Now offered at http://www.bealelee.com/

1. ©2012 Brookstone Capital Management, LLC. All rights reserved. 1172012

2. Where do you think 17 Years
we‟re headed?
History Shows that the market typically
moves in cycles. In the past 105 years, there 17 Years
11 Years
have been three bull markets and three bear
markets. The chart shows that we may have
entered a bear market.
25 Years
5 Years
Bull
18 Years
Bear
1906-1924 1925- 1930-1954 1955-1965 1966-1982 1983-1999 2000-?
1929
Value of the Dow Jones Industrial Average for 105 Years (1906-2011)

3. What do investors want?
Not to lose money
Hope to get or stay rich
Banish fear of being poor
Leave money to kids and or spend money
in retirement

4. How will you get there?
Adding new managers that
will enhance your current
mix of investments and
supplement them during an
economic cycle when
traditional investments do
not work.

5. How will you get there?
Typically, investors have used
three strategies to get there:
1. Asset allocation
2. Market timing
3. Buy and hold

6. Diversification works…
Asset Class Examples Using Vanguard Mutual Funds
Timeline goes from top of the Tech Bubble through the bear market of
2000-2002 and recovery to the peak in October 2007
S&P500
Pacific Index
REIT Index
Small Cap
Total Bond Index
European Index
Emerging Markets

7. until it doesn‟t…
Asset Class Examples Using Vanguard Mutual Funds
After October 2007, equities marched in relative unison.
Bonds offered the only significant diversification.
SMARToption
S&P500
Pacific Index
REIT Index
Small Cap
Total Bond Index
European Index
Emerging Markets

8. Find Non-Correlated Assets
Correlation Sphere
Traditional
investment assets
correlate to “1” in
this area
Hedged Equity

9. Market timing
• The idea is to move money to
bonds and cash when the market
is going to go down
OR
• Tactically move between asset
classes during different cycles in
the economy
• Timing the market involves calling
it right twice, not just once, and
that's nearly impossible

10. Market timing
• Most investors tend to let the competing
emotions of fear and greed dictate their
investment decisions
• This leads to the tendency to invest after a
significant increase in prices and sell during
down periods, the opposite of buying low and
selling high.

11. Market timing
• This phenomenon has been widely
documented, included in a 2003 Dalbar
Study*
• It shows that the average investor
stayed invested in equity funds for less
than 3 years, buying when stocks went
up and selling when the going got tough
*2003 Dalbar, Inc., “Quantitative Analysis of Investment Behavior”.

12. Market timing
The end result was that investors earned an
average of 2.57% from 1984 to 2003, a
hair below inflation of 3.14%, and far short
of the 12.2% annual gain on the S&P 500
for the same period

13. Market timing
The record on professionals timing the market is just as
abysmal.
• The Hulbert Financial Digest* has tracked what would have
happened if every year an investor put his money into the
prior year‟s top performing market timing newsletter.
• Over 21 years the result would have been an annualized
loss of 31.4 percent a year.
• In the real world, that‟s equivalent to investing $10,000 in
January 1981 and finding that all you have left at the end of
2002 is $2.32.
*Mark Hulbert, Hulbert Financial Digest, http://www.fundadvice.com/FEhtml/PsychHurdles/0304b.html

14. Market timing
The Bottom Line: It is very difficult to
time the market successfully!

15. Buy and Hold Investors
American Airlines $36.13 $37.05
1980 to January 12, 2012 $20.87
$13.62
$8
$2.34
$4.44
$0.32

16. Buy and Hold Investors
1996
Eastman Kodak 1987
$80
1962 to January 12, 2012 $68
1972
$66
2009
$2.96
1/2012
$0.52

17. Buy and Hold Investors
Microsoft
2000 to January 12, 2012
April 3, 2000
$32.53 January 23, 2012
$25.70

18. Buy and Hold Investors
If you bought and held a 60/40 If you bought the S&P 500
portfolio* (stocks/bonds), in 2000 and held it through
what it would have done… 2011
e.g. 2008 OR You would be about even
30%
*Lipper Diversified Growth and Income Index

