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r/WallstreetBets, the dark side.

For most individuals, the stock market can be a lucrative place in which they earn interest on a portion of their savings each year. Just set aside a couple of grand, and if you’ve done your research after a few years, watch it multiply or get delisted and turn into dust. But for some, years is far too long to wait, traders, want their money today and throw thousands of dollars into stocks, Forex, and options to get it

Traders are normally pretty sensible clued up and use a detailed series of charts and strategies to predict where stocks are headed. Then you’ve got the professionals. The institutional traders and bankers who have spent years studying markets and have access to trading terminals, walls of monitors, and millions of dollars. They spend hours charting and write full essays of due diligence before even thinking about going in, cunning, careful, and calculated. 

But then you have the WallStreetBets Subreddit – its members turn stock options from a hedging strategy into a glorified bet.

People on the subreddit have managed to convert the entire stock market into a personal casino then add zero-commission brokerage apps available to everyone with a mobile phone, lock the world away in their homes for a year and you’ve got a lot of people on board. The process is simple you start your trading career by signing up to Robin Hood as zero commission online brokerage. Once you are on Robin hood, you’re set it’s time to lose some money. This usually starts by logging onto WallsreetBets, the subreddit itself is home to a few things, useful stock tips thorough due diligence can occasionally be found, however, once located and after skim reading a few lines of it and glancing at some charts, you’ve pretended to understand, it’s time to go all-in on the Yolo, this subreddit signature move, essentially an investment of all of your cash. Once the cash is loaded then its time to get some options on, which almost always means options on SPY, a fund that tracks the overall US market.

What are stock options? 

 

Basically, an option to buy or sell a stock at a specified price. When you’re buying a call option, you’re basically paying a premium upfront to bet that the value of a stock will rise to a certain price by a certain date, the further the price goes beyond your selected strike price, the more your call’s worth. But if it doesn’t hit your strike price by the expiry date, you’re not putting petrol in the Corsa, puts are the same thing, but they are generally for when you think stocks are going to fall. If an option hits your strike price or more, you can exercise them to buy or sell the shares. Now the nature of options allows for huge potential and upside, banking numerous people up to 10 times their investment, but also losing others all of it. There have been a few tragic losses, but even for those that lose everything on wall street bets, there’s almost always another portion of the credit card to play with.

 

r/WallstreetBets – What is it?

 

So WallStreetBets went live as a subreddit in 2012 and it wasn’t long before people on the subreddit started playing around with options and penny stocks. It’s also worth mentioning that most people on the subreddit were relatively competent with stocks and had some idea of what they were doing until 2015, the time when Robin hood starts to gain some traction, from there it’s not long before they find WallStreetBets, the subreddit has 10,000 members and the slow influx of Robin hood traders begins. Over the next few years with users like WallStreetBets Scott appearing claiming to have made $8 million from $43,000 whilst someone makes $110,000 completely by accident. By 2019, the subreddit had grown to 700,000 members

 

War Stories:

 

‘1ronyman”

 

It’s mid-January, 2019 and Reddit user ‘1ronyman’ decides to stray from the proven strategies, he’s still trading options, but this wasn’t your usual options trade this was a box spread, a highly complicated strategy that involved both buying and selling equal amounts of options at the same expiry and strike price and profiting by taking advantage of pricing and efficiencies.

Box spreads are generally not very profitable and the commission charge slapped on top of them usually makes them not that appealing, but ‘1ronyman’ was on Robin hood and Robin hood doesn’t have commission charges. ‘1ronyman’ only has $5,000 in his account, but by trading these box spreads, he manages to take on around $300,000 worth of margin, that’s a leverage of 60 to one. Now, obviously, this should not be possible but his strategy was so mental that not even Robin Hood’s risk management knew it could be done. He had also worked out that the box spreads were completely risk-free, meaning he had no money at risk, if those options remained unexercised in two years, he’d make around $40,000. 

He goes on WallStreetBets and shows everyone the results, realising the inherent risk people tell him not to go through with it, that there was risk involved, that he was completely wrong but ‘1ronyman’ had run the complex algorithms on his Casio calculator and he had no money at risk, it could not wrong well not until people started exercising them, see ‘1ronyman’, thought that for every call he sold being exercised, hee could exercise a call he purchased, meaning a loss of only $500 per spread.

But here’s the thing. He sold 500 spreads on the same day he opened the spreads buyers began exercising them. so many that he had to close 283 spreads in one day, naturally his margin called for a truck full of money that he doesn’t even have. $60,000 down and  -2000% later, Robin Hood actually realised what was going on and close ‘Ironyman’s’ account instantly and box spreads were removed from the platform in a matter of hours.

So overall not a great time for ‘1ronyman’, but it turned out that he managed to withdraw $10,000 of the initial profit from his Robin hood account, meaning that while losing Robinhood, at least $60,000  and forcing the investment platforms to change the rules forever, he had doubled his money !!!

