Options Investment Attorney

Options strategies have become increasingly popular among brokerage firms, registered investment advisers and other financial professionals, often times being sold as safe income producing investment strategies. Many financial professionals do not understand the risks associated with options and, therefore, do not accurately communicate those risks to their clients.

If you have experienced losses as a result of options trading and believe that those losses were caused by the misconduct of your financial advisor or investment advisor, contact the Wolper Law Firm. Our team of options loss attorneys will evaluate your case at no cost, leveraging our years of experience handling similar cases with a 99% success rate for our clients.

How Can an Options Investment Attorney at Wolper Law Firm Help Me?

An options investment attorney can help you understand your rights and pursue legal action if you believe your financial advisor or broker failed to make relevant disclosures or otherwise caused you harm through negligent actions. Over the last several years, the Wolper Law Firm has handled a significant number of cases involving failed options strategies. Recently, the Wolper Law Firm obtained a $7.1 million arbitration award against a registered investment advisor, who destroyed a substantial amount of our client’s wealth by implementing an ill-advised options strategy.

Our founder, Matt Wolper, started the firm to give ordinary investors the tools they need to hold financial professionals accountable for their actions. Prior to forming the Wolper Law Firm, he spent 14 years working with some of the biggest Wall Street firms. Matt has successfully litigated cases affecting investors who lost their money because of unscrupulous brokers, financial advisors, and their firms. We can do the same for you. We have five-star reviews from our clients for the results we provide.

What Is Options Trading?

Options contracts give the holder the right, but not the obligation, to buy or sell a security at a predetermined price within a certain period. The holder of an option pays a premium to such a seller to have this right.

Options trading involves two main parties – the holder (buyer) and the writer (seller). The holder purchases the option contract and pays a premium to the writer, who creates the contract. Many investors find options trading appealing because it allows them to speculate on a security’s price movement without risking more than the initial premium paid. Unfortunately, options contracts are very complex. Any success achieved in options trading is dependent on a variety of factors, including specialized options trading knowledge and expertise.

Types Of Options Strategies

There are a wide array of options strategies. These strategies may include long or short options, put or call options, covered call options, spreads, strangles, iron condors, and yield enhancement strategies. In certain instances, financial professionals may implement a combination of these strategies as well.

Covered Call Options

Options trading is complex. However, it is frequently presented to clients as a safe way to increase portfolio income and decrease downside risk. One of the most common options strategies implemented by financial advisors and investment advisors is a “covered call” strategy.

Covered call options are utilized when an investor “sells” a call option on an equivalent number of underlying shares of stock. Each call option is equivalent to 100 shares of the underlying stock. In exchange for selling the call option, the investor receives a “premium,” which can provide income. Covered call writing is generally viewed as a neutral strategy that is employed when an investment adviser believes that a stock will either trade within a tight range or decline slightly. Covered calls are neither effective nor recommended when a stock price is increasing because the investor will either lose the stock through options assignment or be forced to continuously close the option position at a loss.

Understanding Call Options

Every call option has a “strike price” and an “expiration date.” The strike price represents the price at which the option can be exercised and, in the case of a call option, the underlying stock called away (i.e., sold/assigned). The expiration date is the date on which the option will be exercised or expire worthless. Although the valuation of an option contract is complex, two simple variables that dictate the price movement of an option are (1) time value (i.e., how close the option is to expiration) and (2) the proximity of the market value of the underlying security to the strike price. Generally speaking, options are more volatile when closer in time to expiration and the strike price. They are less volatile when they are more distant in time and price.

In-the-Money vs. Out-of-the-Money Call Options

Call options that have a strike price above the market value of the underlying stock are considered out-of-the-money. Call options that have a strike price below the market value of the underlying stock are considered in-the-money. Traditional covered call strategies are implemented with out-of-the-money options, especially when the investor neither wants to sell their stock nor has indicated a price at which they would sell their stock. Covered calls are generally not appropriate when a stock price is steadily increasing because the investor will either lose the stock through assignment or be forced to continuously close the options position at a loss.

