Although some registered representatives and financial firms downplay the risks involved with options trading, in reality, options trading can be an aggressive strategy that may entail high risks. Because of the risks associated with option trading, it is generally only suitable for investors with a high net worth, experience, and an appetite for risk. Brokers, financial advisors, and financial firms sometimes ignore a customer’s tolerance for risk and improperly approve options trading in the customer’s account. Unfortunately, this can lead to tremendous losses in their accounts. RIK recently filed several multi-million-dollar cases on behalf of investors to recover for losses relating to improper options trading.
Options are contracts that grant an investor the right, but not obligation, to buy or sell an underlying asset at a set price on or before a specific date. Options trading has become popular amongst investors in recent years. To be successful, options trading requires research, discipline, and constant market monitoring. This type of trading involves high risk and requires special approval from the financial firm.
From the outset, options trading often comes with excessive fees which incentivizes brokers and advisors to recommend options trading to their clients regardless of the clients’ investment objectives and willingness to take on risk. In doing so, the broker or advisor sometimes downplays the risks associated with an options trading strategy by claiming that the only potential downside is the initial cost of the contract or that the advisor can hedge the position. Both notions can be misleading. First, the investor pays a premium for options in addition to paying high commission fees. This means the investor is at a loss the moment an option is purchased. Secondly, hedging options is highly dependent on market conditions and is an extremely risky strategy in the current volatile market.
There are many ways some brokers and financial advisors violate rules and regulations involving options trading. For example, financial firms require customers to meet high thresholds of net-worth and investment experience before they can purchase options in their accounts. A broker might fill out an account opening form with inaccurate customer information which would improperly qualify the customer for options trading. Another violation occurs when brokers and advisors excessively buy and sell options, generating commissions, making it nearly impossible for the customer to experience any pecuniary gain. A third example of brokers and financial advisors abusing options trading is when they purchase options in a customer’s account without the customer having enough funds to execute the option. In that case, the broker or advisor will be forced to sell the contract, making the trade less profitable for the customer.
If you have losses from inappropriate options-related trading, RIK is here to help. Our lawyers have extensive experience in options-related matters and can assist you in determining whether you have a viable claim to recover your losses. Feel free to contact one of our lawyers by email or give us a call at (212) 684-0300.