Sad story. However, his investing strategy (or lack of investing strategy) has nothing to do with Robinhood. And it is a rather bold statement that he does not believe in investing in Indexes. Surely that would have been a better strategy, than losing everything on one bet.
He's obviously to blame but giving every college grad the ability to buy/sell options may perhaps not be in a young investor's best interest. There's a reason other brokerage firms ask how long you've traded for before allowing margins/options/etc.
"And that's when I was like, Okay, I'm done with this. Now I want to buy a safe bet. And the safe bet was Alibaba. It had fallen from $330 to $245, but I had wanted to find a company where the price-earnings ratio was low, and every single analyst had a buy rating with like a 40-50% upside on it. Looking at all of TipRanks, my understanding was that this was a very, very safe bet with a limited amount of risk."
A good way to judge the riskiness of a stock is to look at the current implied volatility. Currently the 1-month IV is 20 for SPY (an S&P 500 ETF) and 53 for BABA, according to https://marketchameleon.com/Overview/BABA/IV/ . Index implied vols are lower because indices are more diversified than individual stocks and therefore safer.
Let's be clear: he didn't even buy stock, he bought CALL OPTIONS.
If he put $400K into Alibaba stock, he might still have $150K or $200K, depending on when he did it.
He put all his life savings on what he considered a 'safe' investment in call options with a specific expiry date.
I love investing and taking big risks, but this is idiotic. His description of what call options are ("a leveraged bet on an underlying stock, which helps you increase the upside (or downside) of the bet you're trying to make") is simplistic at best.
I think his description of what a call option is missed the "...and over 50% of them expire worthless" part. I trade options a fair amount and have done so for many years, and I make good money doing it, but I don't have the balls to go all-in on a contract that stands a 50/50 chance of going poof come expiration day. I don't think anyone that has working knowledge of what they're doing with options has that kind of testicular fortitude, at least not without feeding a gambling problem.
Options are supposed to be a hedge, by my understanding (even though I personally don't use them that way); but call them what you like, just don't call them a "safe bet" no matter the underlying stock.
> Just praying, you know like once you go from desperation to literally praying? And I’m not even religious.
To those that have been there, hat tip. You don’t know it until you do.
Live and death situation, you’ll become religious for a minute. I think the important thing isn’t sticking with the spur of the moment promises you make to your god however new they are to you, but rather remembering that feeling. At least that is the thing you can grow from.
I've been in a true, physical life-or-death situation. The dominant thought was not an urge to pray, but a perfect clarity of purpose pushing me to take action towards survival. To surrender to chance was to accept and embrace death.
What he's describing sounds more like denial. The situation was already over. He lost everything and was trying to wish it back into existence.
Retail trader doesn't believe in passive index funds, YOLOs life savings on Alibaba call options that tank, and blames Robinhood... Still doesn't believe in passive index funds.
This wasn't Robinhood's fault. You could do this with any brokerage. I hope the author gets help for his gambling addiction, because it sounds more like that than anything else.
Could you do this with any brokerage, or would others tell you "no, not letting you do that"? E.g. if we accept the gambling comparison, in actual gambling we do regulate (admittedly to different degrees, and not necessarily successfully) what gambling providers can and can't do.
You can definitely buy $400K worth of call options on other brokerages. Aside from the initial onboarding period + making sure you have the money (which he did), I don't think there's anything stopping you from doing this anywhere.
I have a Merrill Lynch account. I signed up to trade options and they asked me to read and agree to a 80 pdf. I have this "thing" about reading things before I agree to them - so I read it. By the time I got to page 10, I had lost interest and moved on.
The guy goes straight from low interest savings in the bank to trading single stocks. Even after losing all in crypto he keeps going. Then buys call options on a Chinese company. Still doesn't Like index funds. I think this guy has trouble quantifying risk.
I'm going feeling pretty smug about my index fund investments right about now...
That said his income sounds incredible and he's young. He should land on his feet if he can stay away from the casino.
A couple different friends of mine have family members who are bipolar, manic, or hypomanic. From their descriptions of the behavior they've had to deal with... this guy definitely needs to be evaluated by a professional.
On the plus side losing his retirement isn't so bad since he's not likely to live long enough to retire if this is his level of "acceptable risk". I imagine he invests in the down time between jumping through narrow slot canyons in his homemade wingsuit.
Quick impression - the author needs to sign financial guardianship over to his mother, and be evaluated by a good psychiatrist.
(Robinhood sounds, at most, peripheral to what happened here. The U.S. offers lots of ways for a legal adult to blow through $400K in a few days or weeks.)
> Robinhood sounds, at most, peripheral to what happened here
The author went "went all in on this one single stock option: The $200 strike price call option on Alibaba." This is gambling. If we had a string of people blowing their life savings at a single casino, there would be regulatory backlash.
Talking about and regulating Robinhood as an investment firm, when most of their money comes from and users are engaging in gambling is the disconnect. And note: this wasn't always the case! They started out focussed on zero-commission stock trading! But options were more fun, and crypto more fun still. That's fine. I have no problem with gambling. But for it to work properly, responsibly, there are known guardrails that we have up in casinos that aren't present at Robinhood.
