a thoughtful web.
Share good ideas and conversation.   Login or Take a Tour!
comment by kleinbl00

Saw that last night, was going to post it.

Let's highlight something:

    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.

    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.





ahosai  ·  221 days ago  ·  link  ·  

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.

katakowsj  ·  221 days ago  ·  link  ·  

Agreed. My fourth grade daughter wanted to drive my neighbor’s Kawasaki Ninja crotch rocket around the neighborhood later today. Reading this has encouraged me to rethink saying yes.

kleinbl00  ·  221 days ago  ·  link  ·  

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.

katakowsj  ·  221 days ago  ·  link  ·  

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

kleinbl00  ·  221 days ago  ·  link  ·  

LOL