Risks of Selling Covered Calls

In many cases where a covered call strategy fails, the financial advisor or investment advisor continues selling covered calls even though the price of the underlying stock is increasing. This results in the call option going in-the-money. In order for the client to retain the underlying stock, the options position must be closed at a loss or “rolled” to a subsequent expiration date, which only temporarily defers the loss. If the underlying stock continues to appreciate, the investor will face a difficult decision. Either pay a substantial amount of money out-of-pocket to close the short call options position or, alternatively, allow the underlying stock to be sold through options assignment at a price that is below market value, forfeiting upside.

In order to avoid these pitfalls, it is imperative that the financial professional conduct adequate research regarding the underlying stock to determine whether it is an appropriate candidate for a covered call strategy. This includes analysis of volatility, implied volatility, and the “Greeks,” which are metrics that options traders use to evaluate the risk of an options trade.

“Volatility” is a measure of the size of price fluctuations in an underlying asset over time, without regard to the direction in which the moves occur. Stocks that have low volatility tend to be relatively stable, with small price moves. Stocks that have high volatility tend to exhibit large price moves. “Implied Volatility” is the volatility that can be inferred from option prices. It can be thought of as the marketplace’s consensus of the likely future volatility of the stock. “Volatility” and “Implied Volatility” are two criteria that every professional options trader can and should analyze so that a framework exists for measuring the statistical probability of success with each trade.

Yield Enhancement Options

In addition to covered calls, many brokerage firms have partnered with professional money managers or utilize in-house options traders that purport to have developed a “yield enhancement” options strategy. In simple terms, a yield enhancement options strategy utilizes more complex options trading (i.e., iron condors, spreads and strangles) to provide modest, yet purportedly hedged, investment returns. These returns are designed to provide “a few points” of additional return to complement an investor’s existing portfolio and are represented to have limited downside risk.

Yield enhancement strategies often involve using equity in the investor’s account to collateralize an options strategy consisting of a combination of call options and put options on an underlying index or basket of securities. A variation of this strategy, referred to as an “iron condor,” utilizes far “out of the money” puts and calls, meaning the current value of the option is distant from the strike price at the time of the transaction. In some instances, the money managers borrow money (i.e., use leverage) to facilitate the yield enhancement strategy. When the strike prices of the puts and calls are closer to the market value of the underlying security, the strategy is more often structured as an option “spread” strategy.

The SEC has closely scrutinized options strategies offered to retail clients because these strategies are often misunderstood by both the financial professionals who work at brokerage firms and the clients who invest. This is due to a lack of education, training, and enforced compliance policies and procedures.

Recent Case Studies

In the case of In re UBS Financial Services, Inc., 2022 SEC LEXIS 1620, (SEC June 29, 2022), UBS sold the UBS Yield Enhancement Strategy (YES) to its retail clients as an income-producing options strategy. The strategy precipitously declined, and its risk disclosures were incomplete and inaccurate. The SEC determined that UBS “provided its financial advisors with inadequate training or dedicated supervisory oversight in this complex options trading strategy during the relevant time period, as a result certain of them did not understand the significant downside risk.” “Certain financial advisors and clients expressed surprise by these losses…” In finding that UBS violated securities laws, it agreed to penalties, disgorgement, and interest of more than $31MM.

In the case of In re Frontier Wealth Management, LLC and Shawn Sokolowsky, 2021 SEC LEXIS 2577, *2-4 (SEC Sep. 3, 2021), the SEC initiated an enforcement action against Frontier for violation of securities laws, stemming from the use of a complex options strategy. The SEC specifically determined that Frontier “gave its IARs broad autonomy on client investments” but “failed to adopt or implement an adequate supervisory system for determining whether IARs had developed a reasonable belief that their advice was in the best interest of each client… Frontier IARs did not assign any Frontier supervisor the responsibility of reviewing, monitoring, or approving Frontier IAR recommendations or IAR representations to clients and potential clients concerning complex financial products like the Feeder Fund.”

