It’s finally happened: this turbulent market has claimed an actual life.
A 20-year-old college student committed suicide after racking up a massive debt using the trendy stock-trading app Robinhood. If you aren’t familiar, Robinhood makes it incredibly easy and fun to invest on your phone. It even pops confetti when you make trades.
It’s like a video game, but with actual money.
Alexander E. Kearns took his life after amassing what appeared to be a $730,165 loss on his trades. Like millions of other bored kids who were stuck at home, Kearns began day trading despite having no investment experience.
But instead of simply picking a hot stock and waiting for a big jump, it appears that Kearns went all-in with the much more complicated method of options, specifically a “bull put spread.”
A bull put spread consists of one short put with a higher strike price and one long put with a lower strike price. Both puts have the same underlying stock and the same expiration date. For an experienced options trader, this is actually a decent way to mitigate risk. But if you don’t know what you’re doing, it may appear that you are deep in the red until those options contracts actually expire.
Sadly, it appears that Kearns wasn’t as bad off as he thought…
“It’s not uncommon for cash and buying power to display negative after the first half of options are processed but before the second options are exercised — even if the portfolio remains positive,” according to Forbes.
We’ve seen thousands of “Robinhood kids” drive up stocks like they were playing a video game. Sadly, unlike video games, you don’t get an extra life when you blow a big trade…
I can’t blame people for wanting to speculate. When you see stocks jump hundreds of percent in just a couple of days, it looks awfully tempting to place a bet.
And a bet of risky stocks these days is exactly what it usually is: a coin flip for a big payday. Except now the odds are far from 50/50.
Speaking of betting, guess what one of the biggest Robinhood trading bets has been this year? Penn National Gaming (NASDAQ: PENN), an American operator of casinos and racetracks.
That bet paid off huge for a lot of people…
If you placed your bet on March 18 during the 52-week low of $3.75, in less than three months you could have banked almost 1,000% when the stock hit $40.
However, nobody buys at the lows and sells at the highs, and PENN is not at all a typical Robinhood trade. Take bankrupt car rental company Hertz (NYSE: HTZ) for instance. Earlier this year, Hertz itself warned potential investors that it may lose all of their money if they buy the company’s stock, and it would take a miracle for the company to avoid bankruptcy. The stock hit $0.55 in May — a 97% plunge in only four months.
As of June 15, Robintrack shows more than 170,000 users hold Hertz stock.
But they didn’t get in at the bottom. According to Robinhood data, most stockholders got in when it jumped to $5.53.
What’s it trading at now?
$1.86.
Ouch.
So you can see how inexperienced traders like Kearns can easily get swept up in the hype. I’m not the type of investor to take bets that risky.
I am, however, betting on a gaming sector that has all upside potential, and none of the risk…
While I caution against investing like it’s a video game, I highly recommend investing in video games themselves.
Currently, video game sales already top $150 billion. That number is increasing every day — especially now that the coronavirus has ushered in a new generation of avid gamers.
But I’m not just talking about investing in the games themselves.
I’m talking about investing in the eSports trend, where millions and millions of people watch video games like they were big-league sporting events. eSports topped about $1 billion in revenue in 2019. Within 2-3 years, that number is expected to double. From there, it could start growing exponentially along with the new generation of players and viewers.
If eSports keeps growing at the current clip, we could feasibly see up to 8,200% gains in the coming years.
That’s far better gains than if you invested in Penn Gaming at exactly the right time, with none of the risks of betting on a company like Hertz.
