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.

While the YES strategy may deliver solid returns in a market that neither rises nor falls substantially over relatively short time frames, the strategy’s inherent substantial risks become apparent in times of heightened stock market volatility. For example, earlier this year in February 2018, when markets turned volatile, a volatility index known as VIX spiked to extreme levels in excess of 20. During that same time frame, YES incurred its first substantial losses of 2018. Unfortunately, the February 2018 losses appear to represent only the beginning. YES investors have reportedly suffered losses in excess of 20% of their committed capital during November and December 2018 as markets once again turned volatile. Many investors found to their chagrin that their options positions incurred steep losses- far beyond what they had thought was possible- over very short periods of time.

Ultimately, options strategies like the iron condor amount to bets in favor of the time decay embedded in options (which have fixed expiration dates) versus volatility. On the one hand, an investor can pocket options premium income in those instances where the option — which has a finite lifespan and fixed expiration and is therefore properly viewed as a decaying asset — goes to zero and expires worthless. However, on the other hand, periods of pronounced market volatility can quickly lead to scenarios where the option premium is dwarfed by losses due to market volatility.

UBS reportedly marketed the “Yield Enhancement” strategy to high net worth investors as presenting limited risk while providing single-digit annual enhancement of returns on bond portfolios. This marketing angle may have appealed to risk-averse investors due to the lower bond yields available during the recent multi-year period of low interest rates.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience representing investors who have sustained losses due to the negligence or misconduct of their broker and/or brokerage firm. In particular, the firm has substantial experience in cases involving non-conventional investments and structured products, including commodity futures, options, and leveraged ETFs and ETNs. Investors may contact us via the contact form on this website, by telephone at (866) 966-9598, or by e-mail at newcases@investorlawyers.net for a no-cost, confidential consultation. Attorneys at the firm are admitted in New York and Wisconsin and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).

A claim was recently filed on behalf of a former client of Luis Fernandez and Angel Canabal against UBS Financial Services Incorporated of Puerto Rico and UBS Financial Services Inc. According to the claim, the retired client invested the majority of his life savings based on the recommendation of Fernandez in UBS proprietary bond funds, which were primarily invested in Puerto Rican debt. Allegedly, these investments were risky, illiquid and unsuitable for the investor.

The claim also alleges that the risks of the investments were not explained to the client, and that UBS made a recommendation that he borrow more money to be invested in the proprietary funds from a UBS-related company. The account was later taken over by Canabal, who allegedly told the investor that the recommendations were sound, the account wasn’t invested aggressively, and no changes were required.

According to investment fraud lawyers, under FINRA rules, firms have an obligation to fully disclose all the risks of a given investment when making recommendations, and those recommendations must be suitable for the individual investor receiving the recommendation given their age, investment objectives and risk tolerance. Reportedly, many UBS clients received unsuitable recommendations regarding investments that consisted largely of Puerto Rican debt.

If you suffered significant losses in UBS Puerto Rico bonds sold by Fernandez, Canabal or another UBS broker, you may be able to recover your losses. To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.