What Happened to Alexander Kearns? How a $730,000 Misunderstanding Led to Tragedy
On June 12th, the remains of 20-year-old Alexander Kearns were discovered. He was the victim of an apparent suicide.
The young man who, family members say, was always so careful with his money, had taken up online trading to break up the monotony of his COVID-related self-quarantine.
Sadly, according to the note he wrote before his death, something went horribly wrong – or so he thought.
The Mirage Of A $730,165 Loss
Kearns started his adventure in trading with a self-directed Robinhood account. These accounts, marketed towards people new to investing, have been hugely popular among millennials.
The mobile app adds a gaming feel to making trades, and it has attracted more than 13 million users since it launched in 2013.
A remarkable three million of those accounts were opened in the first four months of 2020. Compare that to the mere 4.9 million accounts reported by competitor E*Trade at the end of 2019.
It appears that the despair which ultimately led to Kearns’ death was triggered by what he saw in his Robinhood account.
He took a screenshot, which was later recovered by his family that reflected a cash balance of ($730,165). It seems Kearns believed he had incurred sudden, massive financial losses.
Noting that he had neither requested nor authorized margin trading, Kearns was stunned to discover that such a loss was possible. According to a family member, a note written by Kearns just before his death said, in part:
“How was a 20 year old with no income able to get assigned almost a million dollar’s worth of leverage? The puts I bought/sold should have canceled out, too, but I also have no clue what I was doing now in hindsight.
There was no intention to be assigned this much and take this much risk, and I only thought that I was risking the money that I actually owned. If you check the app, the margin investing option isn’t even ‘turned on’ for me. A painful lesson.”
Kearns’ death is a tragedy in so many ways, but nothing is more discouraging than this: Kearns didn’t owe $730,165.
In fact, he had a balance of $16,000. Based on the experiences reported by a number of users it seems that the large negative balance showing in Kearns’ account was likely only temporary – not a balance owed.
It seems that the amount was probably off due to the time it takes for underlying stocks to settle.
The Bull Put Spread
While Robinhood hasn’t released the details of Kearns’ trades, many have speculated that he was experimenting with a somewhat sophisticated options strategy known as a “bull put spread”. The technique works like this:
Put options give the contract owner the right – but not the obligation – to sell the underlying securities at a predetermined level referred to as the “strike price”.
The strike price is valid, regardless of whether the underlying securities increase or decrease in price. The contract has an expiration date, and contract owners can exercise their right to sell anytime before the expiration date.
Those who sell puts are obligated to buy the underlying securities at the strike price if the options contract owner chooses to exercise their rights.
Traders using the bull put spread method sell put options at a higher strike price and buy puts at a lower strike price. Both contracts have the same expiration date.
How Bull Puts Make Money
If the stock price stays above the higher strike price through the expiration of the contract, there is a net credit that the trader keeps.
This isn’t considered a particularly high-risk strategy, because the most a trader can lose per share is the difference between the two strike prices.
In Kearns’ case, what may have happened is this: the contract to purchase shares was called one day, and the option to sell shares was executed the next day.
Until everything settles, the value of the account appears negative – and in this case, very negative. Those who aren’t familiar with the logistics of such trades, or those who misunderstand the information displayed on their app’s user interface, can be in for quite a shock.
How Has Robinhood Reacted To Alexander Kearns?
After learning of this tragic situation, Robinhood has committed to making changes in the app. It is working towards providing clear directions and detailed information for its user base, which is primarily made up of inexperienced traders.
While that doesn’t change the outcome for Alexander Kearns, his family has publicly applauded Robinhood for recognizing their responsibility to users and taking action to prevent future misunderstandings like this one.
If you or someone you know is thinking about suicide, please text the Crisis Text Line at 741-741 or call the National Suicide Prevention Lifeline at 800-273-TALK (8255).
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.