When Your Broker Traded Options Without Your Understanding
You trusted your broker. You may not have fully understood what options were. You certainly did not know that each transaction was generating commissions for your broker—whether the trade profited you or not. And you likely did not understand that some of the strategies your broker placed you in could expose you to losses far exceeding your original investment.
If that description sounds familiar, you are not alone. Options trading fraud is one of the most pervasive and financially devastating forms of investment misconduct targeting retail investors today. The Law Offices of Robert Wayne Pearce, P.A. has spent more than 40 years recovering losses for investors victimized by unsuitable options recommendations and broker churning—including a landmark $6,138,000 FINRA arbitration award against UBS Financial Services in February 2026.
This article explains how exchange-traded options work, how brokers exploit them, what the law requires, and how you can recover your losses.
What Are Exchange-Traded Options — And Why Are They So Risky?
An exchange-traded option is a contract that gives the holder the right — but not the obligation — to buy or sell 100 shares of a stock at a fixed price (the strike price) before a set expiration date. The buyer pays a premium for this right. Options trade on regulated exchanges like the CBOE and are standardized, meaning every contract on a given stock has a defined strike and expiration.
At first glance, options sound straightforward. But their risk profiles range from modest to catastrophic, depending on how they are used.
Covered Options: Risk Is Known in Advance
A covered call writer owns the underlying shares, so if assigned, she simply delivers stock already held. A cash-secured put writer has set aside the funds needed to purchase shares at the strike. In both cases, the maximum loss is calculable before the trade is placed. Conservative income strategies in managed options programs typically operate at these levels.
Naked (Uncovered) Options: The Risk Has No Ceiling
A naked call is written without owning the underlying shares. Because a stock’s price has no theoretical ceiling, the potential loss is unlimited. A naked put is written without holding cash to purchase the shares if assigned. If the stock falls toward zero, the loss equals the strike price times 100 shares per contract, minus the small premium collected.
A seller of a naked $95 put who collects a $2 premium faces an $8,300 loss per contract if the stock falls to $10. Multiply that across dozens of contracts — a common occurrence in churned accounts — and a single position can wipe out years of savings.
The Options Industry Council calls naked calls “the most extreme form of option investment risk.” These strategies require the highest level of broker approval under FINRA Rule 2360 and are expressly prohibited for customers who do not meet stringent experience, net worth, and risk-tolerance thresholds. Yet they appear repeatedly in accounts belonging to retirees, conservative investors, and customers who never asked to write naked options at all.
Assignment Risk: The Danger You Never See Coming
When you sell an option, you face assignment at any time before expiration. The Options Clearing Corporation (OCC) randomly selects a short option holder for assignment and automatically exercises any option that expires $0.01 or more in the money. For a retail investor holding a naked position, unexpected assignment can trigger immediate margin calls, forced liquidation of other holdings, and losses that exceed the account’s entire equity.
FINRA requires brokers to deliver the Options Disclosure Document (the ODD, formally Characteristics and Risks of Standardized Options) and a Special Statement for Uncovered Option Writers before approving any account for naked writing. In practice, these lengthy, technical documents are often never read — and brokers have little incentive to ensure their customers truly understand them before placing the first trade.
How Brokers Exploit Options Accounts to Generate Commissions
Exchange-traded options are particularly attractive to unscrupulous brokers because they generate substantial per-contract commissions, expire quickly creating natural opportunities for frequent trading, are complex enough that customers rarely scrutinize individual transactions, and can be rapidly bought and sold without triggering the same alarms as excessive equity trading.
Two forms of misconduct account for the overwhelming majority of options fraud claims handled by the Law Offices of Robert Wayne Pearce: churning and unsuitable recommendations.
Churning: Trading Your Account to Generate His Commissions
Churning occurs when a broker exercises control over an account and executes excessive transactions to generate commissions, without regard to the customer’s investment objectives. FINRA defines this conduct under Rule 2111 (Suitability) and SEC Regulation Best Interest (Reg BI), and courts and arbitration panels identify it through two primary quantitative metrics:
| How FINRA Measures Churning Annualized Turnover Rate — Divides total purchases by average monthly equity. Under FINRA Regulatory Notice 18-13, a rate of 6 is generally conclusive of excessive trading (endorsed by the Ninth Circuit in Arceneaux v. Merrill Lynch). A rate of 4 creates a presumption; a rate of 2 may suffice for conservative accounts. Cost-to-Equity Ratio — Divides total annual trading costs by average account equity. This measures what the account must earn just to break even after commissions. A ratio above 20% is generally indicative of excessive trading; a ratio above 12% has been treated as solid evidence of churning in enforcement cases. |
For options accounts, total trading costs must include commissions, bid-ask spread costs (which can be substantial for illiquid options), premiums paid on contracts that expire worthless, and margin interest. A pattern of high-frequency options trading generating substantial commissions relative to account equity—especially when positions are held for one day or less—is the core indicator regulators and arbitrators examine.
