Agree. Forbes might've been trying too hard to analyze the scenario(s), while possibly also not being aware of how Robinhood deals with option spreads near expiration, and generally their risk controls.
Cuz they don't check for the margin according to the potential buying power of the account AFTER a potential assignment from shorting the options. They only check the margin according to the option transactions. Since option prices are usually small comparing to the underlying's price so whatever was in the account would be sufficient to cover it. Example: Underlying's price is $36.00. So if he sells 200 put contracts then his/her potential assignment liability would be $36 X 200 X 100 = 720,000 should the put contracts all become ITM But when he was selling the contract, the price of each put is only let's say $0.5. So for 200 put contracts, it's only 0.5 X 200 X 100 = $10,000 well within the amount that's in his account of $16,000. Especially that he did a vertical spread which means he also bought the same amount of put contracts for hedging, so his margin requirement would be even lower. So he definitely be cleared by RH. The only problem happens when the short leg becomes ITM and the long leg doesn't depending on the spread of his vertical, then he would be on the hook for the entire $720,000 to buy the shares but without any assignment from the long leg to cover it. But judging from the story, the guy's spread might not be that large that he was getting a one-sided assignment on the short and not the long because he thought the two were supposed to cancel each other out but you never know. Clearly the guy was trading something that he obviously had very little understanding about. And when he couldn't understand something he didn't want to ask. WHY didn't he just ASK somebody???? If only he ASKED somebody...
My guess, this guy wanted to end his own life, the negative balance thing was just a catalyst that speeded up the process.
Posters are complicating a simple situation. This was the deceased position without knowing the actual number of contracts. Position: spread bought 25 strike put sold 30strike put maximum loss $500 for 1 option spread. Current price 27. 30 strike put is exercised against you. You are now long 100 shares at $30 Why would you exercise the 25 put as some posters suggested and take a $500 loss when you can sell the stock at $27 and limit your loss to $300? (The actual loss is smaller if you include the cash/premium received from selling the 30 put.) the maximum number of contracts in his account is the cash he deposited in account divided by $500-(maximum loss) e.g. if you deposited 20k the maximum number of contracts allowed is 40. The 20k deposit completely protects RH in all scenarios.
In addition,there are scenarios that his position at the time he received notice of a 720k deficit his account was actually profitable. It is possible that RH closed his position and the account showed a resultant profit.
Right -- as I wrote in the OP, RH's past goofs in this regard are well-documented and it wouldn't surprise me to learn that they screwed up some other margin / risk-control setting. But so far, there's no evidence that that's what happened in this case. The only explanation offered centers on poor messaging in their software combined with a trader who was in way over his head and didn't know what he was doing. But I created this thread mainly to try and understand if, beyond those elements, there was an actual legal or regulatory screw-up on RH's part.
I think you're confusing premiums received with margin required to put on the short position. Yes, if you sell 200 Puts for $0.50 each, you'll take in $10,000 in premiums. But that has nothing to do with the margin required for that kind of a position. There's absolutely no way a $16K account would be able to sell 200 such naked Puts on a $36 underlying.