Are you ready for a shocking story of retail options trading, banks collapsing, and brokers refusing to honor their contracts?
Well, buckle up because I’ve got a doozy of a story for you today — one that makes me question whether the entire options market is rigged against us…
It all comes back around to the biggest story of the month — the regional banking crisis…
The recent negative headlines around SVB Financial Group (NASDAQ: SIVB) and Signature Bank (NASDAQ: SBNY) caused many traders to make bets against them…
But now that the banks have entirely collapsed (and brokers have halted the stocks), traders who thought they’d hit the options jackpot are now in a world of hurt.
Not since Robinhood Market Inc.’s (NASDAQ: HOOD) 2021 halting of GameStop Corp. (NYSE: GME) has there been a more obviously rigged scenario against retail traders.
So, prepare yourself … what follows is a tale of outrage, frustration, and even a potential class action lawsuit.
WARNING: if you aren’t aware of these potential dangers in the options market, you could find yourself in a similarly unfortunate predicament during one of your own trades.
So, if you’re ready to learn more about the dark underbelly of the options market, keep reading…
Why Retail Traders Are Getting Screwed
Over the past few weeks, as the troubles of regional banks have become public information, traders of all stripes have been making options bets against the stocks.
You’d think these clairvoyant put traders would’ve made a fortune … right?
Traders who bought puts on SVB and/or SBNY — expecting to close out a killer trade — are now finding themselves in a precarious situation.
Even though the banks have collapsed, brokers like Robinhood, Fidelity, Charles Schwab, TD Ameritrade, Webull, E-Trade, and Interactive Brokers have halted trading in the stocks … leaving retail traders with worthless contracts that are set to expire.
Trading platforms are acquiescing to pressure from the Options Clearing Corporation (OCC) — the biggest equity derivatives clearing house on the planet.
Now, the brokers are insisting that traders either own the shares to satisfy the put contracts or are out of luck unless the stocks start trading again before the options expire.
In other words, these traders would need to lay out thousands of dollars (that they may not have) to exercise in-the-money contracts that should be paying out already.
For example, this trader bought SBNY puts at $70, the stock is trading for $0, and he still hasn’t gotten paid:
The OCC just emailed me and wrote that $SBNY options contracts will not be extending.
In that @Fidelity will only exercise my PUTs at the last trading price of $70 even though the stock is worth zero which was even mentioned by @POTUS.@AlderLaneEggs #SBNYPutFraud… https://t.co/98aR0tHBVW pic.twitter.com/FamfD6kSgS
— Spence ☕️ (@tspencer322) March 15, 2023
This unbelievably sketchy move by the OCC and brokerage platforms has inspired a legion of retail traders to express their outrage on Twitter and create SBNYPuts.com to track the responses they’ve received from brokers.
The situation has also caught the attention of well-known short-seller Marc Cohodes, who is advising traders to call their lawyers as he considers a class-action lawsuit to help them out…
“A simple solution is that every day the stock is halted should extend the expiration date by a day…These are valid contracts. I have hundreds of DMs from hard-working people who hit it big and aren’t being paid. Why have these options if they aren’t going to be paid? It’s a rigged game. The OCC is an absolute disgrace,” Cohode told Forbes.
I reached out to Lawyers and they are ready to roll.. If I were you guys I would get this right or you deal with ME! I am not in puts but you cant screw innocent people again.. I am serious Vlad.. $SBNY https://t.co/XiFoB2GTPq https://t.co/NX8PtZ0wj2
— Marc Cohodes (@AlderLaneEggs) March 15, 2023
How to Avoid the Rigged Game
Now, the question is this … how can you avoid a ‘rigged game’ scenario like this one?
The truth is, this is the nature of the stock market. Unpredictable events occur. You must be prepared for anything.
This isn’t the first time a stock has been halted or an ETF has broken. Make no mistake … the game is rigged.
If you didn’t learn this lesson when Robinhood halted GME shares in 2021 … learn it now!
But I’d be lying if I said there was a reliable way to predict when brokerages and institutions will pull the rug on retail traders.
The only way to insulate yourself against such a situation is to size your trades appropriately.
If you put too much capital into any one trade — and that trade goes against you — you’ll get smoked regardless of whether the play was rigged or not.
WARNING: Never risk more than you’re willing to lose!
We can’t foresee what games brokerages will play with the stocks we’re trading, but we can size our trades so that no one play wipes us out.
Is this fair? Of course not. It’s infuriating to me that hard-working retail traders are getting screwed by multi-billion dollar institutions…
But more than anything, I wanna make sure you don’t end up in a situation where the majority of your account is wrapped up in a play that’s rigged against you.
Be cautious when trading overcrowded plays that take on major institutions. You never know what tricks they’ll pull to make sure you don’t beat them.
If you think the options market isn’t rigged against retail traders, think again…
That doesn’t mean you can’t be successful trading it…
But it does mean you must be extremely cautious about the stocks you trade and carefully consider the size of your bets.