Importantly, SEC Regulation Best Interest (effective June 30, 2020) eliminated the “control” element that claimants previously had to prove to establish churning. Under Reg BI’s Care Obligation, a broker-dealer must have a reasonable basis to believe that a series of recommended transactions is in the retail customer’s best interest—even if the customer technically approved each individual trade.
The Law Offices of Robert Wayne Pearce has successfully argued churning claims in FINRA arbitration for more than four decades. If your account generated significant commissions while losing money, our team can analyze your trading records to identify whether a churning claim exists. Visit our churning and excessive trading page to learn more.
Unsuitable Options Recommendations: Putting You in Strategies You Were Never Approved For
FINRA Rule 2360 requires every customer to be specifically approved or disapproved for options trading by a Registered Options Principal (ROP) before a firm accepts any options order. For accounts authorized to write uncovered short options, a separate ROP approval is mandatory. The industry has adopted a tiered approval structure:
- Level 1: Covered calls, cash-secured puts, protective puts — basic options knowledge required
- Level 2: Adds buying long calls and puts — requires understanding of speculative strategies
- Level 3: Adds multi-leg spreads (verticals, iron condors, butterflies) — requires substantial experience and a margin account
- Level 4: Adds uncovered (naked) writing of equity options — requires significant experience, high risk tolerance, and substantial liquid net worth
- Level 5: Adds uncovered index option writing — some firms require $200,000 or more in the account
Unsuitability occurs when a broker recommends options strategies that exceed the customer’s knowledge, experience, or financial capacity. Recommending naked options to a conservative retiree, or complex spread strategies to an investor with no options experience, violates both FINRA Rule 2111’s customer-specific suitability obligation and Reg BI’s Care Obligation.
The SEC’s April 2023 Staff Bulletin on Care Obligations explicitly states that financial professionals must “fully understand” options strategies before recommending them, and should consider whether “less complex, less risky or lower-cost alternatives” can achieve the same objectives. Falsifying options eligibility forms—a recurring pattern in enforcement cases—constitutes securities fraud independent of any suitability violation.
If you were placed into options strategies you did not understand, or strategies that required approval levels you never agreed to, you may have a viable claim for unsuitability and breach of fiduciary duty.
Blackmon v. UBS Financial Services: A $6.1 Million Reg BI Victory
The most significant recent example of options investment fraud recovery handled by the Law Offices of Robert Wayne Pearce is the February 2026 FINRA arbitration award in Blackmon v. UBS Financial Services Inc. (Case No. 25-00141).
The Claimant
Kyle Blackmon is one of New York’s most prominent luxury real estate brokers and Head of Luxury Sales at Compass Inc. His career has included the sale of former Citigroup chairman Sanford Weill’s penthouse at 15 Central Park West for $88 million—then a New York City record—with clients including Rupert Murdoch and the former CEO of NBCUniversal. Blackmon joined Compass (then Urban Compass) in 2014 as its 82nd agent.
What UBS Did
In connection with Blackmon’s Compass Inc. employee stock options and shares surrounding the Compass IPO in April 2021, UBS recommended a series of “very complex” hedging strategies, including synthetic long options, a risk reversal strategy, and pre-paid equity collars. Compass went public at approximately $18 per share. Its stock declined roughly 30% in its first month post-IPO and eventually fell to approximately $2 per share by 2023 as rising interest rates compressed the real estate market.
Blackmon filed for FINRA arbitration in January 2025, seeking $19.7 million in damages. He alleged breach of fiduciary duties, intentional and negligent misrepresentations, negligence, and — critically — violation of Regulation Best Interest. UBS declined to settle or mediate prior to the hearing.
The Award
After a nine-day hearing in Boca Raton, Florida, a FINRA arbitration panel unanimously awarded Kyle Blackmon $5,375,000 in compensatory damages plus interest, $125,000 in costs, and approximately $30,000 in hearing fees — totaling $6,138,000.
