In response to the low interest rate environment that prevailed from approximately 2009 to 2021 – before the federal funds rate began to rise significantly – many Wall Street brokerage firms, including UBS, Merrill Lynch, and Alliance Bernstein, have offered their customers certain options strategies or options programs designed to enhance yield. In some instances, these options overlay strategies, including but not limited to the so-called “iron condor” strategy, have been marketed to investors as a supposedly safe and efficient way to enhance portfolio income. However, when markets become volatile, such options strategies can witness rapidly deteriorating options positions’ pricing, leading to significant losses for uninformed retail investors.

One such options program offered by Alliance Bernstein is known as “Option Advantage.” Option Advantage was marketed to investors as “seeking incremental return in a low yield environment.” Further, the strategy is “designed to deliver additional return to a portfolio collateralized by existing Bernstein assets.” The Option Advantage program as offered by Alliance Bernstein essentially sought to utilize existing stock, bond, mutual fund, or concentrated stock positions as collateral, to act as a margin backstop on the Option Advantage strategy. In exchange, investors in Option Advantage paid a 0.25% management fee to Alliance Bernstein on collateral backstopping the underlying margin loan, in addition to a 20% incentive fee (capped at 1%) paid to Alliance Bernstein for positive performance.

Unfortunately for many uninformed retail investors, investing in options and options programs can carry significant risk, particularly in volatile market conditions. In particular, when investors invest in naked options (meaning they do not own the underlying asset on the option contracts being traded), as well as when investors are exposed to a strategy in which they are selling options short (in order to capture premium or generate income) any pronounced volatility on the underlying asset can lead to significant losses.

Many such options programs involve writing so-called iron condors through S&P 500 derived options. Such strategies are highly complex and often fraught with risk. When it comes to yield enhancement options strategies, likely the most commonly used financial instrument is the well-known S&P 500 Index (SPX), a stock index derived from the 500 largest companies whose stock is listed for trading on the NYSE or NASDAQ. Further, the Chicago Board Options Exchange (CBOE) is the exclusive provider of SPX options. CBOE provides SPX options with varying settlement dates and ranges, including morning and afternoon settlement, further including, for example, weekly and end-of-month options expiration. Importantly, because SPX options trading is based on a theoretical underlying index, investors in SPX options are necessarily engaged in naked, or uncovered, options trading, which can present incredible risk.

Alliance Bernstein’s Option Advantage program has sought to sell short term SPX options in order to generate premium, or so-called “enhanced yield.” In lockstep with this process, the options overlay strategy then seeks to purchase longer-term SPX options in order to provide some risk-mitigation, or downside protection, to the uncovered short options written to generate income. Irrespective of the precise strategy, retail investors may well have been uninformed as to the significant degree of risk associated with selling short options for income, particularly in rapidly moving markets in which the underlying asset, be it the SPX index or some other underlying asset, might experience significant volatility, thus exposing investors to potentially outsized losses.

The attorneys at Giarrusso Law Group LLC have significant experience in prosecuting claims on behalf of investors in complex options strategies, including so-called iron condor strategies. Investors may pursue a claim to recover losses through securities arbitration before FINRA, or in some instances, through litigation. Investors who wish to discuss a possible claim may contact us at (201) 771-1115 or info@gialawgroup.com for a no-cost, confidential consultation.