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Buffett's senior apprentice430K Wiped Out: A Tragedy Caused by a Single Button
In the past couple of days, I came across a real-life case that sent chills down my spine.
No market maker manipulating retail investors, no black swan event triggering a margin call, but a financial tragedy purely caused by "not understanding the rules."
On March 6th, an investor held 96 contracts of QQQ 260306 605 PUT (put options). Benefiting from that day's sharp market decline, by the time the market was nearing close, the total value of these contracts, including principal and profit, had skyrocketed to 430,000 HKD.
But in the end, he walked away with a mere 2,500 HKD. All of this, simply because he pressed the wrong button.
Originally, he only needed to perform the simplest action,
to "sell to close" the options he held, and he could have pocketed that 430,000 HKD in real cash.
But he didn't. Perhaps out of fear of hassle, or perhaps fearing insufficient funds leading to forced liquidation, he clicked a fatal button on the trading interface: "Abandon Exercise."
In his understanding, "Abandon Exercise" probably meant: "I don't want the broker to convert this into shares for me, it's too much trouble. Just settle the profit shown in my account directly into cash for me."
However, the rules of the financial market are merciless. "Abandon Exercise" has only one legal meaning:
"I voluntarily relinquish all rights granted to me by this contract. Please treat this contract worth 430,000 HKD as scrap paper and tear it up."
Simply put, it's like buying a huge insurance policy, and after a claim event, instead of collecting the hundreds of thousands in compensation, you send a letter to the insurance company saying, "I don't want this money, just void the policy."
The next day, no miracle happened. The contract originally worth 430,000 HKD was indeed voided by the system, leaving only a pitiful small change in the account.
This case once again confirms the most fundamental investment principle:
Never touch things you don't understand. Make money within the circle of your competence.
Options are an extremely sophisticated and sharp tool. Those who understand them can steadily collect premiums through selling puts, acquiring shares of desired companies at a discount; they can also use deep in-the-money LEAPS to replace holding the underlying stock, significantly improving capital efficiency.
But for those who don't understand the rules, options are a machine that can self-destruct at any moment by pressing the wrong button.
The investment market doesn't believe in tears, only in rules.
This 430,000 HKD lesson is truly a painful one.
$Invesco QQQ Trust(QQQ.US)
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