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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.