SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

What Can We Learn From UBS YES Lawsuit?


News followers may have seen the recent stories on UBS being sued by its clients and investors who participated in UBS’s “Yield Enhancement Strategy (YES).”  Evidently, numerous UBS clients signed up to participate in an iron condor strategy that lost a lot of money.They’re angry, and they’re filing a lawsuit.

Such lawsuits are common and typically lack merit because offering documents are properly drafted to protect the companies involved and disclose the risk.

I find it unlikely that the documents were not properly drafted.  For instance, in one of the few actual UBS documents I could find on UBS’s yield enhancement strategies provided “yield enhancement strategy products are designed for investors with moderate risk tolerance who want to enhance the low to moderate return typically generated in a ‘flat’ or ‘sideways’ market.” That’s a great description for trading iron condors. 


So, if the documents were fine (most likely, but you never know), what was the issue?Most likely overzealous brokers pushed the strategy without really understanding the risk profile. 

My takeaway from reading about this is two part.  First, investors typically don’t understand options, and the media certainly does not.  Most advisors do not either.  For instance, the media has called the strategy used by UBS a “leveraged, esoteric options strategy.”  Iron condors are neither esotericor typically leveraged.  They are the definition of a defined risk option strategy.  A profit/loss graph of an iron condor looks like:

 

image.png

 

There is a maximum loss on any single trade that can be controlled based on the strikes and premiums received.  UBS’s strategy purportedly used iron condors on the S&P 500 index, the NASDAQ, and other “primary” market indexes – so volume should not have been an issue. 

 

Other writers have demonstrated their ignorance of the strategy.  One popular critique of the UBS strategy reads:

 

“The problems with YES began in 2018 with violent fluctuations in the S&P 500…The most volatile period was between October and December 2018, during which time the market declined 20%--then followed by a rebound of 12% through January 2019. The violent swings caused the premiums of both the put and call side of the iron condor strategy to spike, leading to losses on both sides of the trade.

 
But this is practically impossible.  An investor can’t experience losses on BOTH sides of the graph (in effect doubling the losses), unless the traders are idiots.  The only way to have that happen is to close out one half of the trade for a loss, in the hopes that the profits on the other side will increase, but then the market whipsaws back, thus causing losses on both sides. 

 

Of course, at this point, the strategy is no longer an iron condor.  It’s a simple vertical spread:

 

image.png

 

The odd thing about this critique is that even vertical spreads have loss limits.  Let’s say the UBS traders had a maximum loss rate of ten percent.  A structured iron condor can have a max loss of ten percent the same as a vertical spread. 

 

If the traders are trading to profit from time decay across multiple indexes, risk could be further controlled through the use of reverse iron condors that have a profit and loss graph of:

 

image.png

 

In the event of a large move, such a position could help offset losses.  (There are other ways to protect against such a move as well – anything from simply buying long dated out of the money puts and calls to trading volatility instruments). 

 

The problem with a normal iron condor in a low volatility market is that traders do not receive a very high premium for the risk they take.  In order to get a 1% or 2% return per month, UBS traders would have to be taking risks that were outside of the “moderate” or “low” range. Traders probably started taking chances they shouldn’t have.

 

Much of the media has commented that the UBS traders “compounded” their results by trying to “make up” for losses after blowing up trades.  (Who of us hasn’t done that?)   Traders make trade adjustments or open new trades on the prediction that either (a) the price will return to the mean or (b) the price will continue moving.  It appears the UBS traders made the bet that the price would continue moving, and instead it reverted to the mean.

 

Of course,when traders do that, they are no longer trading risk defined iron condors.  They are making directional market bets – bets that if wrong, make the situation worse.

 

What can we, as option traders, learn from this?

  1. Trading is as much psychological, as it is methodical, even for supposed professionals.  Losses will occur and decisions will be made trying to “make up” for losses rather than staying within stated trading guidelines.  This is a mistake.  Plan trades, plan for what happens when the trades go wrong, and when they do go wrong, stick to the plan.  Sure you might occasionally “fix” what went wrong, but more often than not, you’ll likely make the situation worse;
  2. The general public views option as “high risk” investments.  They are not, when handled properly.  In fact, as option traders know, options can be used to mitigate risk.  Try to combat the disinformation when you can;
  3. Don’t trust plaintiff class action lawyers. 

