Absolutely hilarious and horrific Robinhood glitch

[Fermion]

I just found out about a recent bug/glitch/exploit in Robinhood that some users (we will call them millennials) used to massively leverage up a small amount of money.

They would use Robinhood Gold, a account feature where for $5 a month you can buy 2x margin on your account balance. They would then buy stock using this 2x margin and sell really really in the money covered calls on this stock which would bring their cash balance to nearly double what they started with and the margin calculator would let them take 2x this amount (so 4x the original amount). They then repeated this until they had hundreds of thousands of dollars in margin (in one case over a million dollars) all based off of a small deposit of like $2000.

One guy used his exploited margin of $50,000 on his $2000 investment to buy Apple puts on Oct 31 that expired Nov 2 (right after earnings). Apple went up and his account instantly went negative $49,000 or something around there.

LOL

Ok, now the horrific part. I use this platform for my trading personal contest. WTH are they programming with? Monkeys?

Here is a youtube video of the guy who lost the $49,000 and now has a internet meme about the word GUH the moment it drops $50,000

 

[NW-Bound]

I read a blurb about this Robinhood bug, but only now know the details.

I initially learned about Robinhood from this forum, but never thought of opening an account. I also do not frequent reddit.

Just now, researched a bit, and found that in Jan 2019, another guy managed to lose a lot more than he had, doing "box spread" option. From an investment of $5K, he managed to end up with a balance of -$58K.

It is a "no can lose" thing if held to expiry, except that some of his options were exercised before expiry, and he did not have the capital to cover it. It is said that because of this, Robinhood no longer allows box spread strategy.

 

[jim584672]

RH is one of those startups firms with folks who don't know there a** from their elbows. Basic risk management doesn't seem to apply in the business model.

 

[donheff]

Good grief. Horrifying. That goofy company is worth billions!

 

[VanWinkle]

Talk about taking from the rich to give to the poor...........

 

[NW-Bound]

... They would then buy stock using this 2x margin and sell really really in the money covered calls on this stock which would bring their cash balance to nearly double what they started with and the margin calculator would let them take 2x this amount (so 4x the original amount). They then repeated this until they had hundreds of thousands of dollars in margin (in one case over a million dollars) all based off of a small deposit of like $2000...

Robinhood apparently did not know how to compute the account value in order to allow margin loans.

In the 4 brokerages that I have used, right after when I sell a covered call, the cash that I received as the premium is recorded along with the call option shown up as being short or negative. This has the effect of keeping my account value the same.

As an example to people who are not familiar with this, here are some numbers. Suppose I have 100 shares of XYZ, currently worth $10. My account value is $1000. A contract to sell the shares at a deep in-the-money strike price of $2 may have the value of $8.5. The difference between the current value and the strike price is already $8, plus a small time value of $0.50 to provide for the chance that the stock price may go higher than $10.

If I sell such covered call contract on my 100 shares, my account will show the following holdings.

100 shares of XYZ: $1000
1 contract short: -$850
Cash: $850

The total value is still $1000, the same as the moment before I sell the covered call. I cannot used the cash as collateral to borrow more money, because it is canceled out by the liability of the shorted contract.

 

[NW-Bound]

In this guy's case, because he already borrowed money to buy 100 shares of XYZ, which is worth $1000 with only $500 cash (2x margin), his account should look like this.

--> Opening account:

Cash: $500

--> Use 2x margin to buy stock:

100 shares of XYZ: $1000
Margin balance: -$500

--> Sell call contract:

100 shares of XYZ: $1000
Margin balance: -$500
1 contract short: -$850
Cash: $850.

The net value of his account is $500, after carrying a margin loan of $500. It's the same before and after selling the covered call.

 

[Fermion]

You think I should worry any about the RobinHood account? It started off at $2500, but now is nearing $15,000. Getting close to real money in there.

I am pretty sure the cash is protected by the SIPC. I know Robinhood got in trouble a few months back by claiming that their bank account balances were protected by the SIPC when they were in fact not.


Oh well, as the millennials say, YOLO!

 

[NW-Bound]

I just learned that the youngins have this YOLO as the motto.

Do they say that right after saying "OK Boomer"?

 

[Fermion]

Oh, they have so many sayings now. My wife and I were watching The Expanse on Amazon (it is a sci fi series based on popular book series). The Belters, people who grew up totally in the region between Mars and Jupiter, talk in a distorted sort of English language. My wife made the comment that this is unrealistic to happen in just ~100 years or so.

