Securities Fraud Attorney Blog
Hundreds of investors have been duped by UBS’s Yield Enhancement Strategy (YES). In its marketing materials, UBS told investors that its YES strategy was an Iron Condor, a generally low risk options “overlay” strategy designed to generate incremental income on top of that generated from a customer’s other investment assets. Losses from such a strategy are supposed to be strictly defined and limited. However, UBS’s YES strategy was not the low risk Iron Condor strategy described to its customers by UBS financial advisors and in UBS marketing materials. In fact, the way UBS implemented YES resulted in potential losses that far outweighed any potential gain. Had UBS made full and fair disclosure of the true risks associated with its YES program, most UBS customers, if not all, particularly conservative ones, would likely never have enrolled in the strategy. Unfortunately, many customers, unaware of the true risks, invested in YES and experienced severe losses in late 2018, early 2019 and 2020 when the S&P dropped. RIK’s investment lawyers are pursuing multimillion-dollar FINRA arbitrations on behalf of investors against UBS to recover losses sustained from the YES strategy.
What Is an Iron Condor?
An Iron Condor is an options trading strategy that consists of simultaneously buying and selling a four option set of S&P Index put and call options, consisting of a combination of a bear call spread and a bull put spread, both having the same expiration date. Investors profit from this strategy when the S&P Index performs, whether up or down, within a “band” defined by the strike prices of the short options and certain breakeven points defined by the long option strike prices. Most short options expire worthless because they tend to lose value as they approach expiration, known as “time decay.” When this happens the buyers of the options will let the options expire unexecuted. In that case the investor (seller) gets to keep the premiums received from the sale of the put and call options, net of the premiums paid for the long options. This is the maximum profit. (Read more about what an option is here).
Iron Condor returns are not supposed to be correlated to the S&P. Rather, Iron Condor strategies take advantage of what are called “volatility premiums,” which persistently occur when the implied volatility signaled by current option prices exceeds the ensuing actual volatility, which has historically been the case and was averaged about 3.45%. The Iron Condor short options are employed to capture this premium.
Losses from an Iron Condor are realized when the S&P index pierces either upward or downward through the “band” defined by the two option spreads of the Iron Condor. In such cases, the buyers of the options will likely exercise their options at favorable prices, leaving the investor (seller) the obligation to in effect make up the difference between the short option strike price and the unfavorable market price. However, in an Iron Condor, losses are capped by the long put and call options at the top and bottom of the band. With this strategy, the maximum potential loss is the same whether the market rises or falls, and the maximum loss is equal to the net option premiums received.
Because traditional Iron Condors make money whether or not the S&P goes up or down (but within the “band”) it is considered a “nondirectional” strategy; i.e., not a strategy that makes bets on the direction the market will take. Further, traditional Iron Condors establish bands around the S&P that are symmetrical, designed such that the maximum loss is the same whether the market goes up or down and the maximum loss equals the net premium received. For this reason, the strategy is considered conservative or low risk.
How Did UBS’s YES Differ from an Iron Condor?
Although UBS marketed YES as an Iron Condor strategy, it was far from a symmetrical, low risk strategy. First, the combinations of puts and calls bought and sold were not symmetrical. UBS sold put options which were less out of the money than the call options, i.e., more likely to be exercised. UBS also bought put options which were further out of the money, i.e., less likely to be exercised, than the call options. Because of these buys and sells, losses sustained from YES in a bear market would be far greater than losses in a bull market, making YES lopsided and asymmetrical. In other words, the spreads were designed to make directional bets on the S&P—exactly the opposite of a traditional Iron Condor.
Because the maximum potential gains were significantly less than maximum potential losses, YES was not non-directional and potential losses were far greater in periods where the market dropped (Read more about YES’s exposure here). As such, UBS’s Yes was less profitable and much riskier than how it was marketed to its customers.
UBS YES Losses in 2018, 2019, and 2020
Unfortunately for UBS YES investors, potential losses became realized in early 2018 and in December 2018 when the S&P dropped substantially. Many investors lost 20% or more of their portfolios (in many cases conservative) that served as margin collateral for the YES trading. Even so, UBS representatives pushed investors to remain in the strategy. YES losses continued over the following months and never recovered. Then, in early 2020, YES had severe losses again due to major S&P declines. Depending on the length of their investments, some investors lost approximately 40%.
Current Claims against UBS
Many investors with losses sustained through UBS’s disastrous YES strategy have been filing claims to recover for their losses. RIK’s securities fraud lawyers are currently handling multimillion dollar claims on behalf of investors to recover their losses from UBS’s defective YES strategy. If you are an investor in YES and have suffered losses, contact us for a free consultation to discuss your potential claims against UBS to recover for your losses.