Robinhood Users Say The Trading App Won’t Cash In Their Profitable Bets Against Silicon Valley Bank

If you had “Robinhood controversy” on your 2023 banking crisis bingo card, you’re in luck. The square just got called. Unlike the great meme stock rally of 2021, this brouhaha revolves around put options and how users of the broker’s app aren’t able to cash in on the collapse of Silicon Valley Bank and Signature Bank even as their bets are in the money.

Put options are a way for investors to wager that the price of a stock will decline. If the stock does go down, the trader can sell the shares at a higher price than market value, making a profit. Or they can sell the contract to someone else who thinks the shares will fall even further. If it works, it’s like winning the lottery with the added bonus of also getting to revel in someone else’s failure.

In the case of Silicon Valley Bank and Signature Bank, some Robinhood users saw the writing on the wall and purchased put options on the stocks before they collapsed. Of course, the banks did collapse. It should’ve been a windfall for those who saw trouble brewing.

The problem is, according to users of the trading app, Robinhood isn’t allowing them to sell their contracts or get paid. A slew of the contracts are set to expire on Friday. That’s got some of them miffed.

Robinhood, which didn’t immediately respond to requests for comment, has its reasons for not letting users exercise their options. The shares aren’t trading anymore, so it’s a bit of a logistical nightmare to buy the shares if you don’t already own them to satisfy the contract. There aren’t a lot of people looking to buy the contracts right now given that the stocks are already on the operating room table and there’s not much, if any, downside left to capitalize on.

Robinhood isn’t the only exchange that isn’t following through, according to retail options traders. Fidelity, which didn’t immediately return requests for comment, has also taken a social-media beatdown for its failure to pay up. Unsurprisingly, given its history, Robinhood seems to be the punching bag of choice.

That’s not stopping users from asking the all-important question: why were they even allowed to buy put contracts on stocks they didn’t own in the first place if that were a condition for getting paid if a situation like this played out?

The Robinhood mobile trading app was designed to democratize finance, to bring the power of the markets to the people, to disrupt the old boys’ club of Wall Street. Yet, when the great meme stock rally of 2021 erupted, Robinhood found itself frozen, like a frightened puppy, as the surging demand for GameStop and other hot stocks threatened to overwhelm the platform’s infrastructure. The company’s pocketbook, it turned out, wasn’t deep enough to handle the sudden spike in trades, leaving Robinhood on the hook for more than it could afford. The result was a near-death experience followed by Congressional hearings that bordered on must-see TV and a yearlong investigation by the House Financial Services Committee that concluded the app was closer to flatlining than it let on at the time.

Just like the meme stock episode, this week’s simmering put-option scandal goes to show that even the best bets can end up worthless.

There’s a touch of irony to the situation. In 2021, WallStreetBets users complained that Gabe Plotkin’s Melvin Capital, among others, held naked short positions against GameStop — meaning they didn’t own GameStop shares to deliver on their bets against the stock. Now, Robinhood and other brokers are saying put contracts, which to be clear aren’t the same as naked shorts, can’t be executed because the shares can’t be bought. It’s all a little too on the nose.

As Twitter lights up with complaints from Robinhood users, well-known short-seller Marc Cohodes offers a bit of advice: call a lawyer. He’s also promising that there will be “hell to pay” if Robinhood or any other broker looks to “screw Joe Six-Pack.” Stay tuned.