The Wolf Den #65 - Bitcoin, Alts, Robinhood Suicide And More
thewolfden.substack.com
This newsletter is sponsored by 2 amazing companies: VOYAGER and PHEMEX.I use Voyager for my spot trading and investing (and to compound interest) and I use Phemex for trading with leverage. Sign up to both with the links above and get some free Bitcoin. I really encourage you to check them both out - you know that I never endorse a product that I do not use!Make sure to use code SCOTT25 after you download the Voyager App to get $25 in free Bitcoin.Alexander E. Kearns, a 20-year-old student at the University of Nebraska, committed suicide last week after seeing a $730,165 negative balance in his Robinhood account. The note found on his computer by his parents on June 12, 2020, asked a simple question. “How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?” Nobody can seem to answer that questions, as of yet.As described in Forbes:"Although Robinhood won’t release the details of his account, it‘s possible that Kearns was trading what’s known as a “bull put spread.” Put options give buyers the right to sell the stock at the strike price anytime until expiration, while put-sellers are on the hook to buy the underlying stock at the strike price, if assigned. This happens automatically at expiration if the price of the underlying stock closes that day at a price one penny or more below the strike price.In Kearns’ note, he says that the puts he bought and sold “should have cancelled out,” because normally a bull put spread involves selling put options at a higher strike price, and buying puts at a lower strike price, both with the same expiration. The trade generates a net credit, which the options trader keeps if the stock price stays above the higher strike price through expiration. It’s generally considered a limited risk strategy because the simultaneous purchase and sale of put options means the maximum loss on a per-share basis is the difference between the strike prices, less the amount earned when the puts are sold initiating the trade.Kearns may not have realized that his negative cash balance displaying on his Robinhood home screen was only temporary and would be corrected once the underlying stock was credited to his account. Indeed it’s not uncommon for cash and buying power to display negative after the first half of options are processed but before the second options are exercised—even if the portfolio remains positive."“Tragically, I don’t even think he made that big of a mistake. This is an interface issue, they have slick interfaces. Confetti popping everywhere,” says Brewster referring to the shower of colorful confetti Robinhood routinely deploys after customers make trades. “They try to gamify trading and couch it as investment.”"Kearns had a basic understanding of what he was doing - he was described as a compulsive money saver, trading bull put spreads to limit his risk. This is a great strategy that options traders often use to reduce their downside risk. What he did not understand is that there can be a gap in time between when the actual shares you buy at expiration are credited, leaving a massive negative balance.Here’s an example of how a bull put spread could produce an unexpectedly large stock position in your portfolio. On June 16, Amazon (AMZN) trades at $2,615 per share. If you’re neutral to bullish on Amazon, you could sell put options that expire on July 17 with a $2,615 strike price for $28 per option. To limit your risk, the other leg of the trade is to purchase puts at a lower strike price, $2,610, for a cost of $26. That two-dollar differential (multiplied by 100) generates $200 for every contract you sell. Do three contracts and you generate $600. If Amazon closes on July 17 above $2,615, you’re in the clear and keep all of the proceeds, as both puts expire worthless. If the stock closes below $2610, you will encounter your maximum loss of $900: $5.00 (difference between strike prices) minus $2.00 (proceeds earned up front) times three contracts. When the stock closes between the two strike prices, the put you bought at the lower strike price expires worthless, but the one you sold is in the money and legally binds you to buy the stock at the strike price. In the case of three contracts of $2,615 Amazon puts, that would be $784,500 to purchase 300 shares. Over a weekend, say, you may see a –$784,500 debit to buy the stock, but you would not see the stock among your holdings until Monday.It's insane and borderline criminal that platforms like Robinhood are allowed to offer options and leverage trading to college kids who do not understand the instruments they are toying with. This is exacerbated by characters like "Day Trader Davey" live streaming their