re: Rookie trader racks up $700K in debt trading options on Robinhood, takes own life

Sometimes it can show a extremely large amount of debt when your short legs get executed early and the long legs are still open. I really hope the guy didn't see $700k debt and didn't realize that he had almost that much in collateral with open options. If so, in reality he probably only owed Robinhood between $1-10k.

The "infinite money glitch" that was out a few months ago really wasn't that big of a deal from the trader's side.

Traders would buy the stock and then sell covered calls. The account value that RH used to calculate margin limit would go up. So you'd borrow against that margin again to sell another covered call. Rinse and repeat. Worst case, the stock crashed and the trader keeps the premium which sold for the same value as the stock.

So if I remember correctly, it was a net zero trading strategy for the sake of the memes.

Option trading is not for the faint of heart.. I blew up my account last month with spy puts. Never occurred to me to kill myself.. just learned a big lesson and moving forward, never be afraid to take profits no matter how small they seem at the time and always have a threshold of the amount you are willing to lose in each position.

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I use options to hedge stocks but I don't trade them either bc don't understand beyond using them to hedge.

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A good options trader understands risk vs reward very very well. there are many strategies out there that make money reguarly.

What most people like this are doing though is not too different from going to a slot machine at the casino and taking a pull.

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Not to sound insensitive but I think an average bankruptcy attorney laughs at 700k in unsecured debt. Guy should have driven through town and get the number of one off of a bus bench.

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Wut

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we bought Hertz two weeks ago and wrecked all the shorts

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HFTs holding short at 55¢ deserve any squeeze they got.
But Robinhooders were buying Hertz from $2-$5.50/share, are now stuck, and most will lose their asses on the trade.

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170,000 Robinhood Millennials Get Stuck in a Hertz Stock Spiral

As of June 15, data from Robintrack shows more than 170,000 users hold Hertz stock. Most of the investors entered the stock when its value surged to $5.53 on June 9. Since then, the Hertz stock fell by 66% within less than a week, now hovering at $1.88.
LINK

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So you thought it was a good idea to buy a stock in borderline bankruptcy, pump it with a bunch of randoms and then expect to actually cash out?

The internet keeps things interesting.

our army cash ganged last week on Hertz my guy

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Maybe I’m not understanding, but this doesn’t sound like a glitch. You don’t need margin (at least with my brokerage) to sell covered calls because you hold the underlying as collateral.

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No, you don't need a margin account to buy a lot of stock and sell a covered call against that lot. But they weren't just buying stock and selling covered calls once. They were using margin accounts to buy stock on margin, sell covered calls and then continue buying stock and selling covered calls well in excess of the allowable margin requirements - actually having access to "infinite leverage".

This Bloomberg article describes it in detail:

Robinhood Traders Discovered a Glitch That Gave Them ‘Infinite Leverage’

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Here’s how the trade works. Users of Robinhood Gold are selling covered calls using money borrowed from Robinhood. Nothing wrong with that. The problem arises when Robinhood incorrectly adds the value of those calls to the user’s own capital. And that means that the more money a user borrows, the more money Robinhood will lend them for future trading.

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They were using margin accounts to buy stock on margin, sell covered calls and then continue buying stock and selling covered calls well in excess of the allowable margin requirements - actually having access to "infinite leverage".

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I read the article and now it makes sense.

I guess the part I missed was that they were buying the underlying on margin. So Robinhood was adding the profits from selling deep ITM calls to their assets for margin calculations, while ignoring that the collateral for those calls was bought on margin. That’s almost like using a credit card to make a down payment on a car.