 

I personally do not understand all of the class type legal advertising that exists because of  the strategy.  By all accounts, all UBS agreements require FINRA arbitration of individual claims.  This greatly decreases the profit potential for attorneys, unless the client lost hundreds of thousands of dollars (in which case the client is probably not calling Saul from the internet for the case).  Strangely, that is what can currently be seen.

Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog.

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Fundamental Volatility and Stock Prices

    Every options trader must wonder whether any connection will be found between the company's fundamentals and stock prices (and in turn, option valuation as well). Because options are derived from stock price behavior, the analysis of stock movement is crucial to selecting options wisely; and that relies on volatility in the reported profit and loss over several years.

    By Michael C. Thomsett,

    • 0 comments
    • 4 views
  • Bullish Short Strangles

    A bullish short strangle sounds like a complicated strategy, but it’s really quite simple for those familiar with option terminology. A short put is combined with a short call to where the position starts with some amount of positive delta overall. This distinguishes itself from a delta neutral strangle, where both the short put and short call are sold at the same delta.

    By Jesse,

    • 0 comments
    • 65 views
  • Eight Mistakes Every Forex Trader Should Avoid

    The forex market is currently the largest financial market in the world and, due to its highly liquid nature and low barriers to entry, is only expected to grow. Becoming a forex trader requires minimal effort and with a decent internet connection, a laptop or computer, and some spare money to invest, you can start in no time.

    By Kim,

    • 0 comments
    • 63 views
  • Put/Call Parity - Two Definitions

    Put/call parity is a term options traders use to mean one of two things. The simplest definition and the one most applicable to most options traders compares the similarity in the bid/ask spread and the net debit or credit resulting from this.

    By Michael C. Thomsett,

    • 0 comments
    • 237 views
  • Put Selling: Strike Selection Considerations

    When selling puts, such as we do in our Steady Momentum PutWrite strategy, there are many questions a trader must answer: What expiration should I use? What strike should I sell? Should I choose that strike based on delta or percentage out of the money?

    By Jesse,

    • 0 comments
    • 263 views
  • What Can We Learn From UBS YES Lawsuit?

    News followers may have seen the recent stories on UBS being sued by its clients and investors who participated in UBS’s “Yield Enhancement Strategy (YES).”  Evidently, numerous UBS clients signed up to participate in an iron condor strategy that lost a lot of money.They’re angry, and they’re filing a lawsuit.

    By cwelsh,

    • 2 comments
    • 872 views
  • Pinning Down the ‘Option Pinning’

    What many people on SO have in common is that they have read the books of Jeff Augen on options trading. Although written a decade ago they continue to be an interesting source of strategies for the retail investor. Retail investors have particular constraints that make most of the broad theoretical musings on options rather moot.

    By TrustyJules,

    • 0 comments
    • 374 views
  • Holding Positions into Expiration

    "Every once in a while you must go to cash, take a break, take a vacation. Don't try to play the market all the time. It can't be done, too tough on the emotions." - Jesse Livermore

    By Mark Wolfinger,

    • 0 comments
    • 297 views
  • Tales Of How Big Trades Went Wrong

    One way to learn from your past mistakes is having to go through the painful and challenging experience of explaining them. Another way is to listen to others who might have lived through some disgruntling trades. Joseph Trevisani goes deep into the rationale he followed during the volatile EUR/JPY days of 2007 in this article.

    By Kim,

    • 0 comments
    • 309 views
  • Covered Straddle Explained

    The covered straddle is a perfect strategy for those all too common sideways-moving trends. When a company’s stock is in consolidation, how can you make trades? No directional trend exists, so most traders simply wait out this period.

    By Michael C. Thomsett,

    • 0 comments
    • 458 views

  Report Article

We want to hear from you!


Such investor offerings tend to have 'risk mitigation ' strategies that call for moving the centre of the condor or like tasty trade advises reducing the span gradually till it's an iron fly to keep profit potential.

In the see saw of late 2018 both those IMHO stupid methods would have ripped you.

Share this comment


Link to comment
Share on other sites

The issue is not the strategy itself. The strategy is fine, and has a long term hedge (you have to manage it property of course).

The issue is placing your whole portfolio into the strategy. The issue is that gurus like tastytrade continue recommending their followers to trade gamma negative strategies only. No matter how you defend/roll/adjust those trades - in case of big market move, you are guaranteed to lose money. The only question is how much. That depends on your skills, level of leverage, the size of the market move etc. But the losses are guaranteed if you have negative gamma only strategies in your portfolio. 

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs