I heard yesterday that the loss showing up on his Robinhood account was a glitch and not correct; however, it has not been released what the true loss was.
I have never traded options and have a very limited understanding. I was under the initial impression it was a bit like buying trade insurance. For example; pay up front for a Call option, sunk cost then you have the future option of buying the stock or selling the option and the only risk is losing the up front cost. I know there are ways to get into the weeds with options but don't know how you do it. Obviously, I don't know enough even think about trying to trade them. I have heard it said; trading stocks is like checkers and options is like chess.
It does take more knowledge but you can trade options with minimal cash and thus less risk, and bigger gains, without actually tying up money. But to be honest I’ve made similar gains buying and selling stocks the normal way, so there’s a reason why options don’t make everyone a millionaire...most people play it safe with options anyway. The stock market is hard no matter how you cut it.
As for the kid, that’s terrible. He likely just didn’t know what he was doing, and the display of his negative spending power freaked him out...but it wasn’t a true loss. This is the best explanation I found:
“You don't need margin, you only need enough cash to cover the maximum loss, which is can be very small. e.g. right now if I wanted 3 put spreads on AMZN at 2640/2635 expiring this Friday, it would give me a net credit of about $2 per contract, or $600 credited to my account. My maximum loss would be 3 * 100 * (2640-2635) = $1500 minus the credit ($600) received, or $900. As long as I had a mere $900 in my account, this trade would be allowed.
If I held through expiration and the short leg (AMZN $2640) was assigned, I would be contractually obligated to buy 300 shares of Amazon at $2640 a piece. This would briefly reduce my buying power by -$792,000. But as I also hold a contract to sell 300 shares of Amazon at $2635 ($790,500), it would have a net cost of only $1,500. And since I already received $600 up front, it would be just $900 additional out of pocket. But for a period of time, my account balance would have displayed -$792k.”
To think he lost his life over $900 with $16k in his account makes me sick.
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