19. Are there other financial
tools I can use to protect
and grow wealth?

20. How to Collar a Black Swan
THE STRIKING PRICE | SATURDAY, JANUARY 8, 2011
By STEVEN M. SEARS
Using options to manage the risk of a downturn
may be a good idea.
“…pension funds and other institutional
investors …can no longer rely solely on
macro-economic analysis to adjust portfolios.
They have to be cognizant of tail risk and risk
management on an ongoing basis. The idea
of tail risk, essentially that the unexpected will
happen from time to time, is one of the key
traits of the modern stock market”.

21. What are other Institutional
investors saying?
Joann Hill, ProShares Head of Investment Strategies
(2010 IMN Superbowl of Indexing keynote presentation).
“alternative strategies that include options add value to a
portfolio and outperform traditional strategies in risk
reduction”
James E. Keohane, Healthcare of Ontario Pension Plan Senior Vice-
President (2010 IMN Superbowl of Indexing presentation).
“portfolio managers that do not use options can not
adequately protect against market risk”.

22. How Options Work

23. Options are:
Contracts to either BUY or SELL a specific
investment at a specific price
The purchase price of an option is called the
PREMIUM – you pay for
this if you exercise your
option or not.

24. Options:
The contracts establish a specific price called the
STRIKE PRICE at which the contract may be
exercised
OPTIONS have a shelf life –
Also called an expiration date,
which is the latest date you can
“exercise” you option or close out your position

25. There are two types of
Options
CALLS and PUTS

26. CALL = Buy
The purchase of a call option gives the owner the
right but not the obligation to BUY 100 shares of the
underlying security at the STRIKE price on or before
the expiration date.
The buyer has the right but not the obligation
to BUY the shares.
The seller of the option does have the obligation
to sell the shares to the buyer.

27. PUT = Sell
Conversely, the purchase of a put option
gives the owner the right but not the
obligation to SELL 100 shares of the
underlying security at the STRIKE
price at anytime before the expiration
date.
In this case the seller of the put is required to
buy the security at the strike price at the
buyer‟s request.

28. Buyers of options
Including both puts and calls spend money.
They pay the premium.
Seller of options
Including both puts and calls collect money.
They collect the premium.

29. 3 Ways SMARToption Uses Options
1. Buy long-term puts
2. Sell short-term covered calls
3. Sell short-term puts

30. PUT Options
Put options are usually purchased as protection
against falling stock prices. You pay the premium
upfront so that if the underlying stock falls below
the strike price, your potential loss is limited.
This protective put works like an insurance policy.

31. PUT Options
If you buy a put option on the S&P 500 (SPY):
You pay some money upfront, and you have the right to sell SPY
at a certain price, no matter how much SPY declines. If SPY goes
below your strike price, the value of you put will increase. The
more the SPY falls, the higher your put will be worth.
You can sell the put for a profit anytime before the expiration date.
If the SPY stays above the strike price, you still can sell the put
anytime before the expiration date, but for less than what you paid.

32. The Covered Call
A strategy in which an investor sells or “writes” a call option
contract while at the same time owning an equivalent
number of shares of the underlying stock or index fund, like
SPY.
The stock or index fund is generally held in the same
brokerage account from which the investor writes the
call, and fully collateralizes, or "covers," the obligation
conveyed by writing a call option contract.
This strategy is the most basic and most widely used
strategy combining the flexibility of listed options with stock
ownership.

33. The Covered Call
• If you sell a covered call on the SPY, you collect
some money upfront, and you have the obligation
to deliver your shares of SPY if it hits the strike
price.
• If SPY stays below the strike price, you get to keep
the premium you collected.
• If SPY approaches the strike price, instead of
waiting for your shares of SPY to be “called away”
you can buy the calls back and close the position.