The Reg BI violation was central to the award, making Blackmon v. UBS one of the most significant options-related arbitration results since Regulation Best Interest took effect in June 2020. Attorney Robert Wayne Pearce represented the claimant throughout the proceeding.
The case illustrates a critical point for retail investors: even complex, high-net-worth scenarios involving sophisticated hedging strategies are governed by the broker’s best-interest obligation. When a broker recommends options strategies a client does not fully understand — regardless of the client’s wealth or sophistication — and those strategies result in losses, a legal claim may exist.
Recent Enforcement Actions: Regulators Are Paying Attention
The Blackmon case is not an isolated event. Regulators have recently sanctioned broker-dealers and registered representatives across the country for the same categories of options misconduct. The following cases illustrate the patterns enforcement authorities are targeting.
Western International Securities: A 78-Year-Old Widow Loses $525,000 in One Month (2024)
In July 2024, the SEC and FINRA jointly sanctioned Western International Securities, Inc. for Regulation Best Interest violations involving a broker who day-traded options in 19 customer accounts — many belonging to customers with moderate to conservative risk profiles and little or no options experience.
The broker employed a strategy of buying and selling options contracts with positions held an average of one day or less. A 78-year-old widow lost $525,000 in a single month. Customer losses totaled approximately $5.2 million across total trading volume of $363.5 million. The broker generated $1.27 million in commissions. He falsified customer account-opening forms and options eligibility documents to obtain approvals customers were not entitled to receive.
The SEC imposed a $140,000 civil penalty; FINRA levied a $475,000 fine plus over $1 million in restitution. The firm had already paid $9 million in financial remediation to affected customers before regulatory sanctions were imposed. (SEC Release No. 34-100618.)
Osaic Services: 6,000 Option Contracts — Zero Account Value Remaining (2024)
In November 2024, FINRA fined Osaic Services, Inc. (formerly SagePoint Financial) $250,000 for supervisory failures that allowed a broker to execute more than 6,000 option contracts across ten different options series for a 60-year-old customer with $100,000 annual income. The customer lost the entirety of her account value and paid nearly $42,000 in commissions.
The same broker opened options positions requiring margin in an account that did not have a margin agreement — exposing the customer to potential losses of $4.5 million, approximately 22 times her $200,000 liquid net worth. After the customer’s 91-year-old mother died in December 2018, the broker continued executing 21 unauthorized trades in the deceased customer’s account through June 2019, generating approximately $10,000 in additional commissions. The broker was barred by FINRA. (FINRA Case No. 2021070904301.)
Spartan Capital Securities: A Business Model Built on Churning (2025)
In December 2025, FINRA filed a complaint against Spartan Capital Securities alleging that approximately two-thirds of the firm’s trading revenue — more than $46 million — came from accounts with cost-to-equity ratios above 20%. The complaint identifies 114 customer accounts that were excessively traded, 35 of which were churned. Fifty-three of those accounts belonged to senior investors. Cost-to-equity ratios ranged from 16% to an extraordinary 491%; turnover rates ranged from 5 to 184.
FINRA alleged willful violations of Section 10(b) and Rule 10b-5, FINRA Rules 2020 and 2010, and willful violation of Regulation Best Interest. Total trading costs across the 114 accounts reached nearly $10 million; investment losses approached $8 million. The complaint is pending adjudication.
Independent Financial Group: Churning Elderly Alzheimer’s Patients (2024)
In August–September 2024, FINRA sanctioned Independent Financial Group, LLC, registered representative Stewart “Paxton” Ginn, and VP of Supervision Richard Mireles for churning and Reg BI violations. From July 2020 through December 2022, Ginn generated over $2.24 million in commissions while causing $2.22 million in realized losses for five customers — including a woman in her late 80s with Alzheimer’s disease, a retired customer in her late 70s, and a third customer in his late 80s. Cost-to-equity ratios reached as high as 27%.
The firm paid Ginn 93% of commissions generated, creating a powerful financial incentive for excessive trading. Mireles directed supervisory staff to review trades individually rather than examining them for patterns of excessive trading — even after automated alerts fired and lower-level supervisors raised concerns. IFG was fined $500,000; Ginn received an 18-month suspension, $50,000 fine, and $115,000 in restitution.
If you believe a broker subjected your account to any of the patterns described above, the Law Offices of Robert Wayne Pearce offers a free consultation. Our team has handled failure-to-supervise claims against broker-dealers nationwide.
