A TRADE GONE HORRIBLY WRONG – A PARENT’S WORSE NIGHTMARE

On June 12, 2020, the sheriff knocked on Dan and Dorothy Kearns front door to deliver the news every parent fears.  Their 20-year-old son, Alex, committed suicide. 

Alex’s Parents Pieced Together The Events Leading To His Suicide.

“Alex Kearns mistakenly believed he’d lost nearly $730,000.00 in a risky bet on the app Robinhood.

Before he graduated from high school, Alex, opened an account with  Robinhood. The app lets anybody buy and sell stocks, with no fees and no experience. “All told, he might’ve had maybe $5,000 in his savings.” 

Dan and Dorothy Kearns (Alex’s parents) didn’t realize Robinhood had also approved Alex to buy and sell options, a risky financial instrument with the potential for huge losses. 

 On June 11, Alex saw Robinhood restricted his account, reflecting what appeared to be a negative balance of ~$730,000.00.

Later that night, at 3:26 a.m., Robin Hood sent an automated email demanding Alex take “immediate action,” requesting payment of more than $170,000.00 in just a few days.

Robinhood had no customer service phone number, but Alex emailed its support address three times late that night and the following morning. He asked for help understanding what had happened and whether he could offset the losses with another trade.   Alex wrote, “I was incorrectly assigned more money than I should have, my bought puts should have covered the puts I sold. Could someone please look into this?” 

In response, he received an automated message: “Thanks for reaching out to our support team!” The email said, “We wanted to let you know that we’re working to get back to you as soon as possible, but that our response time to you may be delayed.” The company assigned him a case number, 6,849,753.

Later that day, the sheriff knocked on the Kearns family’s front door to deliver the news: Alex was dead.

The day after Alex took his own life, Robinhood sent an automated email suggesting the trade had been resolved and he didn’t owe any money.   “Great news!” The email read, “We’re reaching out to confirm that you’ve met your margin call and we’ve lifted your trade restrictions. If you have any questions about your margin call, please feel free to reach out. We’re happy to help!”

Dan Kearns says the safety checks aren’t strong enough. “How are those guardrails? How does that — how does that stop an 18-year-old from making risky trades that they don’t really understand?”

In a note to his parents before he died, Alex had similar questions. He wrote, “How was a 20-year-old with no income able to get assigned almost $1 million worth of leverage?” He added, “The puts I bought/sold should have cancelled out, too, but I also have no clue what I was doing now in hindsight. There was no intention to be assigned this much and take this much risk, and I only thought that I was risking the money that I actually owned. If you check the app, the margin investing option isn’t even ‘turned on’ for me. A painful lesson. F*** Robinhood.”

To read the entire article, click below

https://www.cbsnews.com/news/alex-kearns-robinhood-trader-suicide-wrongful-death-suit/

Need help? Call the National Suicide Prevention Lifeline at 1-800-273-8255 or text HELLO to 741741, the Crisis Text Line.

WHAT WENT WRONG?

I think the best way to illustrate what happened to Alex is to tell my story.  

In 2019, I enrolled in Options Trading training.  I started with paper money accounts, and I thought I was getting good.  {Replace thought with the word HOPE.  HOPE IS NEVER A STRATEGY.}

In January 2020, I was trading real dollars.  The week of February 24, 2020, I was in D.C., attending all-day meetings.  During the week, my broker calls and leaves a message something like this. “Your sold Put has been exercised.  You are $100,000 short in your account.  Please (so polite) call us.” After changing my underwear and pants, I called my broker with a WTH; I thought I was protected?  

I had sold five Puts on XY stock, OBLIGATING me to sell 500 shares of that stock at AB price. {Note: I did NOT own this stock, but after selling a Put, I am obligated to sell this stock to the buyer of the Put, if the Put has value.}.  My broker’s representative pulls up my account and tells me you are covered/protected.  You need to exercise your purchased Put.  

I had entered this trade believing the stock was going up. I sold five Put Contracts for a strike price, less than the stock was selling that day.   If I am wrong and the stock goes down significantly in price, my Puts buyer has the right to exercise my puts if my sold puts’ extrinsic value is zero.  I had simultaneously purchased five puts of the same stock to protect me, giving me the right to sell 500 shares at an even lower strike price.  Are you starting to see the complexity and risk in options trading?

After speaking with my broker, I exercised my purchased Puts and lost about $1,000.00.  YUGEEEEEEE difference in losing $1,000.00 versus $100,000.00!  

ALEX’S STORY

Alex received an email warning him he was $730,000.00 short in his account.  Robin Hood- did NOT have a call center at the time of Alex’s trade.  

Alex utilized a BULL PUT Trade strategy, as I did in my above example.  He had wisely purchased protection; in case he was wrong.  Unfortunately, there was no person he could speak with at Robin Hood to ask for help.

Alex was 20 years old and committed all his money, about ~$5,000.00, assuming the most he could lose was $5,000.00.  When Alex received the email he panicked, just as I did.  He was frightened, fearing he had ruined his and his parents’ lives.  

