Net worth

Wealthy investors are misled into covered call programs

In recent years, financial advisors have aggressively marketed covered call strategies to their high net worth clients. Advisors often market these programs to investors who have concentrated equity positions. The programs allow businesses to earn significant commissions and fees on accounts that would otherwise have little or no business activity.

Options contracts are agreements between investors to sell stocks at a specific price on or before a certain date. Calls are a type of options contract that gives the buyer the right to buy a stock. A covered call strategy involves writing (selling) options on stocks you own while receiving a premium (income) from another investor. Investors are essentially selling the right to benefit from the future appreciation of their shares, thereby creating a stream of income.

Sales pitches for covered call programs are delivered in an unusual and often misleading manner, says investor attorney Marc Fitapelli. These pitches don’t come from salespeople or even the client’s financial advisor. Instead, they usually start with a call from your advisor’s risk department. Calls are usually directed to high net worth clients who have concentrated positions in one or a handful of stocks. Sometimes clients accumulate these unique multi-million dollar stock positions by earning big at startup. Regardless of how the positions were acquired, investors almost always face a huge tax bill if they sell.

When clients with concentrated equity positions are contacted by their advisor’s risk management department, they are told that options can be used as a kind of insurance to protect against the risk of having all their eggs. in the same basket. Investors are tricked into believing that options are a conservative solution to a problem they never had in the first place, argues investor attorney Marc Fitapelli. Covered call options and other complex options strategies are often presented to these clients as a conservative win-win solution – risk is mitigated and additional income is generated. Sounds too good to be true, doesn’t it? Many investors, and even their financial advisors, do not realize the complex and unique risks associated with options trading.

One of the major misunderstood risks of covered calls is the lost opportunity cost. If the concentrated position continues to increase in value, the investor forfeits the opportunity to profit from it. In some cases, the investor may even end up losing if the value of their stock rises too quickly. If the prospect of losing money when your stock goes up seems puzzling, you’re not alone. Marc Fitapelli believes financial advisors mislead many of their wealthy clients into signing up for covered call options and other complex options programs. Fitapelli’s law firm, MDF Law, represents wealthy individuals who have lost money from these programs through FINRA arbitrations.

Disputes against brokerage firms and financial advisors are handled confidentially through arbitration administered by the Financial Industry Regulatory Authority, or FINRA. Marc Fitapelli, owner and founder of MDF Law, believes stock market volatility has resulted in massive losses for retail investors in options programs. This, in turn, has led to an increase in the number of confidential FINRA arbitrations. Investors in these cases are often looking for lost opportunity costs, interest and attorney fees.