Naked/Uncovered Options Trading

Naked or uncovered options are one of the most aggressive options strategies. An option is uncovered if the investor does not own individual shares of the underlying security. When an investor owns uncovered options, if the underlying security reaches the option strike price, the option may be exercised by the counter-party to the transaction and the investor becomes responsible for purchasing the underlying security or commodity at the market price, however high that may be.

For example, if the investor is short uncovered call options with a strike price of $5, and the underlying security or commodity spikes in price to $10, the investor is obligated to purchase those securities or commodities at the market value upon the expiration of the option. Because options transactions are internally leveraged, the investor’s financial responsibility in an options transaction is quickly magnified. Uncovered options can be attractive because they do not require significant cash outlay from the investor at the inception of the trade. However, if the market moves against the investor, the risk and downside are substantial. Among industry professionals, trading uncovered options is often referred to as “picking up pennies in front of a steamroller.”

What Are the Dangers of Buying and Selling Options?

Options are touted as a great way to make money by investing limited amounts. Stockbrokers and financial advisors cite how you can take advantage of the huge swings in the markets and realize significant gains. During the pandemic, options trading increased by 35%. When the markets are doing well, you might see much larger returns than the average investor. The flip side is that when the option underperforms, you can lose unlimited amounts of money.

Your stockbroker or financial advisor will make options seem like an easy way to make money. They will point out how you can invest limited amounts of capital and don’t have to worry about your losses’ multiplying. They may not be giving you all the information you need to make informed decisions about options.

Sometimes, your broker or financial professional will let you know that options limit your risks. This involves what is known as a put option where you are playing the downside of the markets. The idea is that, as the market declines, the value of the put option will increase and offset any losses in your portfolio. The problem is that this sounds good, but the strategy is filled with risks and might not do what was promised. Your broker or financial advisor is not telling you everything.

This is why the Financial Industry Regulatory Authority (FINRA) has clear guidelines that outline what must be done. FINRA oversees the financial industry and sets standards that all investment professionals and their firms must follow. They know that options are full of risk and have added disclosures for this type of trading. Here are some of the risks of buying and selling options.

• You can lose unlimited amounts of money: Some options strategies involve unlimited risks. This is referred to as call or put writing/selling. It involves writing/selling an options contract on a stock, commodity, or currency at a particular price. In return, you will receive a premium for writing/selling this contract. The problem arises if the option increases in value. You will have to buy the stock or deliver the funds into your account. This means that losses can be unlimited, depending on how high the value goes up.
• You must meet certain requirements: All brokerage firms will have specific requirements to become involved in options. You have to fill out the paperwork and receive an options disclosure booklet explaining the risks. You must also keep a minimum of $2,000 in your account. These standards are not appropriate for all investors and require understanding your risk tolerance and comfort levels.
• You might have to take out a loan: Anytime you write/sell calls or puts, the brokerage firm will require you to open a margin account. This is a loan to write/sell the options, and it is required for opening these accounts. The problem is that if the value of the account falls, the brokerage firm will issue a margin call. This is when you must deposit additional funds into the account to bring the value back up to a certain level. If you don’t, the brokerage firm sells out the position as collateral for the loan. You will lose everything that you have invested in the position.

Options Trading Attorney: FAQs

If you have lost money in options, you may have many questions for an attorney. Here are some answers to some frequently asked questions.

Get the Help You Need from an Options Investment Attorney at Wolper Law Firm, P.A.

Your broker or financial advisor may not have let you know about the possible risks; this means you can get compensation. They have a duty to ensure that all investments take into consideration your age, investment objectives, income, and net worth. Failing to disclose everything means that they violate FINRA’s policies.

If you suspect that your broker or financial advisor is not looking out for your interests, you can level the playing field by letting our option loss attorney help you explore your responses. At Wolper Law Firm, we offer a free no-obligation consultation where we will discuss your case and what we can do for you. Contact us today to get started.