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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 Yield Enhancement Strategy (YES).

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 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.

UBS Yield Enhancement Strategy

UBS Yield Enhancement Strategy

Haselkorn & Thibaut, P.A. continues to investigate potential cases related to the UBS Yield Enhancement Strategy (YES).  Haselkorn & Thibaut, P. A. at investmentfraudlawyers.com have investigated several potential claims against UBS and Merrill Lynch since January 2019, and another YES claim was recently filed by their office.  This investment strategy program was sold to high net worth clients as a safe way to enhance or slightly increase yield by a couple of percentage points on the cash, fixed-income and other conservative portfolio assets that customers were holding in their existing accounts.  The strategy was supposed to generate small returns at a low-risk level by using a strategic approach involving an “iron condor options strategy” involving purchases and sales of index options.

In December 2018, the market experienced volatility levels that this strategy did not anticipate and investors believing they were engaged in a conservative strategy to try to earn an extra 2-3% annually were blindsided by significant losses in some cases 20% or more that quickly eroded the capital in their portfolio that was exposed to this strategy.  In the wake of the volatility and losses suffered by investors, not only are investors seeking a recovery from the firm on a voluntary basis being turned away, and that is really making investors upset, especially considering the way the program was represent and sold to them.  To make matters worse, investors are also beginning to learn that the fee revenue generated from these programs was substantial for the firms like UBS and Merrill Lynch.  Not only do the investors learn that they lost substantial capital, they also learned the firm had positioned itself to make substantial fees from the investor (whether the strategy was ultimately a success or a failure) and that in many cases it what prompts the investor to consider his/her options.

For most investors who suffered losses in YES strategies, they learn that a private, confidential customer dispute process is available and they have filed private customer dispute arbitration claims with the Financial Industry Regulatory Authority (FINRA).  Contact experienced securities and investment attorneys at Haselkorn & Thibaut, P. A. for a free consultation and for an explanation of the private FINRA customer dispute resolution process.  There are no deposition, very few hearings, and cases may be expedited for quicker results.

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 (short 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.

“Yield Enhancement” Options Investment Strategies, Including UBS “Iron Condors” Program, May Cause Unnecessary Investment 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 wirehouse 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.

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.

Iron Condor

Iron Condor 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.

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 Investment Fraud Attorneys IF Your Options trading strategy resulted in unexpected or unnecessary losses.

At Haselkorn & Thibaut, P.A. 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 our law firm today at 1-800-856-3352 or reach out to us directly online at www.investmentfraudlawyers.com.  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.