Alexander Kearns, a 20-year-old student at the University of Nebraska, was found dead on Jun. 12, 2020, at a railroad crossing in Naperville, Illinois, after he mistakenly thought that he had lost over USD$730,000 (~S$1.01 million) trading options on an easy-to-use trading platform.

Committed suicide after thinking that he "blew up" his entire future

In his final note seen by his parents as reported by Forbes, Kearns wrote:

"How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?"

To the media - This is paragraph 1 of the suicide note. It’s part of the public domain. Quote away.

If you’d like verification, the family will provide that. pic.twitter.com/Q9Kb2hgccn

— Bill Brewster (@BillBrewsterTBB) June 17, 2020

The 20-year-old teen had taken up investing during the Covid-19 pandemic with Robinhood, a commission-free trading app known for its user-friendly interface and "gamifying" stock trading for individuals.

Kearns started experimenting with different trading options amid the volatile Covid-19 stock market, but an allegedly unfortunate misunderstanding led to his demise.

In a screenshot of Kearns' Robinhood account, the app showed that he had a negative cash balance of USD$730,165.72 (~S$1 million), but the number did not represent uncollaterised indebtedness, but was merely his temporary balance underlying his assigned options actually settled in his account.

I saw @RobinhoodApp response and can confirm they did reach out. The family isn’t ready to speak yet. Since they can’t release account details here’s the screenshot. pic.twitter.com/uqeDhro7aJ

— Bill Brewster (@BillBrewsterTBB) June 16, 2020

The company is not sharing details of Kearns’ account, citing privacy concerns.

"All of us at Robinhood are deeply saddened to hear this terrible news and we reached out to share our condolences with the family over the weekend," a spokesperson from Robinhood told Forbes.

Bill Brewster, Kearns’ cousin-in-law and a research analyst at Chicago-based Sullimar Capital Group, said that Kearns' death came as a shock.

Kearns' father said he was loving the markets and really enjoying investing, Brewster told Forbes, "and then on Friday night, we got this call from his mom, and he had died".

In his final note, which was filled with anger towards Robinhood, he said that he had "no clue" what he was doing in hindsight.

Kearns was apparently shocked to see the cash balance of negative USD$730,165 on Thursday night (Jun. 11) after looking at his Robinhood account.

According to Forbes, Kearns insisted in his final note that he never authorized margin trading and was shocked to find his small account could rack up such a massive loss.

"When he saw that $730,000 number as a negative, he thought that he had blown up his entire future," Brewster said.

"I mean, this is a kid that when he was younger was so conscious about savings."

The misunderstanding

While the teen was unlikely to have engaged in high-risk stock trading, Forbes speculated that Kearns may have been trading what's known as a "bull put spread" as an options investor.

This involves selling a put option on a stock to collect a premium (fee), giving the right to a stock holder to sell the shares to him at a specific strike price within a specific time period, by paying him the premium.

At the same time, he would purchase a put option on the said stock within the same time period at a lower strike price.

If the price of the said stock stays above the strike price until the end of the specific time period, he would get to earn the premium.

If the price of the stock dips below the strike price, his losses will be limited to the put option that he has purchased, capping his losses at a maximum of the difference between the two strike prices.

However, if the stock closes between the two strike prices, the buyer of the higher option will sell the stocks to him as the strike price is higher than the current price of the shares, while the lower option will expire as he would not want to sell to the option seller when it is above his strike price.

For example, if Amazon's shares are trading at $2,640 on Jun. 18, options trader "A" can sell a put option with a strike price of $2,640 per share for one contract (100 shares) expiring on Jul. 18, with a premium of $28 per share, speculating that the price of Amazon's share prices will remain at or above $2,640 until the end of Jun. 19.

At the same time, "A" will buy a put option for one contract with a strike price of $2,635 expiring on Jul. 19 with a premium of $26 from options trader "B".

If Amazon's share prices remains at or above $2,640 until the put options expire, "A" will earn a total premium of $200, which is the difference between the two premiums multiplied by one contract.

If Amazon's share prices fall below $2,635, he will encounter a total net loss of $300, from the difference of $5 multiplied by one contract between the two strike prices minus the premium proceeds of $200.

However, if Amazon's share prices fall in between the two strike prices, say $2,637, the first option buyer will sell the shares to him as the strike price is higher than the price of the shares being traded.

The lower put option that "A" has purchased is also worthless, as "A" would not want to sell the shares at $2,637 to "B", when the strike price for the lower option is $2,635, lower than the price of the shares being traded.

In this scenario, "A" is legally bound to purchase the shares from the option buyer, resulting in his account balance showing a temporary deficit at $264,000 from his purchase of the share, until the underlying stock is credited to his account, which would eventually amount to a minor loss of $100, from the difference of $300 between the share price and strike price, minus his earnings of $200 from the premium.

In Kearns' case, he may not have realised that the negative cash balance was temporary, and would be corrected once the underlying stock was credited to his account.

"Tragically, I don’t even think he made that big of a mistake. This is an interface issue," Brewster said.

Top image via Bill Brewster/Twitter, Everipedia