Bates News, Bates Research | 07-19-19
Is the Increase in Option-Related Cases Affecting Your Firm and Clients?
Bates Group is alerting counsel that we are seeing an uptick in option-related cases where firms offered their clients strategies to increase the yield in their investment portfolio, often involving options trading in order to earn premium income to enhance a portfolio’s regular returns.
Examples of these strategies include covered call writing, zero cost collars and the use of so-called “iron condors” – cashless options trading strategies used to generate premium income in addition to the yield on an investor’s current portfolio, while offering downside protection from potential losses.
Bates Group Support:
Bates staff and experts have provided both consulting and testimony services in matters involving options trading within a client account. Bates experts have opined on the appropriateness of the options trading, as well as the role the option positions play within the client’s overall investment strategy and portfolio of holdings. Bates has performed quantitative analyses examining the likelihood that an option position bought or sold by a client will end in a gain or loss, providing a single figure capturing the probability weighted expected value from the purchase or sale of the option position.
Bates experts have also provided in-depth knowledge and analysis concerning commonly employed options trading strategies and the role of these strategies within an overall investment objective, as well as the relative risks created for the client. Bates consultants and experts have also provided analysis and testimony in support of matters involving premium generation strategies employed to generate additional yield on a client’s portfolio, such as those involving iron condors or other means by which the held portfolio serves as collateral for options-related, income-focused trading.
Specifically, Bates can assist in the following ways:
- Analyzing the trading in claimant’s brokerage accounts to determine the P/(L) associated with the strategy, and quantifying out-of-pocket losses.
- Assessing if the strategy changed over time, where the strategies may have failed, and explaining how any losses occurred. This can include an evaluation of whether the stated strategy was deviated from in a meaningful way, leading to losses.
- Assessing the adequacy of internal and external disclosures.
- Assessing the net premium received versus the level of risk involved in a position.
- Estimating position risk and return; forecasting the probability of a loss and the probable size of a loss at the time positions were written.
- Assessing the suitability of the strategy and the suitability of the size of the strategy mandate.
The Bates team of consulting and testifying experts bring a clear understanding of the theory behind how these strategies work from an academic and industry perspective, from a business side and in-house perspective during the client education phase, and from a sales practice aspect when clients invest using this strategy.