It can ruin your day or your life. And what you don't know about options is probably a large amount of data. A 20-year-old died by suicide, thinking he’d lost more than $730,000 on Robinhood. Now his family is suing.
This has been kicking around in drafts for a while. Not quite since the GameStop kerffufle hit the news. I was going to delete it, but I think the lesson stands. I think it probably says something about the state of our education today, and the moral fiber of our nation. (Or lack thereof.)
Finance is not rocket science. But if you have never read a balance sheet, don't know how to calculate owner's equity, are confused on cash flows, and have never read the auditors' notes on an anual report, then you probably shouldn't jump right into the options market. Just sayin'.
I have been reading balance sheets and statements of cash flow since I inherited a handful of shares of stock in junior high. I worked as Info Tech support at a market-maker clearing firm that did back office processing for people yelling at each other on trading floors. (Back when they did that.) I don't invest in options because I want to sleep at night.
But I agree, that Robinhood should have told this kid what his haircut came to, or at least that you can't balance the accounts until both sides of the trade clear, which doesn't have to be until about an hour after trading closes, or at least that is how it was back in the day. (A haircut would be his net position and required capital.) It might be good to have noted that in the info shown him via the app. But move fast and who cares about the fallout... Or something. I also agree with the following quote.
“How was a 20-year-old with no income able to get assigned almost a million dollars worth of leverage?” Kearns wrote in his final note, explaining that he had never intended to take on so much risk.
I agree that people need to learn about investing. But that doesn't include just buying whatever is a fad today. Assets and liabilities. Income and expenses. Cash-flow. These are a good place to start. Or does anyone remember pets.com? No, of course they don't.
When do you buy? Why would you sell? What is the point of short selling, and why (oh why?) did the SEC eliminate the Uptick Rule? Or was it Congress that did that?
If you want to invest in options then you should know what a put and a call are, and what it means to buy a put versus sell a put. Ditto with the 2 positions relative to a call. You should know what your capital requirements are and what the rules for trading and clearance are. You shouldn't figure that out AFTER you write an option on a million dollars worth of stock.
Then there are futures contracts....
I'm not telling you what to do, except to learn something before you leap.
