearns was trading what’s known as a “bull put spread.” Put options give buyers the right to sell the stock at the strike price anytime until expiration, while put-sellers are on the hook to buy the underlying stock at the strike price, if assigned. This happens automatically at expiration if the price of the underlying stock closes that day at a price one penny or more below the strike price.
If you buy an option your loss is limited to the premium you paid but your profit potential is unlimited. The exact opposite is true if you sell an option - your profit is limited to the premium you collected for the sale but your loss potential is unlimited. Most retail brokerages won’t allow you to sell options unless you are hedged against losses, but they don’t quantify how much you need to be hedged. So any retail investor with an options account could sell an option for say $100 as long as they are hedged by buying a corresponding option, but that hedge could limit losses to $100 or $100,000, the brokerage doesn’t care. My guess is this guy leveraged his margin account and sold a shitload of options but bought the cheapest hedge allowable. When the trade went against him He realized why the hedge was so cheap. The first rule of selling options is don’t. If you still want to sell options watch this apology video from James Cordier who spent decades making hundreds of millions of dollars selling options until he blew up over 24 hours on a single trade selling options on Nat Gas.
Ride? Probably fine. Drive? Unless she's already 5'4 or so the ergonomics do not favor her. More than that, there's ample evidence that the neuroplasticity of anyone under 28 or so puts them at a disadvantage when dealing with the instantaneous decision-making processes involved in operating an operationally-complex device like a motorcycle. Not a crippling disadvantage, but they're more involved. Most young riders start out on dirt bikes, which have the advantages of (a) no traffic (b) substantially softer things to crash into (c) vehicular design intended for occasional spills. I mean, it might be a formative experience for her to eat shit at 11 on a Ninja 250 but I think you do have to contemplate how much you want your kid to eat shit on a Ninja 250.
Oops. My bad. Sorry, I was being facetious. My stab at the humor of the situation that allows a kid to have the power trade options and hypothetically lose 3/4 of a million dollars while having just a shadow of the responsibility needed. Kind of like letting my daughter rip around on a motorcycle. I realize now how stupid it may sound unless you knew me better. She did learn to wakeboard today actually. Far less dangerous though. Thanks for taking the time to post a nice PSA on motorcycles. Thanks. I owe you one. -Jeff
This is in my e-mail archives from February 4, noting that I received it from a Tesla fan at work in December: By my understanding, each option he bought for $2.45 in December could be exercised today to buy a share of TSLA at $710, which opened at $1012 this morning. Can't find the original tweet, but 123× in six months if accurate. At the time, I wrote "I told the fanboy that $2.45 sounded about right, thinking that I would be more or less indifferent between buying or selling at that price."
I don’t get it... the maximum loss the kid could incur is the cost of a bakupcy lawer and 7 years of bad credit. Honest the smart thing to do is to turn 18 and do one of these highly leveraged yolo bets and then immediately go bankrupt if it goes south. Then you would basically be free and clear by the time you moved out of your parents basement or be filthy rich. This is the kinds of bets you want to take in life, high upside, limited downside and a bunch of idiot Robin Hood VC investors eat the loss
Right - but you're applying the ethical flexibility of a person considering the strategic pros and cons of a financial contract. This is my point: the people propping up the retail markets right now are, to stereotype, less sophisticated than the people selling into those markets. We do not instill "grift VCs" as a value in children.
There was a whole lot of foreclosure in the 2008 crisis. One of the big dilemmas back then was that people were "walking away" from their mortgages. ZOMG the horrah. Why would anyone be so brazen as shirking their moral responsibility to uphold their debts? Because, it was argued, they were simply parties to a financial transaction: in return for paying a monthly fee, they were allowed to live in the bank's house without the bank ruining their credit. When the cost of paying the bank for their house was substantially greater than the inconvenience of having their credit ruined, the rational consumer dropped the keys in the mailbox and paid cash for seven years. There was a peculiar wrinkle up here in Washington, as any bank foreclosing on you can be compelled, upon official court motion, to "produce the note", ie bring the actual paper deed to court. Considering how many mortgages were bought and sold it was potentially worthwhile to stop paying your mortgage, let the bank foreclose on you, go to court and demand that they produce the note. If they did, you were foreclosed. If they didn't, the note was considered lost and you suddenly owned your house free and clear. Took the Republicans about nine months to close that little loophole but it was fun while it lasted. I am all about consumers knowing their rights and their maneuvers. "moral hazard" is just a Republican's way of saying "they aren't doing what we tell them to do." But if you don't take Home Ec you don't so much as learn how to balance a checkbook so I'm not optimistic that the system is going to change anytime soon.
I love the term "Moral Hazard" because it only applies to poor people. If you are hungry and need food stamps tisk tisk tisk "Moral Hazard" why arent you selling you body or scrubbing my floors. If you just lost half a billion dollars in a real estate casino scheme - well clearly thats not your fault and you need a bailout. I almost never use the food delivery apps but every time Uber Eats has a coupon, I use it and remind my daughter that 20% + of your meal was brought to you by stupid VC and Saudi money and it would be wrong not to take their stupid money. Maybe im just weird like that. My wife on the other hand wont take her hard eared unemployment bailout dollars because she believes in that shit dispute the fact that we will be paying it back 10x over the next decade.