Securities Lawyers Blog
Several large brokerage houses have been offering their clients option-based trading strategies referred to as a Yield Enhancement Strategy (YES). These firms include UBS Financial Services, Merrill Lynch, Credit Suisse, and Morgan Stanley. According to marketing materials, the YES strategy seeks to increase returns for investors through the trading of options. These options trading program employ various options trading strategies including the iron condor.
The yield enhancement strategies present substantial risks for investors that some advisors may not be fully disclosing. Options are complicated by their very nature and most investors lack the knowledge and experience in options, margin, puts, calls necessary to understand the relative risk reward trade offs associated with yield enhancement strategies. Despite these risks Wall Street firms continue to push these strategies because they generate fees and commissions for the firm while investors shoulder the risk.
First, the name itself is misleading because yield enhancement strategy sounds as if income is going to be generated. However, writing options and generating premiums is not income. Its compensation for the risk of the option being written. One of the most popular YES strategies, the iron condor, can allow an investor to generate a larger net credit relative to downside risk.
But during volatile market condition the iron condor can cause losses if the underlying security’s price closed outside the strike prices. The strategy is designed to only generate a small amount of profit while the potential loss is larger than the advertised “income” profit potential. In fact, the potential losses can be many times larger than the maximum potential gain exposing investors to extreme losses under certain circumstances.
Brokers selling yield enhancement strategies are required under the securities laws to treat their clients fairly. This obligation includes the duties to disclose material risks of the investment strategy being recommended. These obligation is heightened when the broker is dealing with complex or confusing products or services. Such complicated investment strategies must be communicated to clients in a fair and balanced manner that allows the client to evaluate the recommendation. Advisors cannot simply hype the benefits of an investment strategy and then point to the fine print when the strategy fails.
Investors who have suffered losses due to a Yield Enhancement Strategy are encouraged to contact us at (800) 810-4262 for consultation. At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts. Claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.