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Yield Enhancement Strategy Losses? Call Zamansky, LLC

January 31, 2019 Active Cases & Investigations

Investment Fraud Attorneys for Claims Related to Complex Options Strategies, including the UBS “Yield Enhancement Strategy,” and “Iron Condor” Losses

When you invest with a brokerage or advisory firm such as UBS Financial Services, Credit Suisse, Merrill Lynch, or Morgan Stanley, there is no shortage of investment options available. When you seek advice from your broker or advisor, he or she may present a seemingly-endless list of investment products and strategies that are far more complicated, risky, and esoteric than the traditional universe of stocks and bonds with which most individual investors are already familiar.

One type of investment strategy that has been rising in popularity given the prevailing low-interest rate environment is the so-called “yield enhancement strategy,” or “YES” strategy. A YES strategy is a complex options strategy that entails writing numerous call and put options in order to enhance portfolio income in a supposedly safe and low-risk manner.  While the YES strategy is often pitched as a “safe” or “stable” option for investors seeking to augment their income stream, the reality is that such a complex options strategy as YES is extremely complicated and fraught with risk. As some retail investors come to learn too late, unexpected market volatility can quickly lead to substantial losses.

The Risks of “Yield Enhancement Strategy” or Complex Options Investing

Yield enhancement strategies, including iron condors, are risky because they rely on consistent stability in the marketplace – something which is non-existent over the long term. The goal of such a strategy is to earn a profit when the underlying stock index, most commonly the S&P 500, remains within a certain range and does not stray far outside the “strike prices” of the options written on the underlying index. When the options expire worthless without being exercised in a neutral or range-bound market, the investor earns income from the options premium.

Setting aside the catchy “yield enhancement” or “YES” title, however, such complex options strategies that involve selling multiple uncovered, or “naked” options, is extremely risky and can result in outsized losses. Whereas the risk of a “covered” option is mitigated because the investor holds  the underlying position, engaging in selling naked options, particularly naked put options, is an extremely aggressive and risky investment strategy, so much so that some market pundits have likened it to “picking up nickels in front of a steamroller.”

UBS’ Yield Enhancement Strategy through Iron Condors

The iron condor entails selling a naked call option and naked put option, in order to generate options premium income. Additionally, for purposes of risk mitigation, the iron condor trade entails buying two naked options that are deeper out of the money. Thus, the iron condor options trade consists of four trades, or legs. So long as the underlying S&P 500 index does not experience significant volatility, as measured by the VIX (or so-called “fear index”), the trade can offer modest income. However, as has been seen in recent months including February and December 2018, periods of pronounced volatility can quickly lead to options investors sustaining massive losses.

Unfortunately, when it comes to complex options strategies, uninitiated retail investors may not fully understand the risks associated with options investing. Further, financial advisors may fail to fully describe the risk components of such a complex investment strategy.

How Options Work in Investing

Yield enhancement strategies such as the iron condor rely on investment products known as “options.” So, what is an “option,” exactly?

An option is an asset that will disappear into thin air at expiration, and is therefore sometimes referred to as a “decaying asset”. Unlike stock, which represents an ownership interest in a company that you own until you sell, an option is a time-limited asset that only exists on paper. When you buy an option, you are buying the right to buy a stock (or other security) if it reaches a certain price. If the stock reaches this “strike price,” this does not mean that you own it – you still have to buy the security in a subsequent transaction. Conversely, if the stock does not reach its strike price, then the option expires, or simply goes away.

Furthermore, when it comes to complex options strategies such as the iron condor, because the underlying asset is a theoretical index, the investor is writing uncovered or “naked” options against the index. In and of itself, this presents significant risk. And when an investor is selling naked put options, the potential risk is massive.

Options trading can be a sound investment strategy for professional, sophisticated investors who are attuned to the market and have a deep and comprehensive understanding of the relevant financial principles and risk components surrounding options investing and hedging. For most casual investors, investing in options is a task best left to the professionals. However, this does not mean that investors should blindly trust their brokers and advisors to execute sound options strategies on their behalf. Our firm is currently investigating several cases in which individual investors have reported substantial losses from YES or other yield enhancement strategies, including iron condors.

Investment Firms Offering Yield Enhancement Strategies to Individual Investors

Several investment firms have offered yield enhancement strategies to individual investors in recent years, and most, if not all, are continuing to offer these risky investments. Currently, we are aware of the following firms offering complex options strategies through managed accounts, structured notes, and funds and other broader investment strategies and products:

  • Credit Suisse
  • Merrill Lynch
  • Morgan Stanley
  • UBS Financial Services

Recovery Options for Investors Who Lost Money in Yield Enhancement Strategies

For individual investors who have lost money in yield enhancement strategy investments, financial compensation may be available through the process of FINRA arbitration. The Financial Industry Regulatory Authority (FINRA) has oversight over all major brokerage firms operating in the United States (including UBS Financial Services, Credit Suisse, Merrill Lynch and Morgan Stanley), and these firms are required to arbitrate loss claims filed by individual investors.

In order to recover investment losses in FINRA arbitration, investors must be able to prove that their losses are the result of investment fraud. All investments carry risk, and losing money in a yield enhancement strategy – or any other investment – is not necessarily indicative of fraud. That said, due to the extraordinary complexity and unique risks associated with iron condors and other YES strategies, we believe that individual investors who have lost money in these types of investments will be entitled to recover their losses in many cases.

