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A number of investors have incurred unnecessary investment losses associated with an investment strategy at UBS (and other competing firms) referred to as a UBS Yield Enhancement Strategy.

This investment strategy involves an options strategy that was marketed by some as a safe way to enhance the yield (or income stream) from an investment portfolio. Unfortunately, investors are now discovering unexpected and unnecessary investment losses in this supposedly safe strategy.

UBS (and other competing firms) represented to investors that a UBS Yield Enhancement Strategy may provide a low-risk way to generate additional income. In reality, the investment strategy was fraught with risk that ultimately resulted in unnecessary and unexpected losses. If you have experienced unnecessary loss because of this strategy contact our broker negligence law firm today.

How a UBS Yield Enhancement Strategy Was Supposed to Work

The Yield Enhancement Strategy involved a complex iron condor type of options investment strategy which involved buying and selling both put and call options on the S&P 500 index. An iron condor options investment strategy involves writing a series of option contracts, typically at once or around the same time period. The iron condor investment strategy typically includes writing two near money options that are short and purchasing two deeper out-of-the-money option contracts that are long. The first component of an iron condor involves selling an out-of-the-money put (shot put), while simultaneously selling an out-of-the-money call (short call).

Volatile Markets Create Additional Risks

The Yield Enhancement Strategy was typically marketed in a manner suggesting that so long as there was very little market volatility, this was an investment strategy that could generate additional income. However, when the stock market becomes more volatile as it did in the 4th quarter of 2018 (and in particular in December 2018) with substantial and rapid increases and decreases, the investment strategy can cause significant unexpected and unnecessary investment losses for some investors. This investment strategy may have been (or may have become) unsuitably risky for some investors, particularly if it was recommended as a relatively safe or conservative income-producing investment strategy.

It’s possible that the financial advisor or firm that recommended the investment strategy may have failed to make adequate risk disclosures to investors regarding this investment strategy or may have failed to take reasonable steps to avoid unnecessary investment losses as the market became more volatile in recent months.

UBS Yield Enhancement Strategy Options Investment Strategies May Cause Unnecessary Losses

In what appeared to be a low interest rate and low volatility market and investment environment many brokerage firms and financial advisors, including well-known wire house firms such as Merrill Lynch, Morgan Stanley, Wells Fargo, and UBS(among others) have reportedly recommended various options investment strategies to their investor customers as supposedly safe and efficient investment strategies to enhance income from their investment portfolios. However, when stock markets turn volatile, these investment strategies can quickly spiral into unexpected investment losses for retail investors. Examples of a volatile market in February 2018 and again in the 4th quarter of 2018, may have resulted in unexpected and unnecessary investment losses for some investors.

UBS Yield Enhancement Strategy

UBS Yield Enhancement Strategy

Option investment strategies, particularly those strategies involving naked options appear to have been recommended to investors by such well-known brokerage firms like Merrill Lynch, Morgan Stanley, Wells Fargo and UBS (among others). While these option investment strategies have reportedly presented some retail investors with opportunities to potentially generate some additional income by engaging in a sophisticated, and relatively complex options investment strategy, some of those investment strategies were also often fraught with unexpected and/or undisclosed risk. One such options strategy, marketed in some instances as a yield enhancement strategy (or YES), involves writing so-called iron condors through S&P 500 derived option contracts. In some instances, investors are steered into such strategies seeking the option premium income, without fully understanding the investment strategy or fully receiving disclosure (or understanding regarding) the material risks associated with such an options trading strategy.

When it comes to yield enhancement options strategies, perhaps the most commonly used financial instrument is the extremely well-known S&P 500 Index (SPX), a stock market index based on the 500 largest companies with stocks listed for trading on the NYSE or NASDAQ. The Chicago Board Options Exchange (CBOE) is the exclusive provider of SPX options. In this regard, CBOE provides a range of SPX options with varying settlement ranges and dates, including A.M. and P.M. settlement, weekly options and end-of-month options. Significantly, because SPX is a theoretical index, an investor who engages in options trading using SPX will necessarily be engaging in uncovered, or naked, options trading.

How Does The UBS Iron Condors Program Cause Investment Loss?

An iron condor options strategy involves writing a series of option contracts, typically all at once or around the same time. The iron condor structure entails writing two near money option contracts that are short, in addition to purchasing two deeper out-of-the money option contracts that are long. The first component of an iron condor involves selling an out-of-the money put (short put), while simultaneously selling an out-of-the money call (short call). When implementing this first component of an iron condor the investor is essentially betting that between now and expiration, SPX’s trading will remain range-bound between the two option strike prices thereby ensuring that the naked option contracts will expire worthless and the investor will profit from the option premium earned.

In recognition of the substantial risks associated with short naked option contracts, the iron condor strategy involves a second component for purposes of risk mitigation. Specifically, the second part of an iron condor strategy involves buying a further out-of-the money put contract, as well as buying a further out-of-the money call contract. Thus, while the first two legs of the iron condor involve two extremely risky short naked options, the third and fourth legs of the iron condor seek to mitigate that risk with less risky long SPX options. Collectively, these four options trades, or legs, make up an iron condor strategy.

Ultimately, options strategies like the iron condor amount to bets in favor of time decay versus volatility. On the one hand, an investor can pocket options premium income in those instances where the option, which has a finite lifespan and fixed expiration and, therefore, is properly viewed as a decaying asset goes to zero and expires worthless. However, on the other hand, periods of pronounced market volatility can quickly lead to scenarios where the option premium is dwarfed by losses due to market volatility.  A volatility spike in the stock markets in early February 2018 or in December 2018 can cause substantial losses for some investors placed in so-called “yield enhancement” and other similar investment strategies premised on low market volatility.

Unfortunately, some investors get steered into unsuitable and risky option investment strategies without receiving full disclosure from their financial advisor concerning the significant risks embedded in options investing and/or hedging strategies. Investors who have sustained unexpected or unnecessary losses in connection with these or similar options investing may be able to recover their losses. In some cases, the recommendation by a broker or financial advisor may have lacked a reasonable basis in the first instance, or if the nature of the investment including its risk components were not properly disclosed or were otherwise misrepresented.

Contact Our Attorneys IF Your Options trading strategy resulted in unexpected or unnecessary losses.

At Haselkorn & Thibaut, P.A. d/b/a The Investment Fraud Lawyers our top-rated investment fraud attorneys have extensive experience handling complex options trading cases nationwide. If you lost money because your broker or adviser recommended an options trading such as an iron condor strategy or yield enhancement strategy (YES), at Morgan Stanley, Merrill Lynch, Wells Fargo, UBS (or elsewhere) or relating to another investment strategy that resulted in unexpected or unnecessary investment losses, call us today at 1-800-856-3352. We are standing by, ready to help you recover your investment losses.

To schedule a free, no obligation review of your potential case, please contact the Investment Fraud Lawyers today at 1-800-856-3352.  We typically handle options trading cases on a contingency fee basis that means we do not get paid unless we help you recover your investment losses.