lucky million dollar wins gambling on a market that "only goes up." Any college kid would believe that they could make millions from their dorm room - similar to what we saw in crypto in 2017.While it may often feel like you are trading with Monopoly or "magic internet" money when trading options and especially crypto, it's important to realize that every decision you make when trading and investing affects your financial future and possibly your mental health. You should only invest what you can afford to lose. You should only trade assets that you understand. You should only trade once you have a risk management strategy and plan in place.I DON'T EVEN TRADE OPTIONS.These things seem so obvious, but rarely do people do the hard work that it takes to be good at trading and investing. Sadly, the market attracts gamblers and people that are looking to get rich quick.I hope that all of you choose to take the smart path. Kearns will not be the last person to kill himself over the market. In history, this story has always ended the same way - huge gains followed by even larger losses for clueless retail.A general note - whenever I draw a line on a chart, it should be viewed as elastic and not static. It is more of a zone. So the areas around those lines are usually more accurate. Further, I try to use multiple techniques and indicators on various charts, so if you are learning TA, you should read through all of these to see how I blindly look at a chart.If you are a new member, please refer to Issue 10 (you can click on it here - https://www.getrevue.co/profile/TheWolfDen/issues/the-wolf-den-crypto-newsletter-issue-10-219754 and have it sent to you) for instructions on how to make my charts your own.IMPORTANT NOTE - I will only accept requests on Wednesdays, between 8 AM and 1 PM EST. That will make sure that they are your most pressing requests. Please mark it in your calendar and email me by responding to this email!What’s In This Issue:Bitcoin Thoughts And AnalysisBitcoin DominanceSecurity Audit - Do It Now!The Fed Is Buying Everything!The Wolf Of All Streets Podcast Ft. Ruben MerreAmericans Can't Pay Their LoansBetting On The ElectionTrump Wanted To Go After BitcoinAltcoin TradesBitcoin - An Abstraction Of Value And FreedomMy Recommended Platforms And ToolsChart RequestsPhemex Launches Fiat Support
The Wolf Den #65 - Bitcoin, Alts, Robinhood Suicide And More
The Wolf Den #65 - Bitcoin, Alts, Robinhood…
The Wolf Den #65 - Bitcoin, Alts, Robinhood Suicide And More
This newsletter is sponsored by 2 amazing companies: VOYAGER and PHEMEX.I use Voyager for my spot trading and investing (and to compound interest) and I use Phemex for trading with leverage. Sign up to both with the links above and get some free Bitcoin. I really encourage you to check them both out - you know that I never endorse a product that I do not use!Make sure to use code SCOTT25 after you download the Voyager App to get $25 in free Bitcoin.Alexander E. Kearns, a 20-year-old student at the University of Nebraska, committed suicide last week after seeing a $730,165 negative balance in his Robinhood account. The note found on his computer by his parents on June 12, 2020, asked a simple question. “How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?” Nobody can seem to answer that questions, as of yet.As described in Forbes:"Although Robinhood won’t release the details of his account, it‘s possible that Kearns was trading what’s known as a “bull put spread.” Put options give buyers the right to sell the stock at the strike price anytime until expiration, while put-sellers are on the hook to buy the underlying stock at the strike price, if assigned. This happens automatically at expiration if the price of the underlying stock closes that day at a price one penny or more below the strike price.In Kearns’ note, he says that the puts he bought and sold “should have cancelled out,” because normally a bull put spread involves selling put options at a higher strike price, and buying puts at a lower strike price, both with the same expiration. The trade generates a net credit, which the options trader keeps if the stock price stays above the higher strike price through expiration. It’s generally considered a limited risk strategy because the simultaneous purchase and sale of put options means the maximum loss on a per-share basis is the difference between the strike prices, less the amount earned when the puts are sold initiating the trade.Kearns may not have realized that his negative cash balance displaying on his Robinhood home screen was only temporary and would be corrected once the underlying stock was credited to his account. Indeed it’s not uncommon for cash and buying power to display negative after the first half of options are processed but before the second options are exercised—even if the portfolio remains positive."