 

‘AnalFarmer2’

 

19-year-old student ‘analfarmer2’ starts out on WallStreetBets in 2018, his first post suggests he’s new to trading asking where he should Yolo his 5k, fast forward to July 2019, and he’s a veteran with $100k in his Robin hood account he goes all-in with it in the short term, expiry calls on a company called Align Technologies, it goes well and then a day later he banks $200,000 profit. Two days later he jumps back into the market which had gone up yesterday, so logically tomorrow it was going to drop. He then YOLOs $170 K on zero-day expire spy puts, these puts expire the next day so naturally, they’re high risk, high reward, on the same day he buys them a rogue tweet from Donald Trump pronouncing a new wave of Chinese tariffs causes the markets to nose dive and he gets another $300K making his account worth almost $700K.

Confident a market rally was on the cards for the day after ‘analfarmer2’ then put $600K of the profit he just made into another round of zero-day expiry options for tomorrow but this time they were calls. The next day its a sea of red, the market was down hard again and his $600K washed away. He sold the calls for $100k leaving around $200K in his account. He could make that $500K back with a few careful moves, fast forward a week it’s down to $40K so one final Yolo move, he spots that on August 14th an earnings report for canopy growth Corp, will be published and decides to put the entirety of his account on calls for it. It’s generally assumed that he lost the rest of his account having made and lost $700,000 in three weeks, ‘analfarmer2’ decides to take a break from wall street bets.

 

‘Controlthenarrative’

 

A couple of months later, and the guy called ‘controlthenarrative’ arrives. He borrows money via leverage through Robin hood and loses $30,000 on options for Microsoft earnings report. He makes a Reddit post declaring the end to his trading career and that was the end of it until he came back three days later, this time he’s only got $2,000, but there’s a twist turns out there’s a glitch on Robin Hood it gives you infinite leverage; others use this glitch to borrow money in the millions, but ‘controlthenarrative’ is sensible he only borrows enough to meet his personal risk tolerance, $50,000. 

The loophole works by applying for two to one leverage via Robin Hood gold, a monthly subscription service, which requires a minimum of $2,000 in your account because he has two to one leverage he now has $4,000 buying power control. ‘Controlthenarrative’ then buys a hundred shares of AMD stock he pays $3,200 for the shares with almost half of that being leveraged. He then goes to Robin Hood’s options market and sells AMD calls, turning over his one hundred shares and receiving a premium of $3,200, he had essentially laundered the leverage Robin Hood had given access to into a cash balance in his account and since he has Robin Hood gold and his leverage is two to one, he now has access to $8,000, rinse and repeat until he hits $50,000, his personal risk tolerance. 

He then bets every single penny of that on Apple puts days before an earnings report expecting bad news, earnings day finally arrives and Apple hit it out of the park,  He loses 25x his entire account in an instant It wasn’t long before the leverage loophole was fixed. Robin Hood would then go onto WallStreetBets to clarify their policies on margin and state that anyone found abusing systems on Robin Hood would have their account closed. 

 

Roll forward to 2020

 

February 2020, the Dow Jones index is riding at an all-time high and WallStreetBets now has almost 900,000 members, at the same time things were happening in China, that weren’t good. A new coronavirus was springing up all over WooHan and it was spreading fast. China locked down the city and told everyone that everything was just fine. Fast forward a few months. almost the entire world has it, and it’s still spreading after infection starts springing up in Europe, in America, governments cave in one by one. Time to close shop, the market is going to go down,  bears on WallStreetBets have struck it big, and while infections continued to spread bears were rubbing their hands together.

In March the US market fell by almost 30%, but the lockdown was expected to cripple the economy for years, bears were certain the worst was yet to come. So the mission was simple, load up on puts and head straight back in, COVID was getting worse, rent wasn’t being paid and unemployment numbers were skyrocketing. They hadn’t taken into account one thing, a booming market was Trump’s golden tickets to reelection in 2020, and he wasn’t just going to let it slip into the gutter. 

 

And so began the pump

 

The head of the federal reserve Jerome Powell is tasked with keeping the stock market afloat, a feat that seemed almost impossible under the current circumstances, but then s miracle happened all that was needed was to press a simple button. It turned out that the fed has a magic printer and it printed money, the recession was canceled instantly, game over. 

 

In late February, the US government pledged $2.5 billion to fight the coronavirus but by mid-April, it had burnt through more than $6 trillion. The fed pledged to a  $2 trillion stimulus package, as well as announcing unlimited purchasing of government bonds, emergency packages of $1,200, were also deployed 

 

The results were incredible. 

  • 40 million unemployed across the country and the markets go up !!!
  • Almost $1 trillion added to the national deficit in one month SPY hits 300

 

All that had to be done was keeping the print button pressed down with tape meant that Jay Powell ended the crash instantly and guided the world’s financial systems back to normal for good and thanks for excessively printing money to counterbalance economic issues, there won’t and never has been unintended consequences from that.

Bears were absolutely brutalized, tens of thousands of puts reduced to smoke, but as things worsened and the market kept rising, one by one, the bears fell, by late May it was over even with 40 million Americans unemployed, the NASDAQ had overtaken the pre-crash peaks of late 2019, the Dow Jones index wasn’t far behind. 

The moral of the story is don’t think that with all that is happening that you can jump into a subreddit, clean up and retire tomorrow, there are lots of tales of individuals who haven’t made millions and lost it all but that doesn’t make great news.

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