![]() In the case of three contracts of $2,615 Amazon puts, that would be $784,500 to purchase 300 shares. 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. 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. 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. Do three contracts and you generate $600. That two-dollar differential (multiplied by 100) generates $200 for every contract you sell. 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. 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. On June 16, Amazon (AMZN) trades at $2,615 per share. ![]() Here’s an example of how a bull put spread could produce an unexpectedly large stock position in your portfolio. There can be wrinkles, however, when the price of the underlying stock at expiration is between the two strike prices, or in the case of early assignment, which may have occurred in Kearns’ account. 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. The trade generates a net credit, which the options trader keeps if the stock price stays above the higher strike price through expiration. 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. 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. “I mean this is a kid that when he was younger was so conscious about savings.”Īlthough 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. “When he saw that $730,000 number as a negative, he thought that he had blown up his entire future,” says Brewster. In his final note, seen by Forbes, Kearns insisted that he never authorized margin trading and was shocked to find his small account could rack up such an apparent loss. Kearns apparently fell into despair late Thursday night after looking at his Robinhood account, which appeared to have $16,000 in it but also showed a cash balance of negative $730,165. His father said he was loving the markets and really enjoying investing, Brewster told Forbes, “and then on Friday night, we got this call from his mom, and he had died.” ![]() ![]() “I thought everything was going fine,” says Bill Brewster, Kearns’ cousin-in-law and a research analyst at Chicago-based Sullimar Capital Group. Robinhood, E-Trade, TD Ameritrade, Charles Schwab, Interactive Brokers, Fidelity and even Merrill Lynch have all embraced commission-free trading and zero-minimum balances in an effort to attract younger customers, many of whom have little understanding of the securities and markets they are dabbling in. ![]() Still, the tragic demise of Alexander Kearns is a cautionary tale of the serious risks associated with the race to the bottom in the brokerage business. It’s impossible to know all of the factors contributing to suicide, especially in young people. ![]()
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