Iif you had “Robinhood Controversy” on your 2023 bank crisis bingo card, you’re in luck. The place has just been called. Unlike the big meme stock rally of 2021, this brouhaha revolves around put options and how users of the broker’s app are unable to profit from the collapse of Silicon Valley Bank and Signature Bank, even though their bets are in the money.
Put options are a way for investors to bet that the price of a stock will fall. If the stock falls, the trader can sell the stock at a higher price than the market value, making a profit. Or they can sell the contract to someone else who thinks the stock will fall even more. If it works, it’s like winning the lottery with the added bonus of getting to revel in someone else’s failure too.
In the case of Silicon Valley Bank and Signature Bank, some Robinhood users saw the writing on the wall and bought put options on the shares before they collapsed. Of course the banks collapsed. It should have come as a surprise to those who saw trouble brewing.
The problem, according to users of the trading app, is that Robinhood does not allow them to sell their contracts or get paid. A number of the contracts expire on Friday. This irritated some of them.
Robinhood, which did not immediately respond to requests for comment, has its reasons for not letting users exercise their options. The shares are no longer traded, so it’s a bit of a logistical nightmare to buy the shares if you don’t already own them to fulfill the contract. Not many want to buy the contracts right now as the stocks are already on the operating table and there is little, if any, downside left to exploit.
Robinhood isn’t the only exchange not following suit, according to retailers. Fidelity, which did not immediately return requests for comment, has also taken a swipe on social media for its failure to pay. Not surprisingly, given its history, Robinhood seems to be the punching bag of choice.
That doesn’t stop users from asking the all-important question: why were they even allowed to buy put contracts on stocks they didn’t own in the first place if it was a condition of getting paid if a situation like this played out?
The Robinhood mobile trading app was designed to democratize finance, to bring the power of the market to the people, to disrupt the old boys club of Wall Street. But when the great meme rally of 2021 broke out, Robinhood found itself frozen, like a frightened puppy, as rising demand for GameStop and other meme stocks threatened to overwhelm the platform’s infrastructure. The company’s wallet, it turned out, wasn’t deep enough to accommodate the rapid increase in trades, leaving Robinhood responsible for more than it could afford. The result was a near-death experience followed by congressional hearings that bordered on must-see TV and a year-long investigation by the House Financial Services Committee that concluded the app was closer to flatlining than it gave at the time.
Like the meme stock episode, this week’s smoldering put option scandal shows that even the best bets can end up being worthless.
There is a touch of irony in the situation. In 2021, WallStreetBets users complained that Gabe Plotkin’s Melvin Capital, among others, had bare short positions against GameStop — meaning they didn’t own GameStop stock to deliver on their bets against the stock. Now Robinhood and other brokers say that put contracts, which to be clear are not the same as naked shorts, cannot be executed because the shares cannot be bought. It’s all a bit too on the nose.
As Twitter lights up with complaints from Robinhood users, noted short seller Marc Cohodes offers a little advice: Call a lawyer. He also promises that there will be “hell to pay” if Robinhood or another broker appears to “screw Joe Six-Pack.” Stick around.