The Rules That Protect You — And What Happens When Brokers Ignore Them
The regulatory framework governing options recommendations provides multiple layers of investor protection. When brokers and their firms violate these rules, investors have the right to recover their losses through FINRA arbitration.
FINRA Rule 2360: Options-Specific Obligations
FINRA Rule 2360 is the comprehensive framework governing options transactions. It requires that every options account be approved by a Registered Options Principal before any order is accepted, that customers receive the Options Disclosure Document and — for uncovered writing accounts — a Special Statement for Uncovered Option Writers before trading begins, that the firm review approved accounts for compatibility of options transactions with the customer’s investment objectives, and that written supervisory procedures be maintained for options account approval and monitoring.
Regulatory Notice 21-15 (April 2021) clarified that the “appropriateness” standard for approving options accounts is comparable in rigor to a full suitability analysis — regardless of whether the account is self-directed.
FINRA Rule 2111: Quantitative Suitability and Churning
FINRA Rule 2111 imposes three distinct suitability obligations: reasonable-basis suitability (the strategy must be suitable for at least some investors); customer-specific suitability (the strategy must suit this particular customer); and quantitative suitability (a series of transactions must not be excessive in the aggregate). The quantitative component directly connects to churning analysis and applies even if each individual trade, viewed in isolation, appeared acceptable.
Regulation Best Interest: The New Gold Standard
Since June 30, 2020, broker-dealers recommending any securities transaction to a retail customer have been required to comply with SEC Regulation Best Interest. Reg BI’s Care Obligation requires the broker to exercise reasonable diligence, care, and skill; understand the potential risks, rewards, and costs of the recommendation; have a reasonable basis to believe the recommendation is in the customer’s best interest; and consider reasonably available alternatives. For options specifically, the SEC’s April 2023 Staff Bulletin identified options as potentially requiring heightened scrutiny because “without in-depth knowledge about products and/or strategies, there’s no way to reasonably believe that what brokers and advisors are recommending truly aligns with the best interest of the retail investor.”
Reg BI’s Conflict of Interest Obligation separately requires firms to identify and mitigate conflicts — including commission-based compensation structures that create incentives for excessive trading. The Spartan Capital complaint alleges willful Reg BI violations because the firm’s supervisory system was specifically designed to shield churning brokers from scrutiny.
To understand the full scope of your rights under these regulations, visit our FINRA arbitration lawyer page.
The Scale of the Problem: Why Retail Investors Keep Losing
Options trading volume hit a sixth consecutive annual record in 2025, with the OCC clearing 110 million contracts in a single day on October 10, 2025. Zero-days-to-expiration (0DTE) options — the most aggressive and speculative instrument in the retail options market — averaged 14 million contracts daily in 2025, up 41% year-over-year, and now represent nearly a quarter of all U.S. listed options volume. Average daily premium traded reached $36.8 billion, with notional value averaging $4 trillion per day.
The academic research on what this volume means for retail investors is unambiguous. MIT Sloan researchers found retail investors lost approximately $3 billion trading options from 2010 to 2021, with average losses of 5% to 9% around earnings announcements and 10% to 14% during high-volatility events. University of Florida researchers documented average retail losses of 16.4% over three-day periods on complex options positions. A separate study found retail option trades lost an average of $5.03 million per day during the periods studied.
Retail broker flows now account for half of all options volume. That growth has not been accompanied by commensurate improvement in investor outcomes — it has instead created a larger pool of accounts for brokers to exploit. FINRA’s 2026 Annual Regulatory Oversight Report specifically identified fraudulent options trading as a recurring external fraud threat, and options trading was the third costliest FINRA enforcement area in 2024 with $4.3 million in fines.
FINRA processed 2,469 customer arbitration cases in 2024. The customer win rate in decided cases reached 30% — and the settlement rate was 87%, meaning the vast majority of cases are resolved favorably before ever reaching a final hearing. If you have suffered losses in an options account, the statistics suggest that pursuing a claim is not only viable but frequently successful.
Warning Signs That Your Broker May Have Committed Options Fraud
The following patterns suggest that you may have a viable claim for churning, unsuitable options recommendations, or related misconduct. They are drawn from the enforcement cases described above and from more than 40 years of FINRA arbitration experience at the Law Offices of Robert Wayne Pearce.
- Frequent trading you did not request or understand. If options positions were opened and closed on a daily or weekly basis without your initiation, that pattern may establish the excessive trading element of a churning claim.
