Articles Tagged with UBS Yield Enhancement Strategy

shutterstock_62862913-259x300Several 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.

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shutterstock_175835072-300x199According to BrokerCheck records financial advisor Scott Rosenberg (Rosenberg), currently employed by UBS Financial Services, Inc. (UBS) has been subject to at least three customer complaints during the course of his career.  According to records kept by The Financial Industry Regulatory Authority (FINRA), Rosenberg’s customer complaints allege that Rosenberg recommended unsuitable investments in what appears to be UBS’ Yield Enhancement Strategy (YES).

UBS created and advertised YES as an option-based trading strategy that sought to increase returns for investors.  UBS brokers are alleged to have advertised the Yield Enhancement Strategy as involving trading call or put options to try and accomplish increased returns in their portfolios. Investors were often presented with slide presentation which advertised the Yield Enhancement program.  The slide deck represents that the YES strategy has “limited correlation with the market or a single stock position, the YES Strategy may provide portfolio diversification.”  The strategy also claims to use upside and downside protection to prepare for “unexpectedly volatile market conditions” and that the options strategies are designed to limit risk.

However, yield enhancement strategies are risky because any opportunity to profit relies on stock market stability – an impossible long-term scenario.  When a stock index, such as the commonly used S&P 500, remains within a certain range the strategy can profit because the options purchased expire without reaching their strike prices.  The investor earns a return from the option premiums.

The UBS YES program is alleged to have included the Iron Condor options trading strategy.  The iron condor is an options strategy structure where investors write two short near money options and purchase two long out-of-the money options.  While the YES strategy was marketed as a way to seek additional returns many investors instead suffered significant losses and margin calls instead.

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