Can somone explain the 1R0NYMAN affair? How does unexpected assignement affect options strategies?

External question — Personal Finance Stack Exchange Author: BadBANNY Original post: https://money.stackexchange.com/questions/166188 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I'm new to options. I recently stumbled upon the "1R0NYMAN affair" while looking for box spreads in options Wikipedia describes the "1R0NYMAN affair" as follows : Around January 2019, a user known as u/1R0NYMAN sold a box spread creating a $300,000 credit that should have netted him from $40,000–50,000 over the course of two years. He described the trade as a way to make "risk-free money", but he was unaware of the assignment risk. A few days later, some of the options were exercised against him, causing a loss of over $60,000; calculating from the original amount in the user account, $5,000, the negative return of the trade was 1,832.99%. As a result, Robinhood decided soon after that it would no longer allow the trading of box spreads. The user withdrew $10,000 from the account before the positions were closed; it is believed by the news website MarketWatch that the brokerage itself took the majority of the loss https://en.wikipedia.org/wiki/R/wallstreetbets There are many things I don't understand in this case. Long and Short Box spreads have predetermined risks so how could the trader lose 2000% of it's account? Even with an unexpected assignment how could the loss be 2000%? I also fail to see how unexpected assignment are a risk only limited to box spreads. Don't all option strategies that involve selling American options have this risk, so how does unexpected assignment affect other options strategies? PS: I also don't understand how he was able to withdraw 10k.

External answer — Personal Finance Stack Exchange Author: 0xFEE1DEAD Original post: https://money.stackexchange.com/a/166199 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Here's a YouTube video that explains it in detail: https://www.youtube.com/watch?v=3zW86yXg7RM From a Reddit thread 1R0NYMAN discovered that Robinhood's risk management was complete garbage in that it let him use components of what's called a short box spread as credit to be able to balance the 'debit' halves of the spread without borrowing money, because the position is naturally hedged against itself. Using this he was able to obtain positions on about $250,000 using $5000 of his own money. Naturally this position was taken on UVXY which itself is a leveraged derivative instrument, not a real stock of an actual company, and the original poster referred to it as "risk free". This all changed when it started to fall apart and Robinhood forcibly liquidated the spread but not before 1R0NYMAN withdrew $10,000 leaving RH $58k in the hole. Robinhood banned the strategy on their app almost immediately. Based on comments in a different Reddit thread , he got assigned early on long-dated (2 year expiry) deep in-the-money (strikes were 10 and 15, underlying was trading at ~65 at the time) options on UVXY , a leveraged ETF on VIX futures that can be quite volatile itself.