- High commissions relative to account performance. If your account generated significant commissions for your broker while producing losses for you, calculate your cost-to-equity ratio. A ratio above 12% warrants investigation; a ratio above 20% is presumptively excessive under FINRA guidance.
- Naked or uncovered options you never requested. If your monthly brokerage statements reflect positions labeled “short call,” “short put,” “uncovered,” or “naked” and you do not have a clear memory of discussing and approving such strategies, you may have been placed in unauthorized positions.
- Losses that appeared quickly and exceeded your invested capital. Losses that exceed the total amount you deposited in an account are a hallmark of leveraged options strategies, including naked writing and options purchased with margin.
- Strategies you cannot explain. If your broker described a strategy using terms like “iron condor,” “risk reversal,” “synthetic long,” or “collar” and you could not explain the strategy to someone else, that gap in understanding may constitute an evidence of an unsuitable recommendation.
- Discrepancies in your options eligibility forms. If your options account was approved at a level that does not match your actual financial situation or experience — or if you do not remember completing an options application at all — your eligibility documentation may have been falsified.
- A broker who encouraged you not to read your statements. Any broker who minimizes the importance of reviewing monthly statements, or who discourages you from asking detailed questions about your positions, is exhibiting a serious warning sign.
If any of these warning signs apply to your situation, contact the Law Offices of Robert Wayne Pearce for a free, confidential consultation. You can also review our options and securities fraud case results to see the range of recoveries we have achieved for investors in similar circumstances.
A Proven Track Record in Options Cases
The Law Offices of Robert Wayne Pearce has recovered more than $185 million for investor clients across more than 200 cases. The following results reflect a portion of the firm’s options-specific track record:
| Recovery | Case Description |
| $7,840,000 | FINRA arbitration settlement — complex options trading strategy in the oil and gas sector for a Brazilian holding company; settled on the eve of trial through mediation (2010) |
| $6,138,000 | FINRA Arbitration Award (Case No. 25-00141) — Blackmon v. UBS Financial Services, Inc.; risk reversal strategy, synthetic long options, and pre-paid equity collars related to Compass Inc. employee stock options; Reg BI violation (February 2026) |
| $545,500 | FINRA Award (Case No. 90-02875) — Larry Witte as Guardian of Teresa Bill v. Raymond James; misrepresentation and unsuitable options recommendations to an elderly incompetent widow; treble damages for civil theft |
| $287,500 | Award (Case No. 91-01913) — Leung v. Wakefield Financial; unsuitable recommendations in an option trading program |
| $257,000 | Award (Case No. 92-00340) — Koppel v. JW Charles; misrepresentations and unsuitable investments in an option trading strategy |
| $185,000 | Settlement — 84-year-old widow; broker used a covered option writing strategy combined with churning in options and technology stocks |
| $174,000 | Settlement (March 2024) — speculative option trading inconsistent with clients’ instructions; unauthorized option trading by advisor with written discretionary authority |
Past results do not guarantee a similar outcome in your case. However, this track record demonstrates the firm’s deep familiarity with options fraud claims, FINRA arbitration procedure, and the financial modeling required to prove damages in complex options cases.
What You Should Do If You Suspect Options Fraud
The statute of limitations for securities fraud claims is strictly enforced. Waiting too long to act can permanently bar your right to recover losses, regardless of the merits of your claim. If you believe your broker mismanaged your options account, took the following steps as soon as possible:
- Gather your account statements. Collect every monthly and quarterly brokerage statement going back to the beginning of the account relationship. Pay particular attention to statements showing commissions charged, options positions opened and closed, and margin interest paid.
- Preserve your records. Do not delete emails, text messages, voicemails, or written correspondence with your broker or the brokerage firm. These communications are critical evidence.
- Do not sign anything the firm sends you. Broker-dealers sometimes present investors with documents framed as routine paperwork following large losses. Do not sign any release, settlement, or arbitration waiver without consulting a securities attorney.
- Contact a qualified securities attorney immediately. The Law Offices of Robert Wayne Pearce offers a free, confidential consultation to investors who believe they have been victimized by options fraud. There is no fee unless we recover money for you.
| Free Consultation — No Fee Unless We Recover The Law Offices of Robert Wayne Pearce, P.A. represents investors nationwide in FINRA arbitration and securities litigation. Call (800) 732-2889 or visit www.secatty.com to schedule your free consultation. Cases are handled on a contingency basis — you pay nothing unless we win. |
