March's bank failures show options can be tricky even when retail traders pick big winners

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The sudden failures of Silicon Valley Bank and Signature Bank last month created a nervous waiting game for options investors, showing that even winning trades can be risky in the derivatives market. 

The closures of SVB on March 10 and Signature on March 12 led to halts for the stocks — at $106 per share for SVB and $70 per share for Signature. 

This halt, and how regulators and brokerage firms handled the outstanding options contracts, turned simple trades into a big headache for retail investors. In some cases, traders had to put up additional cash and take on potential risk or see their timely bets expire worthless.

This was a problem for even more sophisticated retail traders like Shaun William Davies, an associate professor of finance at the University of Colorado-Boulder who had purchased Signature put options on brokerage platform Robinhood with a $50 strike price as a hedge against market volatility.

A put option gives the holder the right to sell the stock at the strike price, and serves as a bet that the stock will go down. A put contract is also attractive because it has limited downside for the holder.

Logically, that trade should have been a big winner, but Davies' options were technically out of the money, based on the last traded price — that is, the share price at the time was above his $50 strike price — and the stocks were now illiquid. The put options were set to expire on March 17.

Davies said that usually he would sell his winning options trades before expiration, so he does not have to deal with the settlement process. But the halt meant that he had to convince Robinhood to open a short position to exercise his options, and then allow him to close out the short position whenever the