Tuesday, 5 November 2019

Robinhood's infinity leverage

US equity indexes closed a little mixed, sp -3pts (0.1%) at 3074. Nasdaq comp' +0.02%. Dow +0.1%. The Transports settled +0.6%.




It was a pretty sleepy day in equity land, and although the SPX fell shy of a new historic high, the Dow and Nasdaq comp' did not. Volatility remained subdued, with the VIX settling +2.1% at 13.10.

Robinhood's infinity leverage

Across the past few decades, I've seen some pretty crazy things within finance. The following is certainly in the top ten...


Someone (I'll deem them a maniac) has $4k in a Robinhood trading account.

The trader WRITES a covered CALL in Ford (F). Trader picks a deep in the money call - the June $1.00, to receive the highest income from the sale.

The Robinhood computer INCREASES the buying power by the $ amount of the Written call.

Trader now has more money to spend on Ford stock.

Trader WRITES more covered calls... further increasing buying power.

Trader can buy more Ford stock

Rinse.... repeat... many.... many times.

*In theory, a trading platform should not allow (under ANY circumstances) more than 4x margin, in this case... $16k. Yet, here we have... 

The above shows an account with no less than 120,000 shares of Ford, worth $1.03M !

Even a 1% swing in the price of Ford would result in an account balance move of around $10,000, more than twice the initial capital the trader started with.

The original thread (although I'd not be surprised if its removed at some point)....


Its currently still expected that Robinhood will IPO. However, that seems less likely with each day. 
Further, those with any amount of assets within Robinhood should be at least somewhat concerned by trading platform software that is clearly broken. What other quirks might there be?

For now, it appears that Robinhood is not able to update the software, and is instead locking accounts that it becomes aware of. Not great.

*I should note, Zerohedge are carrying the same story, although focusing on a trader (see video) who was writing AAPL Puts. I'd imagine the issue might make it to the mainstream within a day or two.
see: https://www.zerohedge.com/markets/robinhoods-infinite-money-cheat-code-gives-traders-access-unlimited-funds


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