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How Put and Call Options Lead to Claims of Investment Fraud
Investing in put and call options involves risks that do not apply to investing in traditional stocks and bonds. But, despite the differences between options and more-traditional securities, many brokers and advisors recommend them without explaining the unique risks involved. When this happens – and when investors suffer losses as a result – investors will often be able to pursue claims for investment fraud.
Understanding Options Investing
Unfortunately, many investors only start learning about options investing after they begin suffering losses. They want to know why they aren’t reaping the returns their brokers and advisors said were possible, and they want to know what (if anything) they can do to recover the money they have lost. If you need to get up to speed on options investing, the following is a brief overview of what you need to know:
What is an Option?
An option is a contract to buy or sell a security or other asset. Unlike buying a stock or bond, when you buy an option, you are not purchasing an investment asset directly. Instead, you are purchasing the right to buy or sell an investment asset at some point in the future.
With options investing, the basic idea is that you can profit from a change in the price of an investment asset without taking on the risk of the asset losing its value. For example, let’s say an investor purchases an option to buy stock in ABC Company at $50 per share (this is the “strike price”). ABC Company’s stock is currently trading at $30 per share. If ABC Company’s stock rises to $55 per share, the investor can purchase it at the $50 strike price and then immediately sell it for a profit of $5 per share. But, if ABC Company’s stock plummets to $10 per share instead, the investor can simply let the option contract expire.
What is a Call Option?
A call option is a contract that gives you the right to purchase a stock if it reaches a predetermined strike price (as in the example above). You pay a price for the call option (called a “premium”); and, if the share price of the underlying stock reaches the stipulated strike price, you can exercise the option and purchase the shares. If the underlying stock does not reach the strike price, you can let the option contract expire, and your losses are limited to your premium.
What is a Put Option?
A put option is a contract that gives you the right to sell a stock that you either own or borrow. While the goal of purchasing a call option is to purchase a stock at a discount when its price goes up, the goal of purchasing a put option is to sell a stock at a premium when its price goes down. In contrast to typical investing, rather than betting that a security will increase in value, you are betting that the security underlying your put option will decrease in value during the option period. If the underlying security falls below the strike price, you can sell for a profit. If it doesn’t fall below the strike price, you can let your option contract expire.
What are the Risks of Options Investing?
The risk of investing in options is that once an option contract expires, it is gone. You bought something that no longer exists. As a result, while you may have been able to ride a downturn and eventually earn a profit had you purchased stock, since you purchased an option, you are simply left with nothing. There is no way to recover your premium (other than trying to purchase another investment that offsets your loss)—unless you can prove that you are a victim of investment fraud.
Understanding Investment Fraud Claims Related to Put and Call Options
Investors who purchase put and call options through brokers and advisors can pursue fraud claims under a variety of different scenarios. Of course, not all options losses are indicative of fraud. Like all investments, there is no guarantee that an option contract will be profitable—even with full disclosure of all material information.
So, when can individual investors pursue fraud claims related to put and call options? Some of the most common examples of investment fraud claims include:
- Withholding or misrepresenting material information (i.e., information about investment risks or fees)
- Making unauthorized options trades
- Making unsuitable investment recommendations
- Overconcentrating investors’ portfolios in option contracts
- Selling complex structured investment products such as yield-enhancement strategies (YES) that entail options trading
Speak with an Option Fraud Attorney at Zamansky LLC in Confidence
Do you have an investment fraud or broker fraud claim related to put or call options? To find out, schedule a free consultation at Zamansky LLC. Call 212-742-1414 or contact us online to schedule an appointment with an experienced option fraud attorney today.