PLEASE SEE DISCLAIMER IN VIDEO DESCRIPTION. I am not endorsing, encouraging, or promoting this behavior - I am covering it as a story as it develops. Enjoy! Add me on Instagram: GPStephan
DISCLAIMER: The purpose of this video is to describe a newsworthy event, the issues surrounding it, why it’s a bad idea to engage in this type of behavior, and bring to light a very serious issue so it can be property fixed. I am not endorsing, or promoting, OR encouraging this behavior…instead, I am covering this story as it develops so you can better understand the issues at hand, and the ramifications it causes. Since this issue has been getting a lot of traction on social media lately, and there has a lot of confusion surrounding it, this video serves to explain what’s going on - NOT so you can do this yourself - but so that you can better understand the risks of investing. DO NOT TRY THIS YOURSELF, I DO NOT ENDORSE THIS, I AM ONLY COVERING A DEVELOPING STORY THAT’S GAINING TRACTION ON SOCIAL MEDIA.
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So just for some background, this all started a few days ago on a Reddit forum known as WallStreetBets. This user found a way to “Trick” Robinhood into lending him money….almost infinitely, as much money as he likes…through an error in Robinhood’s system, without them even realizing it.
He went and opened up a Robinhood Gold account and deposited $2000 on the platform. Robinhood then gave him an addition $2000 as a loan on Margin. That means he now DOUBLED his purchasing power almost instantaneously.
He then went and spent $3800 buying 100 stocks of AMD - $2000 was from his own money, and $1800 was borrowed from Robinhood. And this is where the master-trickery loophole begins.
Robinhood allows you to do what’s called OPTIONS TRADING. This is where you can sell someone the OPTION to BUY your stock from you at a certain price, which is known as the STRIKE PRICE.
In this case, he sold ALL of his AMD stock - that he JUST BOUGHT - on a CALL OPTION…meaning, someone will pay him back ALL the money he spent buying AMD stocks, minus $2 per share…and THAT person gets the right to buy his stocks in the future, for the low price of $2 - again, that’s known as the strike price.
BUT…he cleverly figured out that Robinhood based their margin level on the assets within his account, meaning he gets back $3600 from selling AMD options…of which, he bought with loaned money from Robinhood…but Robinhood would see $3600 in his account, and Double THAT with another $3600 worth of Margin…and within minutes, he now has $7200 to buy more stock with.
Knowing this, he goes ahead and repeats the same thing - but this time, he buys 200 shares of AMD, sells the call option to receive almost all of his money back…which is then doubled AGAIN by Robinhood’s margin…and he continues doing that as much as he wants, racking up as more and more money within his account. Up to the point where Robinhood was lending him $25 for every $1 he invested of his own money in the platform….
IDEALLY…Robinhood should’ve seen that he was selling options, and not loaned him ANY MORE than a 2-to-1 ratio from what his NET account value was…but, obviously, they didn’t catch it…and you can see his account still showed his Margin Health as being: GOOD ….even though he was up to his eyeballs in debt, and risky investments.
https://i.imgur.com/7F6Mo4C.png
See, the REAL issue is whether or not Robinhood has a legal obligation to protect people from themselves, and to make sure there’s NO CHANCE of this ever happening in the future.
But until then, it’s been a VERY interesting journey to follow this saga…and it’ll definitely be interesting to see how this all plays out!
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness @gmail.com