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The Financial Industry Regulatory Authority (FINRA), a securities regulator, announced that it has censured and fined Cambridge Investment Research (“Cambridge”) $400,000 and Securities America $100,000 for failing to supervise their representatives’ recommendations of an alternative mutual fund that resulted in hundreds of thousands in losses for customers.  The FINRA Letters of Acceptance, Waiver & Consent (AWCs) announcing the sanctions are accessible here.  Cambridge AWC SAI AWC.  Cambridge also was ordered to pay a restitution of $3.13 million plus interest; and Securities America was ordered to pay a restitution of $235,979 plus interest.
According to the AWCs, Cambridge and Securities America permitted the sale of the LJM Preservation & Growth Fund (LJM) without conducting reasonable due diligence and without a sufficient understanding of LJM’s risks and features, including the fact that the fund pursued a risky strategy that relied, in part, on purchasing uncovered options.

In early February 2018, the value of LJM’s shares dropped more than 80% over the course of just two days during a spike in the volatility index (VIX), losing more than $600 million for investors.  The LJM Fund was launched in January 2013 and sold in three different share classes (ticker symbols LJMAX, LJMCX, LJMIX).  According to its last annual report, LJM had net assets of $768 million as of October 31, 2017.

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An options trading program marketed as a “Yield Enhancement” strategy to brokerage customers of UBS, reportedly including risk averse investors with substantial bond portfolios, has suffered a hard landing in November and December as the so-called “Iron Condor” index options spread-based scheme has reportedly delivered losses in excess of 20% of the capital committed.

Iron Condor Basics
UBS’s Yield Enhancement Strategy (“YES”) reportedly has over $5 billion under management and over 1,200 investors.  Investors in YES must agree to commit capital to the program, a so-called “mandate,” which may take the form of securities or cash.  The committed capital provides collateral for options spread trading in each investor’s account.  Although marketed to bond investors, the bonds held by each investor have nothing to do with the YES strategy other than serving as collateral for the options trades.  Some investors pledge other securities or cash as collateral for the YES program.

The YES strategy entails generating option premium income through the strategic sale and purchase of SPX (S&P 500) index option spreads.  This strategy, which is also sometimes referred to as an “Iron Condor” spread, involves writing two vertical options spreads – a bear call spread and a bull put spread.  Thus, this strategy entails four different options contracts, each with the same expiration date and differing exercise prices.  The “Iron Condor” strategy involves writing both a short put and a short call against the SPX, with these naked, or uncovered, options are designed to generate income for the investor via the receipt of premium.  Further, the “Iron Condor” strategy involves writing both a long put and long call against the SPX, with these trades, or options legs, designed to mitigate the risk associated with the uncovered options positions.

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