What is Investment Fraud?

The definition of “investment fraud” is much broader than many individual investors realize. While many people picture boiler room scams from the movies (and these certainly exist in real life), most cases of investment fraud involve practices that are much more mundane.

For purposes of FINRA arbitration, investment fraud involves a broad range of improper brokerage and advisory practices that lead to investors unknowingly making poor investment decisions. While this includes brokers’ and advisors’ intentional attempts to profit at investors’ expense, it also includes circumstances in which investors receive unsuitable recommendations or are not provided with the information they need to protect themselves.

Forms of investment fraud that can lead to losses with yield enhancement strategies include:

  • Self-Interested Investment Advice – The option purchases involved with yield enhancement strategies provide direct profits to brokers and advisors regardless of whether or not they actually yield enhanced (or any) returns. In some cases, brokers and advisors may be recommending yield enhancement strategies based simply on their ability to generate commissions and fees.
  • Unsuitable Investment Advice – Due to their complexity and the fact that they can result in investment losses in multiple different ways, yield enhancement strategies are unsuitable investments for many individual investors. Providing unsuitable investment advice is a form of investment fraud.
  • Overconcentration of Portfolio Assets – There have been some cases in which brokers and advisors have recommended that investors pour a significant portion of their portfolio into yield enhancement strategies. This includes one case (likely among many others) in which advisors at Credit Suisse reportedly advised an individual investor to, “allocate a significant portion of his retirement funds in a high-fee proprietary [yield enhancement] strategy.”
  • Omission of Material Information – As an individual investor, when you work with an investment firm, you are entitled to the information you need in order to make informed investment decisions. If you were pushed into investing into an iron condor or other yield enhancement strategy that you did not fully understand, you may have a claim for investment fraud.

What is FINRA Arbitration?

FINRA arbitration is an alternative dispute resolution (ADR) procedure that exists solely to help individual investors recover fraudulent losses from their investment firms and brokers. In FINRA arbitration, both parties (the investor and the investment firm or broker) present evidence to an arbitrator, and the arbitrator renders a binding decision similar to a judge in court. However, the process is much more streamlined than courtroom litigation, and the process is both less-expensive and less-time consuming than litigation. At Zamansky, LLC, we represent individual investors in FINRA arbitration on a contingency-fee basis, so recovering compensation costs nothing out of pocket for our clients.

For more information about what to expect in FINRA arbitration, you can read:

Legal Representation for Investors with Yield Enhancement Strategy Losses Nationwide

Zamansky, LLC is a leading securities fraud law firm located in the heart of Wall Street. Our attorneys represent individual investors nationwide in FINRA arbitration, and we are actively pursuing claims based upon fraudulent investment advice related to yield enhancement strategies, including iron condors sold by UBS Financial Services and other large firms. Together, our attorneys have decades of experience fighting for the rights of individual investors, and we have secured millions of dollars in compensation for our clients’ fraudulent investment losses.

If you lost money in a complex options strategy, including YES and iron condors, it is important that you speak with an attorney promptly. While investors technically have up to six years to file a claim with FINRA, there is no reason to wait, and delays can potentially make it more difficult to secure a financial recovery. Our attorneys are available to meet with investors in person in New York City or over the phone nationwide, and we can use our experience as well as the results of our recent investigations to assess whether you have grounds to pursue a financial recovery through FINRA.

When you choose our firm to represent you, you will pay nothing out of pocket during the course of your FINRA arbitration claim. We advance all costs associated with seeking compensation for yield enhancement strategy investment fraud, and we do not seek reimbursement of these costs or charge any legal fees unless we secure a financial recovery. Whether your investment firm is willing to settle or we need to take your claim all the way through arbitration, we will work diligently to ensure that you receive full compensation for your investment losses.

Schedule a Free Initial Consultation About Your Yield Enhancement Strategy Losses

If you would like more information about how our attorneys may be able to help you recover your losses from a failed yield enhancement strategy, we encourage you to contact us promptly for a free, no-obligation consultation. To speak with one of our highly-experienced investment fraud attorneys in confidence, please call 212-742-1414 or tell us how to reach you online now.

Client Reviews

“Jake Zamasky and his colleagues represented me in a FINRA arbitration case against a large multinational bank and succeeded in obtaining an award for the full amount of my investment losses. I would highly recommend the Zamansky firm for their experience in securities litigation, their level of detailed research and case preparation, and their ability to effectively fight for what’s right.”

Richard R.

“Throughout my entire case, Jake Zamansky was incredibly responsive and spent time walking me through each step of the process. He is professional and worked with my challenging schedule, even meeting with me nights and on weekends. He knew exactly which turn to take when it came to my case and yet was respectful of any decisions I wanted to make resulting in a positive outcome.”

Donald A.

“Jake Zamansky and his firm represented me in a FINRA arbitration case to recover investment losses. Jake and his team were very professional and worked very hard preparing for trial and then reaching a substantial settlement of our case. I would highly recommend them.”

William E.

“Jake Zamansky represented me in a FINRA arbitration case which allowed me to recover a substantial portion of investment losses. He is truly an expert in this space and I would highly recommend him to those investors who may have been been a victim of investment fraud.”

Chris K.

“Jake and his team did a great job communicating with me throughout the process of my lawsuit. I would recommend him to anyone looking to sue UBS for unethical practices.”

Mike A.
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