34. PUT Options
If you sell a put option on the SPY:
You collect the premium immediately adding cash to you
account, and you have the obligation to buy shares of SPY if
it hits the strike price.
If SPY stays above the strike price, you get to keep the
premium you collected
If SPY approaches the strike price, instead of being forced to
buy SPY at that price, you can buy the puts back and close
out the position.

35. Are options risky?

36. Are options risky?
Not any more risky than buying a
stock is risky.
It‟s the investment strategy that can
significantly lower risks, not the options
themselves.
When correctly applied and actively
managed they can be tailored for specific
purposes and market conditions.

37. Are options risky?
When incorrectly applied or left
unmanaged, these strategies can expose
investors to unacceptable losses.
In the past when these strategies failed, they
made headlines in the news.
Options ended up with the blame
instead of the investment strategy.

38. The Options Clearing
Corporation (OCC)
► OCC is a participant in every options transaction,
serving as the intermediary between buyers and
sellers.
► You do not deal with any person on the other side
of the transaction, you are dealing with the OCC
► OCC issues, guarantees and clears all option trades
placed on the U.S. options exchanges.
► Ensures that all of the rules involved in the sales
transactions will be followed and that each side will
perform as promised.

39. The use of exchange-listed
options has been growing
at a phenomenal rate.
500%
In the last ten years trading
volume has increased by
nearly 500%, with more than
3.8 billion contracts traded in
2010.*
*2010 Options Industry Council Benchmark Study

40. Why should you have options
in your portfolio?
1.Generate income
2.Hedging
3.Diversification
4.Locking in profits

41. How SMARToption works

42. How SMARToption works
Hedged Equity Strategy
+
Proprietary Monthly
Trading Strategy
A two-pronged approach that
mathematically minimizes large losses in
your portfolio

43. SMARToption
Basket I Basket II
Equity + Hedge/Downside
Monthly Options Trading
Protection

44. Basket I
Consists of:
• S&P 500 exchange traded fund
• a put option to minimize risk
The option portion of Basket I is specifically designed to limit a portfolio‟s
exposure to falling markets. The option component is an investment
similar to an insurance policy on your house. The deductible for this
policy (amount you pay for protection) is specifically chosen to limit (not
eliminate) losses.
If Market is Put is

45. Basket I
100% of client money
Hedge / Downside
Equity Protection
(85-90% of client money) (10-15% of client money)
S&P 500 Exchange Traded Fund Long Put Option: Bought at or near
SPY the money – sized to give you
defined risk of 7-10% maximum downside.

46. Basket I
By investing in a broad-based index fund such as SPY, it
automatically reduces company/ sector risk through
diversification across multiple companies and even markets
(e.g.US/International).
Buying and holding the index ETF also eliminates futile
attempts in market timing and/or predicting future values of
individual stocks.
This strategy is possible because protection from significant
declines does not come from prophesy but from the Basket I
hedge.

47. Basket II
We sell out of the money
Puts and Calls against our positions in
Basket I
(Brings cash into the account)
1. Sell Put on SPY 2. Sell Call on SPY

48. Basket II
When puts and calls are sold, they generate
premium or „income‟ that is added to your account.
This independent income generating component of
the strategy generates income to the account in all
market conditions.

49. Basket II
This income also helps to offset the cost of the hedge used
in Basket I. It incorporates multiple specified adjustment and
liquidation points to minimize risk and maximize the
frequency and size of monthly returns.
These adjustment and liquidation points were extensively
back-tested and then proven through implementation over
the past 14 years.
Basket II has been quantitatively designed in type, size, &
frequency to provide market-neutral returns.

