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Investments - Unsuitable

Virtually Bankrupt, An Elderly Investor Trades Options on Advice from Broker

April 3, 2020

[Image:  Top 6 Options Trading Strategies /]


by Howard Haykin



In 2012, an elderly, retired man opened a $205,000 IRA brokerage account with Berthel Fisher & Company Financial Services. By 2015, the value of the account stood at $120,000 - driven down by monthly withdrawals of $1,500, and larger occasional withdrawals to pay for other expenses. Inasmuch as the IRA account essentially represented his entire liquid net worth and served as a lifeline - along with his Social Security benefits - to cover all current and other expenses, this man was in desperate need of budgeting and money management advice.



Instead, the man was told to begin trading options - by the broker - as a way to generate more income in the account. Equity options give an investor the right to buy (a 'call') or to sell (a 'put') a quantity of stock (usually 100 shares) at a set price (strike price), within a certain period of time (prior to the expiration date).


The man followed the broker’s recommendation, even though he had little or no experience trading options. Between August 2015 and January 2018, the man wrote 20 covered call options, purchased 22 put and call options, and wrote 6 uncovered put options – all based on the broker’s recommendations. [See below for brief explanations of these options strategies.]


By January 2018, the balance of the man’s IRA account balance had fallen to below $20,000 - due to the combined effect of investment losses and steady withdrawals.


For recommending and effecting a risky options-trading strategy that was entirely unsuitable for his customer, the broker was discharged from the brokerage firm and essentially booted from the industry.


For its apparent failure to adequately supervise this broker, Berthel Fisher received no sanctions in connection with the mishandling of this customer’s IRA account.





PUT OPTIONS give the option holder the right to sell a specified amount of an underlying security at a pre-determined "strike price." CALL OPTIONS, conversely, give the option holder the right to purchase a specified amount of an underlying security at the strike price.

  • In both cases, the purchaser pays a premium in exchange for the option - and risks losing

   that entire premium.

  • If shares of the underlying security rise or fall past the strike price, the option holder may exercise the option.
  • The option holder can also sell the option before its expiration date, either to realize a profit or avoid greater losses.
  • If neither of those happens, however, the option expires worthless, and the purchaser loses the entire amount of the option premium.


A PUT IS NAKED OR UNCOVERED when the option seller does not hold a short position in the underlying security and therefore risks losing the entire difference between the put option's strike price and the value of the underlying security at the time of the option's exercise.

  • An investor who sells uncovered puts, which are also known as "naked" or "short" puts, runs the risk of having to purchase a security for significantly more than its market price



[For further details, click on … FINRA Case #2018057425201.]