Stockbroker Jason Dworak of UBS Financial Services in Lincoln, Nebraska is involved in legal disputes with customers who allege that Dworak recommended an unsuitable options-overlay strategy, which UBS referred to as the “yield enhancement strategy.” The aggregate damages being sought by the customers exceeds $2 million.
UBS’ “yield enhancement strategy” was sold to investors as a safe, conservative investment strategy, so many “YES” investors were shocked to discover steep losses in their accounts in 2018 and 2019. The investors were reportedly unaware that they could sustain losses of such magnitude in the YES program because the strategy was not properly explained to them by their UBS financial advisers. In particular, investors contend that they were not properly informed about the effects of market volatility on options values, and about how high volatility combined with high leverage could be a recipe for disaster.
YES is an options-overlay strategy involving “iron condors,” which are transactions that involve a combination of put and call spreads. In an iron-condor transaction, the investor (1) sells an out-of-the-money put on an underlying asset or index, and buys a further out-of-the-money put on the same asset or index (this is known as a “bull put spread”); and (2) sells an out-of-the-money call on the underlying asset or index, and buys a further out-of-the-money call on the same asset or index (this is known as a “bear call spread”). Taken together, the sales and purchases generate positive net-sales premiums for the seller. The purchases also fix the maximum loss if either of the outer options is exercised at expiration.
When undertaking an iron condor transaction, the investor is essentially betting that the value of the underlying investment will not change enough to trigger any of the options being exercised at expiration. If the investor wins the bet, the investor profits by the amount of the net sales premiums. However, when a change in the value of the underlying investment is sufficient to cause the “inner” put or call to be exercised, the transaction can result in losses for the investor. If the change is sufficient to cause the “outer” put or call to be exercised, the investor will lose an amount equal to the difference between the inner and outer strike prices.
Prior to expiration of an iron condor transaction, the options prices can fluctuate significantly if volatility is high. This has been an issue for UBS YES investors because their iron condor investments utilized substantial leverage that far exceeded their collateral “mandate.” As a result of this leverage, when short put or call positions increased in value due to volatility, UBS YES investors were forced to increase their collateral (in the form of cash or securities), or let UBS unwind their positions and thereby lock in losses.
If you have suffered damages as a result of an unsuitable investment strategy recommended by Jason Dworak, our experienced team of investor attorneys may be able to assist you in recovering some or all of your losses. Call us now toll-free at (888) 607-4819 or email us using our “Contact” page.