“On June 12, 2020, Alexander E. Kearns, a 20-year-old student at the University of Nebraska, took his own life after believing he had lost over $730,000 trading options.”
While home from college and living with his parents because of the Coronavirus, Kearns opened an account with Robinhood—an online brokerage firm that uses technology to encourage everyone to begin investing and participate in the U.S. financial system. As stocks experienced huge price swings during spring 2020, Kearns began experimenting with trading options.
After using a speculative technique that involved put options, Kearns believed that he had lost over $730,000. In reality, his negative balance may not have represented a negative balance at all, but rather a temporary balance until the stocks underlying his option investments were posted to his account. And yet, because of a timing and reporting issue, he became despondent and took his own life.
Because of privacy issues, Robinhood won’t provide details of Kearns’ account, but the brokerage firm is making major changes to their trading platform—especially for option trades.
For more information, click here.
You may want to use the information in this blog post and the original article to
- Stress the importance of learning all you can about any investment before you begin an investment program.
- Review the risks involved in the more short-term speculative techniques of day trading, investments that use margin, selling short, and options.
- Robinhood, like many financial service firms including E-Trade, TD Ameritrade, Charles Schwab, Fidelity, and Merrill Lynch now allow investors to open an account with no initial investment and offer commission-free trading. Would you be tempted to open an account and begin investing given the current economic environment?
- In the note he left, Alexander Kearns asks a simple question, “How was a 20-year old with no income able to get assigned almost a million dollars worth of leverage?” He also admits in his note that he had “no clue” what he was doing. What mistakes did he make when he began investing? How could you avoid making the same mistakes?