In my worst-case scenario, I thought (if I made a serious mistake) I might have lost $100,000.00.  Although I did not believe this was true, I knew I could cover that loss.  Alex did not have the luxury of speaking to a professional to understand what was happening.  He did not have $730,000.00.  In a moment of stress, fear, etc. Alex decided to end his life. “He thought he blew up his life. He thought he screwed up beyond repair,” Dan Kearns said.

CONGRESS SIMPLY DOES NOT CARE!

While Congress is calling Robinhood’s CEO to testify, it is not about the lack of reasonable precautions that may have prevented this young man’s death. N0 – Our incompetent Congressional Members care more about young traders beating Hedge Fund Billionaires!

TRADING OPTIONS WITHOUT COMPETENCY IS AS SMART AS PLAYING RUSSIAN ROULETTE! 

A PARENT’S WORSE NIGHTMARE

COVID changed life for all in 2020. With sports gambling and casinos shut down, many people who love to gamble turned to the stock market.  Over 13 million new stock trading accounts were opened in 2020 by amateurs.  

Trading stocks without competency is gambling. Trading options without the knowledge and understanding the risk is like gambling while snorting cocaine.  It can lead to irrational exuberance while the market is going straight up.  And HELL, when it goes against your trade.  Just think of GameStop’s wild ride, from a low of $10.00 to a high of $483 and back to $50, in a few days.  

Gamestock’s WILD Ride!

Many of the 13 million amateurs, with Robinhood new accounts, were authorized to trade Options, a higher risk investment tool, without understanding the fundamentals or the risk.  And many lost 100% of their money—some in a matter of a few days.

OPTION TERMINOLOGY TO DEMONSTRATE THE COMPLEXITY 

LESSONS LEARNED – A TRADE GONE HORRIBLY WRONG – A PARENT’S WORSE NIGHTMARE

  1. Depression is an illness.  We all sometimes need help.  Ask someone who cares about you.  Call for help if needed. {Need help? Call the National Suicide Prevention Lifeline at 1-800-273-8255 or text HELLO to 741741, the Crisis Text Line.}
  2. Robinhood is a no-frills investment website.  Robinhood was the first to offer ZERO fee stock trades.  And a majority of large investment companies followed suit.  For that, we can thank Robinhood!  While Robinhood is acceptable for buying and selling stocks, it is a poor choice, in my opinion, for Options trading.  Options trading is complicated, and at times you need IMMEDIATE expert assistance.  You also need access to adequate training materials and workshops.  If trading options, I suggest you use a larger, more mature investment firm versus RobinHood.
  3. Congress does NOT care. While Congress is calling Robinhood’s CEO to testify, it is not about the lack of reasonable precautions that may have prevented this young man’s death. N0 – Our incompetent Congressional Members care more about young traders beating Hedge Fund Billionaires!
  4. Obtaining education before risking your HARD-EARNED MONEY is a necessity.  Major investment firms such as Fidelity, Charles Schwab, Ameritrade, etc., offer excellent learning centers.  USE the services.  You can also find resources on YouTube and the public library.  
  5. Millions of people started trading stocks and options in 2020 WITHOUT first building their knowledge, competency, and experience.  And many lost 100% of their savings! 
  6. HOW MUCH MONEY YOU CAN LOSE SHOULD ALWAYS BE YOUR FIRST CONSIDERATION WHEN INVESTING YOUR HARD-EARNED MONEY!

CONCLUSION – A TRADE GONE HORRIBLY WRONG – A PARENT’S WORSE NIGHTMARE

A PARENT’S WORSE NIGHTMARE

Alex’s death was devastating for his family. So many families have experienced similar losses due to COVID and other reasons.  The serenity prayer is one I often turn to: “God give me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.”  

Every time I have invested my HARD-EARNED MONEY in too good to be true investments (schemes), I LOST MY MONEY.  Warren Buffett’s first rule is “Never Lose Money”.  Another rule I learned:  HOW MUCH MONEY YOU CAN LOSE SHOULD ALWAYS BE YOUR FIRST CONSIDERATION WHEN INVESTING IN ANYTHING!

Note: “Alex’s parents filed a lawsuit accusing Robinhood of wrongful death, negligent infliction of emotional distress, and unfair business practices.” 

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ABOUT ME

I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with an N.C. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.

I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life.  It is my time to serve and give back.

DISCLAIMER

I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate, and happy to share my finance and investment lessons learned with you.

However, I am NOT a licensed financial advisor.  Please do not construe my suggestions on this blog as recommendations for your situation.  Please seek your licensed CPA or fiduciary financial advisors for individual financial advice.  

I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.

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Powers Investments Management, LLC

This blog will provide, information and simple strategies, that will assist you to achieve YOUR financial objectives and long term targets. For over 30 years, I solved multi-million dollar problems, for Fortune 10-250, companies. My formal education includes: Business, Finance and Chemical Engineering {Problem Solving} at: Harvard, Rutgers and North Carolina State. And an additional 30+ years, managing my family’s investment decisions. I currently manage/advise people with net-worths ranging from the tens of thousands to several million dollars.

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