50. Basket II – Selling out of the money
Puts and Calls against our positions in Basket I
1. Sell a put
2. Sell a call
Sweet spot over the
If the market moves down market. Take profits on If the market moves up
toward put strike, we have both the put and call if toward call strike, we
a stop order to buy back market remains within have a stop order to
the put here sweet spot buy back the call here
Put in the $ Call in the $
1. Put strike S&P 500 current 2. Call strike
price market price price

51. Basket II
Adjustments
If the market moves
If the market moves down down toward put
toward put strike, we have strike, we will take
adjustment points that Sweet spot over the profits on the original
enable us to stay in the market moves with call and sell a new
trade and increase the the market call which brings in
probability of success to more premium
over 80%
Original Put New Call Original Call
S&P 500 S&P 500 closed for
strike price
new price original price profit

52. SMARToption‟s – 2 components
Basket I - 100% of a client‟s portfolio is invested in Basket I. 85-90% is
invested in SPY equity shares and 10-15% is invested in a hedge through a
long-term option on SPY.

53. Basket II is an independent income generating component
of the strategy which has been quantitatively designed in
type, size, & frequency to provide market-neutral returns.*
*Based on past performance

54. The proof is in the
performance.

55. The Key to SMARToption‟s Success
Upside
Capture has 100%
averaged 70% of Bear
the S&P 500 70%
returns in bull
markets
-5%
Downside Capture
has averaged 5% of the Bull
S&P 500 returns in bear
markets
-100%

56. SMARToption captures substantial
upside in bull markets
Market Cycles
and minimizes losses SMARToption vs S&P 500*
in bear markets!
SMARToption* S&P 500
Bull 1 49.23% 71.17%
Bear 1 24.41% -37.61%
Bull 2 53.61% 82.85%
Bear 2 -3.60% -37.00%
Bull 3 44.50% 48.97%
*Since inception, 1997, gross of fees
Important Notes: All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results and there can be
no assurance, and clients should not assume, that future performance will be comparable to past performance.

57. Cumulative Value vs. Market
Bull and Bear Market
Cumulative Values
SMARToption* S&P 500 SMARToption vs S&P 500*
Bull 1 $149,232 $171,169
Bear 1 $185,660 $106,792
Bull 2 $285,192 $195,269
Bear 2 $274,925 $123,019
Bull 3 $397,156 $183,254
*Since inception, 1997, gross of fees
Important Notes: All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results and there can be
no assurance, and clients should not assume, that future performance will be comparable to past performance.

58. The Key to SMARToption‟s Success
Prevent large losses! Down Years for the S&P 500*
From 2000-
12.97%
2002, hedging 12.22%
protected the 8.42%
downside and
-3.6%
actually provided a
profit! -9.10%
-11.89%
In 2008, when S&P
500 lost 37%, we -22.10%
were down only
3.6% before fees!
-37.00%
*Since inception, 1997, gross of fees
Important Notes: All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results and there can be
no assurance, and clients should not assume, that future performance will be comparable to past performance.

59. Reduces Risk
Increases Returns Risk vs. Return
1997- 2011
Annualized Return
Risk – Standard Deviation
Important Notes: All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results and there can be
no assurance, and clients should not assume, that future performance will be comparable to past performance.

60. Client in SMARToption
since 1997 *Net of fees
Aggregate Growth vs. Indices*
4.5
1997 – 2011
4.0
3.5 SMARToption
3.0 S&P 500
2.5
2.0
1.5
1.0
12/97 12/99 12/01 12/03 12/05 12/07 12/09
Important Notes: All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results and there can be
no assurance, and clients should not assume, that future performance will be comparable to past performance.

61. Take the Good with the bad
If you are in the market and not
hedged when the market drops
40%, it’s a lifestyle change!

62. Client in SMARToption
since 2003
Aggregate Growth vs. Indices* *Net of fees
2003 – 2011
2.6
2.4
SMARToption
2.2
S&P 500
2.0
1.8
1.6
1.4
1.2
1.0
1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11
Important Notes: All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results and there can be
no assurance, and clients should not assume, that future performance will be comparable to past performance.

