> 3) the user has enough money in their account to be able to exercise any options that they buy, ie you buy 1 Call contract for Tesla that gives you the right to buy 100 shares at the strike, do you have enough money in your account to buy 100 shares of tesla? If not then you can't buy
I don't quite understand this one. first of all, if I buy a call I don't have to exercise it. if I don't have enough cash to exercise it, can't I just sell the contract itself for roughly the same gain? if so, why should there be a capital requirement to buy one?
I'm assuming the loss was on options he wrote, not bought. Options buyers have a choice. Options writers don't.
There was an offsetting option or long or short position. But the options he wrote were exercised before those hedges settled. Robinhood's UI correctly showed the P&L at that time (though it could have gone further). The user didn't understand it. Robinhood then incorrectly sent a demand letter for $170,000 and didn't provide any means by which the user could contact them.
(Disclaimer: I am not a lawyer and none of this is even legal analysis let alone advice.)
If you have no skin in the game, and can buy literally infinite numbers of options, with no intention to execute, that breaks a lot of things (not least, because of how you force counterparties to behave).
Afaik, abusing this is a big part of the Reddit pump-and-dump train playbook.
You pay a premium for the option. One of the massive benefits of trading options is being able to leverage your money.
If you can't afford to buy 100 shares, you can buy an option for 100 shares for much cheaper, with the intention to flip the option later to either a bagholder or someone who wants to exercise it.
This method isn't even exclusive to retail traders.
you do have skin in the game though. you have to actually pay the premium for all those options. if you have no intention to exercise them (or at least sell the contracts before they expire), you are just throwing your own money away. if the premium is priced appropriately, this shouldn't be a problem for the counterparty. if not, it's kinda their own fault. am I missing something?
I think what you're missing is that you understand how options work. A 20 year old futzing around with Robinhood on his phone probably doesn't.
Robinhood removes the friction associated with getting authorized for things like options trading. It's like taking a 16 year old to the craps table at a casino. IMO, it's irresponsible, both as a service provider and a stakeholder in the broader market to make that type of activity available to people with no money.
mainly I'm curious why chollida1 specifically thinks there ought to be a capital requirement to buy a call. I can see why you might not want to let a 20yo buy calls on margin (or anything on margin for that matter), but that wasn't specified in the original post. chollida1 seems to be a lot more experienced than me, so perhaps there is something to learn here.
in the unfortunate case of this guy who took his life, robinhood apparently gave him access to a large amount of margin and the ability to write options. that seems crazy to me. I doubt schwab would let me do that, and I've been trading with them for years.
Well the biggest reason alot of retail focused brokers dont' let you buy things yhou don't have the money to buy is what happens if you hold to expiry?
If its out of the money no big deal, you lose your money, what happens if its in the money?
Do they force you to exercise? If so then you owe them money that isn't in your account
Do they sell it for you? If so at what time? what if there is no offsetting bid for your option? What if they sell it and you had planned on exercising?
This just opens the brokerage up to all sorts of law suits eeven if their terms of service clearly aly out what they'll do.
There just is not always a cut and dry best option for what to do with options before they expire.
What happens if they sell an ITM option but it expires out of the money?
Forcing the user to have money to exercise their options makes it clear and easy, no guessing on when to sell the option, no worrying there wont' be a market for the option, etc.
as long as they don't let my ITM option expire without doing anything, I don't think I would complain. but I see why a retail broker might not want to open this can of worms now. thanks for the breakdown.
I don't quite understand this one. first of all, if I buy a call I don't have to exercise it. if I don't have enough cash to exercise it, can't I just sell the contract itself for roughly the same gain? if so, why should there be a capital requirement to buy one?