Options are derivative securities that are based on the value of another security and underlying securities, such as a stock or index. Options give investors the contractual right, not the obligation, to buy or sell an underlying asset within a finite time with a specific expiration date, requiring investors to get the timing and direction of the stocks just right.
There are two common types of option strategies: call options and put options. Call options give the owner of the option the right to buy the asset at a stated price and by a specific date. Put options allow the holder to sell the asset at a stated price and by a specific date.
Some examples of broker fraud with options include:
- Misrepresenting or omitting material information, including risk or fees, to the client
- Overconcentrating investors’ portfolios in risky option trades
- Unauthorized trades and excessive buy and sell options to generate commissions
- Unsuitable option recommendations based on a customer’s objectives, risk tolerance, net worth, and investment experience
- A broker filling out an account opening form with inaccurate customer information that would qualify the customer for options trading based on untrue qualifications
- A broker purchasing options in their customer’s account without having the funds to execute the option
There are significant risks associated with options trading, and there is no market-neutrxal secret strategy to options trading. Options are inherently complex, leveraged, and can cause accelerated and magnified investment losses during adverse market movements.
Options are generally only suitable for experienced investors who knowingly accept the risks of the option trades. It is the responsibility of the stockbroker to perform all the necessary due diligence to ensure the options investments and options strategies are suitable for the investor.
However, many brokers recommend unsuitable options trades to their clients, as they earn excessive fees, which is perhaps an incentive for brokers and advisors to recommend these trades to their clients. The fees, in addition to premium payments, put investors at a loss from the start of their investment.
Recovering Options Losses Through FINRA Arbitrations
FINRA rules require that investors be specifically approved for options trading. Brokers are required to consider customer information, including the customer’s knowledge, investment experience, age, financial situation, and investment objectives. They are also required to determine whether the customer is approved to trade options.
Count on our experience to successfully take you through the FINRA arbitration process.
If you have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation and find out how to recover from stock loss. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations, and institutions in claims against brokerage firms, investment advisors, RIAs, banks, and insurance companies on a contingency-fee basis.