FINRA's Saction of Mason Gann Highlights Risks of Naked Puts Strategy

Attorney Advising Disclaimer

When FINRA suspended former Berthel Fisher broker Mason Gann over a risky options-trading strategy in a senior citizen client's account.

Gann's alleged conduct had all the hallmarks of a broker failing to act in the customer's best interests—recommending securities transactions or strategies without a reasonable basis to believe it was suitable for the customer, who in turn FINRA described as "limited income, modest retirement savings, and minimal investment knowledge."

A put option gives the option holder the right to sell a specified amount of an underlying security at a pre-determined "strike price."

A call option, conversely, gives 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.

The FINRA findings revealed Gann was using the unsuitable investment strategy at issue known as uncovered puts.

The technical definition deems a put "naked" or "uncovered" when the option seller does not hold a short position in the underlying security, leading to a risk of losing the difference between the put option's strike price and value of underlying security at the time of the option's exercise.

In plain English, a naked put runs the risk of having to purchase a security for significantly more than its market price.

Using naked puts is regarded as a risky strategy that, in Gann's case, caused his 71-year-old and retired customer to lose more than $12,500. Investigators noted that the uncovered put options strategy, recommendations, and resulting transactions were "unsuitable" for Gann's customer, given his investment profile, liquid net worth, and he had little or no experience trading options."

If you have invested with any broker or investment adviser who unsuitably recommended you engage in an uncovered put strategy, short sales, or other complex and risky financial alchemy that has proven harmful to your investments or interests, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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