Expected Market Volatility During 2019 Could Spell Trouble for “Iron Condor” Investors


The “iron condor” is an extraordinarily complex investment product. A form of “yield enhancement strategy,” or “YES,” it involves making at least four separate options trades with the hope that none of the options will actually reach their strike price so that the investor can pocket a modest “option premium.” With an iron condor, the investor is betting that the market (more specifically, the S&P 500 index) will remain fairly constant over a set period of time, neither spiking nor falling suddenly.

The problem with this is twofold: (i) the stock market spikes and falls all the time, and (ii) these sudden fluctuations are inherently unpredictable. This, combined with the fact that the options purchased with an iron condor investment simply disappear if they aren’t exercised, means that investors stand to suffer significant losses if and when the market moves either up or down.

Experts Disagree With Wall Street on Where the Market is Going

When big Wall Street banks like UBS and Credit Suisse pitch iron condors to individual investors, they play up the fact that these YES investment losses rely on market stability. You don’t need the market to move in one direction or the other to make money. Sounds good, right? The problem with betting on a lack of volatility is that the market does move, and even experts can’t agree on the direction in which it is moving.

For example, in a recent article titled, “Wall Street Says the Stock Market Will Soar This Year. Don’t Fall for the Fantasy,” one Forbes.com journalist writes:

“[D]espite a roaring start to the year that has lifted the S&P by 3% in the first six days of trading, investors should be extremely skeptical of Wall Street’s enthusiasm. Pundits and market strategists are inviting you to fantasyland. Don’t go there.”

This sentiment was echoed in an article published on CNBC.com less than three weeks later:

“This is the time of year when most companies roll out earnings guidance for the full year, and the overall trend has been the numbers moving lower. . . . The one thing the market cannot wish away is the global slowdown. It has been referenced by many firms. And other big companies, including Whirlpool, AK Steel, and 3M, have referenced higher costs eating into margins.”

In other words, while Wall Street banks want YES investors to believe that the market will remain involatile, they want other investors to believe that stocks are soaring. At the same time, pundits are cautioning that 2019 could see slow growth, or possibly even a decline. So, whose opinion should you trust? Probably not the banks that are providing skewed information and reaping profits from trade commissions on iron condors regardless of the outcome for their investor clients.

Have You Lost Money in an Iron Condor Investment?

If you have lost money in an iron condor or other yield enhancement strategy investment, the securities fraud attorneys at Zamansky, LLC may be able to recover your losses through FINRA arbitration. To learn more in a free and confidential consultation, please call 646-481-3927 or request an appointment online now.