Lede

The sudden failure of two banks last month created a headache for retail options traders, even with their winning trades, showing how risky the derivatives market could be.

Summary

• The sudden closure of Silicon Valley Bank and Signature Bank on March 10 and 12 respectively, resulted in halts for the stocks, making even winning trades difficult for retail investors.
• This created a problem for even more sophisticated traders such as Shaun William Davies, who had purchased Signature put options on brokerage platform Robinhood with a $50 strike price as a hedge against market volatility.
• However, the halt meant that Davies had to convince Robinhood to open a short position to exercise his options and then allow him to close out the short position whenever the stock began to trade again, turning a straightforward trade into a complicated process.
• The Options Clearing Corporation declared that the options should be closed on a broker-to-broker basis, sending investors digging through their options agreements to figure out next steps.
• Investors who held put options would likely need to call a company representative to exercise the put option.
• The trades with simple put options were relatively easier to figure out, but some accounts had put-spread positions that include multiple options and were trickier to unwind.
• Some others had short put positions, requiring them to buy the stock at the strike price, resulting in losses for the traders.
• There are regulatory minimums for margins that brokerages have to impose on short positions and sometimes additional margin is necessary for risk management for the firms.
• Retirement accounts are not allowed to hold short positions, creating additional steps for traders and brokers to close out the trade.
• The stress of the trade did not go away even once the traders entered a short position against Signature Bank, as there was concern about whether the stock would begin trading at a higher price.
• In the end, Davies was able to cover his short position at just 20 cents per share, netting a small gain.