“Tragically, I don’t even think he made that big of a mistake. This is an interface issue, they have slick interfaces. Confetti popping everywhere,” says Brewster referring to the shower of colorful confetti Robinhood routinely deploys after customers make trades. “They try to gamify trading and couch it as investment.”"Kearns had a basic understanding of what he was doing - he was described as a compulsive money saver, trading bull put spreads to limit his risk. This is a great strategy that options traders often use to reduce their downside risk. What he did not understand is that there can be a gap in time between when the actual shares you buy at expiration are credited, leaving a massive negative balance.Here’s an example of how a bull put spread could produce an unexpectedly large stock position in your portfolio. On June 16, Amazon (AMZN) trades at $2,615 per share. If you’re neutral to bullish on Amazon, you could sell put options that expire on July 17 with a $2,615 strike price for $28 per option. To limit your risk, the other leg of the trade is to purchase puts at a lower strike price, $2,610, for a cost of $26. That two-dollar differential (multiplied by 100) generates $200 for every contract you sell. Do three contracts and you generate $600. If Amazon closes on July 17 above $2,615, you’re in the clear and keep all of the proceeds, as both puts expire worthless. If the stock closes below $2610, you will encounter your maximum loss of $900: $5.00 (difference between strike prices) minus $2.00 (proceeds earned up front) times three contracts. When the stock closes between the two strike prices, the put you bought at the lower strike price expires worthless, but the one you sold is in the money and legally binds you to buy the stock at the strike price. In the case of three contracts of $2,615 Amazon puts, that would be $784,500 to purchase 300 shares. Over a weekend, say, you may see a –$784,500 debit to buy the stock, but you would not see the stock among your holdings until Monday.It's insane and borderline criminal that platforms like Robinhood are allowed to offer options and leverage trading to college kids who do not understand the instruments they are toying with. This is exacerbated by characters like "Day Trader Davey" live streaming their lucky million dollar wins gambling on a market that "only goes up." Any college kid would believe that they could make millions from their dorm room - similar to what we saw in crypto in 2017.While it may often feel like you are trading with Monopoly or "magic internet" money when trading options and especially crypto, it's important to realize that every decision you make when trading and investing affects your financial future and possibly your mental health. You should only invest what you can afford to lose. You should only trade assets that you understand. You should only trade once you have a risk management strategy and plan in place.I DON'T EVEN TRADE OPTIONS.These things seem so obvious, but rarely do people do the hard work that it takes to be good at trading and investing. Sadly, the market attracts gamblers and people that are looking to get rich quick.I hope that all of you choose to take the smart path. Kearns will not be the last person to kill himself over the market. In history, this story has always ended the same way - huge gains followed by even larger losses for clueless retail.A general note - whenever I draw a line on a chart, it should be viewed as elastic and not static. It is more of a zone. So the areas around those lines are usually more accurate. Further, I try to use multiple techniques and indicators on various charts, so if you are learning TA, you should read through all of these to see how I blindly look at a chart.If you are a new member, please refer to Issue 10 (you can click on it here - https://www.getrevue.co/profile/TheWolfDen/issues/the-wolf-den-crypto-newsletter-issue-10-219754 and have it sent to you) for instructions on how to make my charts your own.IMPORTANT NOTE - I will only accept requests on Wednesdays, between 8 AM and 1 PM EST. That will make sure that they are your most pressing requests. Please mark it in your calendar and email me by responding to this email!What’s In This Issue:Bitcoin Thoughts And AnalysisBitcoin DominanceSecurity Audit - Do It Now!The Fed Is Buying Everything!The Wolf Of All Streets Podcast Ft. Ruben MerreAmericans Can't Pay Their LoansBetting On The ElectionTrump Wanted To Go After BitcoinAltcoin TradesBitcoin - An Abstraction Of Value And FreedomMy Recommended Platforms And ToolsChart RequestsPhemex Launches Fiat Support