It’s been about two weeks since the tragic story of Alex Kearns came out in the media. For those that don’t know, Alex Kearns tragically took his own life after his Robinhood account showed a -$730,165.72 balance. First off my condolences go out to Alex Kearns’ family and those who loved him. Second, I want to have a raw discussion here about stock trading and mental health. There is something that we can all learn in order to make sure this strategy can not happen again.
Leverage and Options
For those of you who aren’t aware there are more instruments available to traders than just buying individual securities. There are also leveraged contracts called options. You can either buy or sell an option contract and they can either be a put or a call. If you’d like to understand option trading more deeply I suggest you check out this post on Lockdown Investment’s guide to option’s fundamentals.
Now these contracts can be bought individually, or as a set to employ more advanced strategies. These advanced strategies can include things such as spreads, collars, butterflies and the like. Most options expire on Fridays and typically the 3rd Friday of every month. If you hold an option through expiration you can be faced with automatic exercise if the contract is in the money.
Let’s say you are running a bull call spread. This is constructed by purchasing a call option and selling another call option with the same expiration date but a higher strike price. The maximum loss is restricted to the net premium paid. The maximum profit is equal to the difference in the strike prices less the net premium paid. When you buy a call you have the right to buy the security at the strike price. When you sell a call you have the obligation to sell the security at the strike price.
What Happens at Expiration
When running this trade we have 3 options that can happen at expiration.
The first option is that the stock price is below both of our option contracts. This is where we would experience our maximum loss. Now through our broker, the two contracts would offset themselves both settling over the weekend. No big deal, we need what premium put in when we opened this position.
The second option is that the stock is above both of our option contracts. This is where we would experience our maximum gain. If our strike pride width is $5 then we will be netted with $500 and the premium for the spread has already been deducted from our account. We go on our merry way happy that we had a successful trade.
The last option is that the stock is between our two options. This one is usually where things get a little messy. Now when we bought a call you technically have the right but not the obligation to buy the stock. However, since we held through expiration the OCC will execute any trades that were in the money. So since our lower strike price is ITM it gets executed. The only problem here is our security for this trade was the OTM contract, we don’t actually have the cash on hand to buy these shares. So what happens?
Well thankfully your broker will take care of this for us. Since our contract is ITM what will happen is our contract will be physically settled, if it’s an individual stock, and then the shares will be sold netting us our profit. Unfortunately while this is happening you may have a negative buying power because you are technically holding 100 shares of that security. It seems like this is exactly what happened to Alex Kearns.
Buying Power vs Account Balance
Unfortunately when you are trading options you may encounter times where your buying power and account balance are different. This is because trades take time to settle and markets are closed when options expire. However, your account balance is still positive because you know have those shares that are worth more than what you acquired them for. Hence the profitability of that trade.
In the case of Alex Kearns, I have read numerous news outlets stating that it was a glitch in Robinhood’s software that they displayed the incorrect balance. Almost every broker that I have experience with treats these trades in the same manner. This is why education revolving is so important when you are trading leveraged securities. Does Robinhood have an opportunity to grow and change as a company? Absolutely. Are they entirely at fault for this situation? I don’t think that was the only thing at play here. There are some other factors that go into stock trading and mental health.
Stock Trading and Mental Health
According to this article, financial works have the 3rd highest suicide rates. Everyone is passionate about their finances and their ability to create income. Loss of income or assets is one of the highest leading causes of depression. With more people having access to the markets with limited risk management strategies in place, I am afraid that there will be more cases like Alex’s in the future.
I personally have had my own struggles with mental health. It was when I was young and faced depression in an isolated environment. I felt my world crushing in on myself and thought that the future was bleak. I turned to drugs for an escape and momentary bliss. During this time period I also drank way more than I should. All this did was put the burden of sorrow on the shoulders of tomorrow. It wasn’t until I talked to those closet to me that I found real hope and happiness. I am proud to say I am in a much better place now.
Mental health is one of the largest issues our society and our world is dealing with. With more things going electronic we are stuck inside and not create the loving social interactions that we need to thrive. Moments like these, losing money or income, are mere catalyst for a larger systematic issue. One that we, as a people, need to find a solution to.
The Way Forward
I for one, am obsessed with personal finance and investing. I surround myself with these numbers everyday and it is part of my 9 to 5. However, your bank account, your investment balance and your credit score do not determine your worth as human being. We are so much more than that. Stock trading and mental health can make things even more difficult. I understand how trying it can be when you don’t know how you will make your next mortgage payment, or how crushing your student loans feel. It is all very real but there is help available for those who need it.
The most important thing we can do everyday is to connect to those around us. Whether that is family, friends or strangers in the street, you never know the difficulties they are silently carrying. When you take the time to listen, really listen, to people you can make all the difference in the world. I strongly believe that everyone is capable of making the world a better place. All it takes is one smile, one conversation and one friendship. You never know what is out there.
If you or someone you know is struggling with depression call 1-800-273-8255. One phone call can save a life.