63. The proof is in the performance
SMARToption vs S&P 500
Cumulative Returns 1997 – 2011
SMARToption (Gross of Fees)
S&P 500
297%
83%
Important Notes: All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results and there can be
no assurance, and clients should not assume, that future performance will be comparable to past performance.

64. The proof is in the performance
Growth of $100,000
Cumulative Returns 1997 – 2011
SMARToption (Gross of Fees)
S&P 500
$397,156
$183,254
Important Notes: All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results and there can be
no assurance, and clients should not assume, that future performance will be comparable to past performance.

65. GIPS®

66. Are a big deal!
In the past, investors had great difficulty obtaining meaningful
comparisons of accurate investment performance data.
Making apples-to-apples comparisons of investment
performance was problematic,
and the existence of country-specific
guidelines for performance presentation
further complicated matters.

67. Are a big deal!
There was a need for a practitioner-driven set of ethical
principles and a standardized, industry-wide approach to
calculating and reporting investment results.
The foundation for the GIPS standards
was first established in 1987.
To develop one globally accepted
set of standards, the GIPS
committee began work in 1995 to get
them formally endorsed

68. Are a big deal!
After an extensive period of public comment, the AIMR Board
of Governors (now known as the CFA Institute) formally
endorsed the GIPS standards in February 1999.
Since their introduction, the GIPS standards have gathered
momentum with investment management firms worldwide
adopting these voluntary, ethical standards for calculating
and presenting historical investment performance.
Organizations in 34 countries sponsor and promote the
standards.

69. Are a big deal!
• GIPS compliant firms voluntarily go beyond legal reporting
requirements to demonstrate a commitment to open,
honest, and ethical practices.
• To claim compliance, an investment firm must demonstrate
adherence to comprehensive and rigorous rules governing
input data, calculation methodology, composite
construction, disclosures, and presentation and reporting.
• GIPS compliant firms must have their data audited and
verified by a qualified third party firm.

70. Are a big deal!
Investments that adhere to GIPS® should assure
investors that the firms’ investment performance
is complete and fairly presented.

71. Fees

72. Fees
SMARToption will have a SET FEE SCHEDULE!
Fees will be deducted quarterly for a total of 2.25% annually.
The FEE SCHEDULE is not-negotiable and cannot be altered.
You will not see any other fees taken out of your account
NO transaction fees
NO ticket charges
NO trading costs
How can we do this?

73. Wrap fee structure
A wrap fee structure is where both:
● Asset management fees for advisory services
● Transaction fees for execution services
are wrapped into a single fee charged to the client.
In a Wrap Fee arrangement, a client’s costs are the
same regardless of the number of transactions in an
account.

74. Total Expense Structure
The underlying vehicle is an S&P 500 ETF,
which has a very low expense ratio of
0.0945%.
TOTAL ANNUAL FEE: 2.25% + 0.0945 = 2.3445%

75. Quarterly Fee Schedule
Investment Investment
Asset Total Fee Total Fee
Advisory Consultant
Valuation Quarterly Annually
Fee Fee
$60,000 -
$500,000 0.3125% 0.25% 0.5625% 2.25%
$500,001 -
$1,000,000 0.2875% 0.2125% 0.5% 2.00%
Over
$1,000,000 0.25% 0.1875% 0.4375% 1.75%
Minimum: $60,000

76. It‟s all about transparency
► With fee-based money management you
know what you are paying for upfront.
► Your advisor’s interest is in-line with yours.
The better your investments performs the
higher the fee they will receive.
► When compared to other fee structures for
comparable products, this fee schedule is
quite reasonable.

