Robinhood Outage Sees Traders Losing Big Money On Market Bounce
One of the popular trading apps right now, especially for younger traders has been Robinhood. In fact, each month we review some of the most popular penny stocks on Robinhood and discuss. But after one of the biggest down weeks in market history, Robinhood users have their hands tied. Why?
For most if not all of the Monday session, the Robinhood trading app has been down. Meanwhile, the company’s official Twitter account made a public statement nearly 2 hours after the market was already open.
We don’t advocate for any particular penny stock trading platform. But when it comes to risks of trading penny stocks, you’d like to think your brokerage account wouldn’t be one of them. Today that wasn’t the case and the flurry of backlash has already started to filter through the ranks of day trading chatrooms, discussion groups, and social media accounts. Some have even taken full advantage of this event offering free consultations to help “victims”.
Others have tried to make light of the situation. One Twitter user compared the event to the classic room on fire, dog meme.
But obviously this is bad and could get worse for some. Aside from any long positions in penny stocks or blue-chips for that matter, Robinhood has become a favorable platform to trade options. Now, if you aren’t up to speed on options, this could pose an even bigger risk for certain traders.
Robinhood Down: Penny Stocks, Blue-Chips, Options & More
When you trade stocks, for example, you buy, sell or hold until you make a profit (or sell for a loss/break-even). There’s no time clock for when you need to sell your stock. When it comes to options, there is. Most options have weekly expiration dates that mark the last day your can trade or execute an option. If you don’t sell or cover your outstanding option trade, or let it expire out of the money, you lose your whole principal (or worse). Let’s give some very basic terminology first so you can get an understanding of how bad this could be for some users.
What Are Call Options?
If you were to buy call options, you assume a stock will rise in price. A Call option is a financial contract that gives you the right but not the obligation to buy 100 shares of a company’s stock at a specified price within a specific time period/per contract. That specific price is called the Strike Price.
If a stock reaches or exceeds your strike, you would be considered “in the money” on the call option. This gives you the right but not the obligation to buy the underlying asset at the strike price. Example: if you own 10 contracts of stock, you can exercise your option to buy 1,000 shares of that stock or sell your option contract to someone else, taking the profit on the option trade.
What Are Put Options?
If you buy puts, you think a stock will go down. It gives you the right but not the obligation to sell 100 shares of a company’s stock at a specified price within a specific time period/per contract. If a stock reaches or declines lower than your strike, you would be considered “in the money” on the put option.
On the flip side, you can also”short” options. This involves selling puts and calls and carries infinite risk. With the case of Robinhood, these scenarios are very real especially for a very popular ETF that trades on the platform which is the S&P Trust ETF (SPY). While many options expire on Fridays, SPY options expire every Monday, Wednesday, and Friday. For those who bought call options on Friday with a March 2 expiration they are likely up but as the expiration gets closer (4 PM EST), the value of that option decays (time decay).
Not only are they not able to take profit but even if the problem is resolved before the close, the time value will kill the profit. Similarly, if someone bought put options with a March 2 expiration, they likely lost most if not all of their principal amount due to this “glitch”.
Could It Get Worse For Robinhood Users?
Those who either sold calls (thinking the stock will decline) or sold puts (instead of buying calls) are probably in panic mode. If you’re short SPY right now, you’re likely hemorrhaging money. Furthermore, if the market closes and the options expire, there could be a whole slew of other issues the could arise.
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While buying calls and puts gives you the right but not the obligation to buy or sell stock, Selling a Call or Put obligates you to buy or sell if the option expires “in the money”. This means that a seller may be required to make good on a “promise to buy or sell”.
“This is the extreme exposure to the market and poses an unlimited risk for anyone selling calls on Friday with a March 2 expiration,” said Michael Edward, head trader of a popular stock market chat room, True Trading Group.
Essentially, this can all be summed up perfectly with a recent post in the popular SubReddit, WallStreetBets:
Something else to consider is the fact that if you’re in the money even on calls/puts that were bought, the platform could auto-execute you, resulting in the need to purchase shares. While this is likely something specific to platforms, here’s a snippet of a conversation when one of our readers reached out to TD Ameritrade on the Think or Swim Platform:
Is this the same case for Robinhood’s users? If that’s the case, auto-execution may pose a huge problem especially if accounts aren’t prepared to buy individual lots of 100 shares of SPY at a time.
Are You A Robinhood User?
As of the end of the lunch hour on March 2, Robinhood is still down. The comment thread is into the thousands on its twitter page. Meanwhile, there hasn’t been a formal announcement on ETA of the glitch fix. What’s also important to keep in mind is that this isn’t the first glitch we’ve seen from the app.
Last year we wrote of the popular Robinhood unlimited margin cheat code. This “cheat code” allowed traders to borrow via margin trading seemingly limitless amounts of capital without posting anywhere near enough cash as collateral. Even more interesting is that this was not the first time or isolated incident for Robinhood.
As of December, the app had surpassed the 10 million account mark. As a CNBC article pointed out, “To put Robinhood’s 10 million clients in context, the combined Charles Schwab and TD Ameritrade brokerage giant will serve about 24 million clients. Schwab announced it is buying TD last month,” following the merger announcement last year. *UPDATED* What’s more and updated as of March 2, is that it may have come down to a simple coding error:
*UPDATED 3-3-2020* As of March 3, Robinhood is back online and has sent out messages with instructions on what to do next. Here’s a snippet of what their update entailed:
“On Monday, March 2, at 9:33 AM ET, we had instability in a part of our infrastructure that allows our systems to communicate with each other. This resulted in outages across many of our services, preventing customers from using our app, website, and help center.
At this time, we have restored Robinhood services.”
But, more importantly, to our point above about options:
If I had options expiring on March 2, 2020, what happened to them?
“Because of the outage, we handled your expiring positions in a slightly different manner. If your contracts were at least $0.01 in the money, your long contracts were exercised and your short contracts were likely assigned”
The biggest question right now is what will be the fallout for Robinhood? Comment below on your thoughts.