Several large brokerage houses have been offering their clients option-based trading strategies referred to as a Yield Enhancement Strategy (YES). These firms include UBS Financial Services, Merrill Lynch, Credit Suisse, and Morgan Stanley. According to marketing materials, the YES strategy seeks to increase returns for investors through the trading of options. These options trading program employ various options trading strategies including the iron condor.
The yield enhancement strategies present substantial risks for investors that some advisors may not be fully disclosing. Options are complicated by their very nature and most investors lack the knowledge and experience in options, margin, puts, calls necessary to understand the relative risk reward trade offs associated with yield enhancement strategies. Despite these risks Wall Street firms continue to push these strategies because they generate fees and commissions for the firm while investors shoulder the risk.
First, the name itself is misleading because yield enhancement strategy sounds as if income is going to be generated. However, writing options and generating premiums is not income. Its compensation for the risk of the option being written. One of the most popular YES strategies, the iron condor, can allow an investor to generate a larger net credit relative to downside risk.