I then look at Millennial and whatever this newest generation is called and how they speak and figure 100 years is about right.

 

[NYEXPAT]

My current fave is "Trouple"! I learned this from my 14 y/o.

 

[NW-Bound]

I thought about this some more, and perhaps Robinhood knows how to compute account balances, but their computer could not keep up with the trading volume.

Twenty years ago, during the 2000 stock mania, a friend of mine and I both had Schwab accounts. He was doing some trading in an IRA account, and in the heat of excitement entered a purchase of 1000 shares instead of 100 shares of a stock, and he did not have enough free cash for that order. The order went through!

If he had a margin account, Schwab would record that he was loaned some money to cover the purchase, and all would be well. However, this being an IRA account, you are not allowed to use existing shares as collateral to borrow money.

Schwab called him up at the end of the day, saying that he committed a "no no". I don't remember exactly if the purchase was cancelled, or they sold the extraneous shares to negate the forbidden negative cash balance. I think it was the latter, because the stock went up during the day, and he said that he made some money.

I also remember that Schwab slapped his hand, and forbade him from trading for 2 or 3 days, or something like that.

Nowadays, if you make a mistake like that, the computer at the brokerage would not let the order go through. It would cry out "Insufficient Fund!". Try that on your account.


PS. It has been 20 years, so I do not remember all the details. Maybe my friend recognized his mistake immediately, and quickly sold the extra shares that he should not have bought, and made a bit of money in those few minutes he had the shares. And Schwab thought he was trying to do day trading on borrowed money that he was not allowed to have.

 

[NW-Bound]

Here's a mistake that I still occasionally make but catch it in time, and if I don't, the brokerage computer will catch it. So far, that is.

Option contracts are traded in round lots of 100 shares. In a moment of senility, one may temporary forget and enter 100 contracts instead of just 1. The 100 contracts would cover 10,000 shares of stock. Yikes!

I don't do penny stocks, and many of my trades cover stocks with share prices of $200-300. One hundred contracts would mean potential transactions of $2M to $3M! YIKES!

The computer would say "No way!"

But if I did stocks with a lower share price, the order might just go through if I happened to have sufficient cash, and I would be trading $100K's on a single trade that I did not mean to. YIKES!

 

[Fermion]

Oh, I have fat fingered trades before as well. Long time ago I accidentally bought 10,000 shares of a stock when I meant to buy 1000 (it was a $3 stock). I quickly sold the 9,000 extra shares for a couple penny loss and then the VERY next day the stock went up a dollar.

 

[Spock]

Here's a mistake that I still occasionally make but catch it in time, and if I don't, the brokerage computer will catch it. So far, that is.

Option contracts are traded in round lots of 100 shares. In a moment of senility, one may temporary forget and enter 100 contracts instead of just 1. The 100 contracts would cover 10,000 shares of stock. Yikes!

I don't do penny stocks, and many of my trades cover stocks with share prices of $200-300. One hundred contracts would mean potential transactions of $2M to $3M! YIKES!

The computer would say "No way!"

But if I did stocks with a lower share price, the order might just go through if I happened to have sufficient cash, and I would be trading $100K's on a single trade that I did not mean to. YIKES!

I hate it when the system can't keep its units of measure straight/consistent.
I about had a heart attack the first time I bought brokered CDs. They are in units of $1000... I bought 50... got a text confirmation message a couple of days later for 50000 units.

 

[Fermion]

The Robinhood saga continues. Yesterday a enterprising investor on reddit WallStreetBets (who a month ago did not even know what a call option was) discovered a way to trick Robinhood into filling a Iron condor option trade for a ridiculously good price (so a fill that should go for $0.03 gets filled for $0.95, then you can immediately sell it or let it ride to completion). I reported the glitch to Robinhood in hopes of capturing the $100 to $5,000 bounty on bug reporting. I have not heard from them personally, but they made a reddit account and posted on WSB that they think the system is working essentially. WSB treated them as you would expect, giving them a YOLO flair and then banning them.

I can't wait for the market to open and see what a train wreck this will be when 700,000 people try to put in iron condor orders this morning for easy money.

I really should think about moving my Robinhood contest money out of Robinhood...

 

[NW-Bound]

I do not frequent reddit, so miss out on all this crazy stuff.

 

[ExFlyBoy5]

I do not frequent reddit, so miss out on all this crazy stuff.

Best stay away....there is WAY too many subjects and can be a major time suck if you aren't careful.