YES Turns to NO as Firms like UBS Start Investigation and Loss Recovery

YES Turns to NO as Firms like UBS Start Investigation and Loss Recovery

There has been an unfortunate turn of events within the investment community. Firms such as UBS, Merrill Lynch and others helped propagate YES, or “Yield Enhancement Strategy” as a safe way to enhance one’s income stream (or yield) from investment portfolios. But there have been many investors who have lost money from this strategy, which was supposedly marked as a safe way to invest. Now, YES was represented as a low-risk way to increase portfolio income by UBS and others. It turns out that YES was actually much riskier than investors were led on to believe, which caused unexpected and unnecessary losses.

The lawyers Haselkorn & Thibaut, P.A. ( have already started investigating multiple claims against Merrill  Lynch and UBS that reach all the way back to January 2019. YES was sold as a supposedly “safe” way to increase or enhance yield by a few percentage points on fixed-income, cash, or other conservative portfolio assets that customers already had. It used a strategy called “iron condor options strategy” in an attempt to generate small returns at a low-risk level.

However, in the December of 2018, the market turned incredibly volatile in unexpected ways that circumvented the supposedly safe investments, and instead of a safe, conservative strategy that earned a small 2% annually on average, investors instead were hit by a whirlwind of losses that could go as high as 20%, destroying the capital in portfolios that were using YES. In reaction to this coming to light, investors are seeking recovery from the firm that sold this investment strategy. And not only was YES disastrous to investment portfolios, it turns out the firms using this strategy were also in a position to make money off of substantial fees from the strategy, regardless if the investor themselves actually made money.

How was UBS’s Yield Enhancement Strategy Marketed to Work?

In order to understand what YES involved, we must first discuss an iron condor option, as YES is based on it. The iron condor strategy involves writing a series of option contracts, typically at once or around the same time period. Usually, an iron condor strategy has the investor purchase two deep out-of-the-money options that are long, as well as two nearer money options that are short. The next step for the iron condor strategy is selling an out of the money put, or “short put,” while at the same time selling an out-of-the-money call, or “short call.” This is the main way the Yield Enhancement Strategy worked.

Normal Markets = Less Risk, Volatile Markets = More Risk

Now, this is obvious to any investor, but there’s always risk in investment. There’s always an element of chance, no matter how smart your investments are. Of course, this is exacerbated when the market turns volatile. YES was marketed as an investment strategy that would guarantee income in safer markets, which is like saying your boat is safe as long as there isn’t a storm. Unfortunately, a storm hit the market in the 4th quarter of 2018, with December being especially rough. And since YES was designed for calmer waters, the volatility of the market during that time changed the “guaranteed” additional income to wild increases and decreases, creating significant unnecessary and unexpected investment losses for investors. Now, while it is understood that there is risk involved in investing, financial advisors are required to disclose the amount of risk a strategy entails. It’s been suggested that financial advisors for UBS and others who used YES did not disclose the adequate risks of YES in a volatile market, in perhaps an unwise optimism that such a market wouldn’t exist. It’s also possible that advisors didn’t take action to stop the volatile investments as the market changed around them.

How YES and the Iron Condor Strategies it is Based on can Cause Unnecessary Investment Losses

As stated before, in standard markets, YES and other iron condor investment strategies are designed to be safe, conservative investments. Many of the major wirehouse firms (Wells Fargo, Merrill Lynch, Morgan Stanley, UBS, etc.) are reported to recommend various options investment strategies to their customers as safe and efficient ways to enhance income. Of course, markets are never in a permanent state of low volatility, and as such, when times such as the Quarter 4 of 2018, and even before that in February of the same year, the market’s volatility may have turned these conservative investments into wild rolls of the dice, potentially causing investment losses for those affected.

As stated before, iron condor option strategies involve a series of option contracts, usually around the same time or all at once. Iron condor specifically entails writing two near money options that are short, and two deeper out-of-the-money option contracts that are long. Once one sells out-of-the-money put and out-of-the-money call, the investor is ensuring the naked option contracts will expire worthless and profit from the option premium. While short naked options are often substantial risks, the iron condor strategy shores up this weakness when buying further out-of-the-money put contract and call contract. Iron condor’s first two legs are very risky short naked options, but its third and fourth legs mitigate the risk with less risky long SPX options (Side note: why do we talk about four legs when condors only have two?).

The reason strategies like the iron condor are conservative is that they bet in favor of time decay over 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, therefore, is properly viewed as a decaying asset — goes to zero and expires worthless. On the other hand, this all goes out the window when the market gets more volatile than expected, and the investor can end up in a position where the option premium is dwarfed by losses due to the changes in the market. Changes such as the ones in Q4 2018.

Now, this is not true of all investors, but some get steered into high-risk option investment strategies without receiving full disclosure about the risks that are embedded in options for investing and hedging strategies. In cases like YES, investors may not have been told about the risks that can occur when the market turns volatile. If you were one of these investors, contact your lawyer to find out what your options are.

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