Greed is such a powerful motivator. OP managed to save $100k in five months, a healthy sum for even the most expensive areas in the country. But no. He wants more.
Implied volatility is typically overpriced compared to realized volatility. Theta Gang strategy is selling risk premium on stocks - cash secured outs/covered calls, wheel strategies. If you stick to stocks you’d like to hold for long periods of time, the downside risk is limited.
> I don't believe in passive index investing. You know how Warren Buffett made a multimillion dollar bet that the index will outperform a bunch of hedge funds over a decade long period? My truthful belief is I don't necessarily believe passive investing to be the answer.
This was glided over without much detail. Warren Buffett did make this bet. But he won it! https://longbets.org/362/ It's like saying "You know how Galileo was talking about an experiment to see if heavier things fall faster? My truthful belief is that I don't necessarily believe that something lighter could fall at the same speed".
>If their model is payment for order flow, there's no question they just want you to trade, no matter if you win or lose money.
The broker wanting people to trade is also the case if they had charged $10 per trade, the prior business model for retail trading.
How can someone end up with $300k in liquid assets to invest with a $50K/year job after only 3 years?
He must have blown through his family's money, or he is not telling us everything.
He’s a wallstreetbets degenerate, they tend to turn $2k or some other stupidly low amount into 6-7 figures gambling on options, and then swiftly lose it all.
“I consider myself conservative from an investing perspective.”
(Proceeds to do the least conservative thing imaginable. )
Perhaps this fellow needs to see a therapist regarding staggering levels of cognitive dissonance. Heck, he could pick a stranger on a park bench and ask if A) this strategy seems conservative or perhaps B) the riskiest strategy imaginable. I don’t think I could come up with a riskier plan if I tried. I don’t think any random person would describe it as careful or conservative.
Also he should never open a trading account again and block /r/wallstreetbets or whatever stock meme central is these days.
Trading is not investing, which this guy completely does not understand. He says that he still doesn't believe in diversification and that it's not the answer. The answer to what? If we're talking about building a long-term portfolio, it's the best answer we've come up with to-date. On the other hand, almost by definition, you don't diversify in trading. Yes, you can have a variety of open positions but each one is an individual bet and must be viewed as such. Selling off a diversified portfolio is not recommended in a market downturn but sticking to a bad trade is a recipe for disaster. The crucial lesson here is setting a stop-loss for every trade and abiding by it no matter what.
Market Wizards: Interviews with Top Traders by Jack Schwager, considered a classic, focuses on the psychology of trading. At the end of the book, the author reflects on the one thing that all of his subjects had in common. Every one of them experienced a massive loss, sometimes several, early in their careers. And every one of them came back with the discipline to cut future losses at predetermined thresholds.
From personal experience, it's also crucial to lock in profits. You need to set a reasonable sell-down schedule that won't leave you with the urge to claw your face apart if you miss the chance to sell. I recall reading that missed opportunities tend to haunt traders much more than losses. This was certainly true for me and part of the reason why I decided to get out of trading altogether. I ended up with a tidy profit but it still hurts to think about the life-changing amount that I missed out on. If I had followed a system and banked half or two thirds of the life-changing amount, I am pretty sure I would have had no regrets. That's because I never got hung up on taking an acceptable loss on a position that would have eventually turned a profit. Just like in poker, it's easy to absolve yourself of blame, when you are following a good strategy.
But at the end of the day, one has to understand that trading is gambling. And you don't gamble with more than you can stand to lose. I've learned that gambling is not for me and so I no longer trade.
>I consider myself conservative from an investing perspective
May be he actually is conservative. May be it is his (historically) safe nature that made him bad at understanding risk in other areas.
As an analogy: I'm good at assessing risk while driving. Highway speeds are less safe than residential roads, backseat is safer than front seat, etc. Well, let's do something different, let's go skydiving. I have NO risk profile to assess skydiving. My conservative background doesn't prepare me for this - so I screw it up.
Overtrading is the worst way possible to trade, but it's what feels intuitive and 'playing the game' to most. I got suckered into it at the beginning, and thankfully didn't lose that much before I calmed down.
Finding stocks with solid fundamentals, and buying and holding based on common sense is the strongest strategy. For example you see that Microsoft's ARM operating system is getting bad reviews, buy Apple.
Also, the whole market is rigged in big finance's favour. They can borrow shares from thin air, and pump and dump whilst getting the smallest of fines.
Ignore financial news. It's all owned by the same big companies, and is weaponised.
If you try to day trade, you are just going to be outperformed by the algos and the hedgies, who can trade smarter and faster with information you don't have.
Say what you want about the Gamestop apes, but many have been holding for a whole year.
"The stock market is a device for transferring money from the impatient to the patient." ~ Warren Buffet
This guy is a complete idiot. So many things wrong with the decision making here I can’t even begin. It violates common sense, all well worn investing maxims, and trading risk management principles.
In terms of options suitability there is no verification process; it’s all based on self-made attestations.
This could happen with nearly any broker. In the past a large trade might have been questioned especially in a newer account. However, with online trading today everything is automated so the human that may have been like “Hey fella, you may want to think this through” is not there anymore.
Blaming the brokerage is just stilly. Here a rank amateur made making very amateur trades with no risk management. You reap what you sow. The derivatives markets are not playthings.
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