Lede

The sudden failures of two banks last month created a waiting game for options investors, showing that even winning trades can be risky in the derivatives market.

Summary

• The closure of Silicon Valley Bank (SVB) and Signature Bank led to halts for the stocks, causing a big headache for retail investors and traders.
• Traders had to put up additional cash and take on potential risk, or see their timely bets expire worthless.
• Even experienced traders were caught off guard, like Shaun William Davies, who had purchased Signature put options on brokerage platform Robinhood.
• Davies’ options were technically out of the money based on the last traded price and the stocks were illiquid.
• Robinhood initially refused to allow Davies to open a short position and exercise his options, despite no mention in the options agreement about the risk of stocks being halted.
• 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 the next steps.
• 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.
• 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, not a way to generate more profit.
• Some types of accounts, including retirement accounts, are not allowed to hold short positions, creating additional steps for traders and brokers to close out the trade.