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UBS Yield Enhancement Strategy (or “YES”), Marketed as Limited Risk, Delivers Major Losses

A UBS Financial Services options trading program marketed as a “Yield Enhancement” strategy to brokerage customers of UBS, reportedly including risk averse investors with substantial bond portfolios, suffered substantial losses approaching 20% of the capital committed in late 2018 and early 2019, although customers to whom the strategy was sold had reportedly been under the impression that the maximum loss they faced in a given month was  1-2%.

Iron Condor Basics

This impression of minimal risk was borne out by UBS’s marketing materials for YES, which at least strongly suggested that the central trading strategy of YES- the Iron Condor– exposed the client to finite or limited risk.  For example, one UBS marketing presentation touted historic returns that featured very few months with losses, and many months with gains.  UBS marketing materials also characterized YES’s central strategy as follows: “selling short term out-of-the-money European style puts and calls on the S&P 500 Index.  To help mitigate downside and upside market exposure, short term below-market and above-market call options are purchased with the same duration as the puts and calls sold.”

Other UBS marketing materials summarize the strategy as follows:

*          Sell options (puts and calls) to generate premium/income:  simultaneously buy  options (puts and calls) to contain and quantify risk.

*          Risk limited to the difference between the short strike price and the long strike price less the amount of the initial net option premium                              received.

*          Maximum profit realized from selling an option spread is equal to the amount of               the initial premium received, net of any fees.

Seemingly as a hedge, UBS marketing materials also noted the following: “During periods of high volatility, positions may be adjusted, at our discretion, to seek to provide additional protection or to increase returns.  This could potentially result in the realization of additional losses.”

Additional losses, indeed.  In truth, the YES program was a risky and complex investment strategy that may have been unsuitable for many investors.  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, 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 were only the beginning.  YES investors reportedly suffered much larger losses during November and December 2018 and into early 2019 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.

UBS’s Yield Enhancement Strategy (“YES”) reportedly at one point had 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.

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 financial advisors and/or brokerage firms, including 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, New Jersey 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).