77. Expense Ratios
► According to the Investment Company Institute (ICI) the average
expense ratio for a mutual fund that is actively managed is 1.45%.
► This includes fees paid to the manager of the fund, administrative
costs, marketing and distribution services.
► The expense ratio is not deducted from your account, rather the
investment return you receive is already net of the fees.
► Plus on top of that you will also pay your advisor a fee. Typically
1%-2%.
► Assuming 1.5% (advisory fee) + 1.45% (average expense ratio
mutual fund) this brings the total cost of owning a mutual fund to
about 3.0%, not to mention trading and transaction fees that may
apply!

78. This Putnam Fund has an expense ratio of
1.58%
+ 1.50% Management fee + Other transaction costs $$$

79. Liquidity
► The underlying holdings in the account consist of an
ETF (SPY) and options (puts and calls), all of which
are highly-traded, marketable securities.
Therefore, the strategy is 100% liquid at all times as
we could simply sell these securities if needed at any
time.
► To optimize the strategy, we would strongly
discourage you from taking funds out of the
SMARToption Model, so that you can receive the full
benefit of the model‟s performance.

80. Liquidity
► SMARToption is positioned as the core “growth”
strategy and so short-term liquidity should be
addressed elsewhere in your financial plan.

81. Technology

82. Technology Advantage
One of the most sophisticated and highest performing
strategies in the industry, SMARToption requires advanced
technology to be able to implement across thousands of
accounts.
► We have developed a proprietary electronic system which
facilitates implementation, monitoring, and adjustment of the
strategy.
►By specifically designing our interface consistent with our
strategy, we have dramatically simplified implementation and
management activities such as trading, new account
investment, reporting, etc.

83. Operations
Trading Systems
● Broker-Specific Trading and Order Management Systems
● Proprietary/Custom Trader Software
Monitoring/Coverage
● Continuous oversight /monitoring during trading hours
● Multiple traders monitoring positions and executions (redundancy)
● Automated email/phone notifications on market price, adjustment &
liquidation points
Back Office/Reporting
● Captools (GIPS® Compliant) performance software

84. Industry Recognition

85. SMARToption‟s
Recognition and Awards
5 Star Rated for
3 Years
2008-2009-2010

86. SMARToption‟s
Recognition and Awards
Market-Neutral
#1
*August 22, 2011
Manager
For 1 and 5 Years*

87. SMARToption‟s
Recognition and Awards
3, 5, 7 and 10 Years
Top 1% of Large Cap Money Managers
for Returns* *As of 2010

88. SMARToption‟s
Recognition and Awards
3, 5, 7 and 10 Years
Top 1% of Large Cap Money Managers
for Low Risk* *As of 2010

89. SMARToption‟s
Recognition and Awards
PSN TOP Gun
3 Years
(among the top 10 performers in its peer group of
several thousand large cap money managers as
maintained by Informa Investment Solutions)

90. SMARToption‟s
Recognition and Awards
GIPS® compliant (verified through end of 2010)
demonstrated returns over 14 years.
In bull, bear and flat market conditions

91. Performance
is GIPS®
Verified

92. SMARToption as a Core
Holding
Satellite
Positions (such
as Real
SMARToption Estate, Commo
dities, Bonds, E
Core merging
Markets etc.)
Equity

93. SMARToption as a Large
Cap Holding
SMARToption

94. SMARToption as an
Alternative Holding
SMARToption

95. Performance results are presented in U.S. dollars and are gross-of-actual-fees and trading expenses
and reflect the reinvestment of dividends and capital gains. Actual fees may vary based on, among
other factors, account size and custodial relationship. No current or prospective client should assume
future performance of any specific investment strategy will be profitable or equal to past
performance levels. All investment strategies have the potential for profit or loss. Changes in
investment strategies, contributions or withdrawals may cause the performance results of your
portfolio to differ materially from the reported composite performance. Different types of
investments involve varying degrees of risk, and there can be no assurance that any specific
investment will either be suitable or profitable for a client's investment portfolio. Historical
performance results for market indices and/or categories generally do not reflect the deduction of
transaction and/or custodial charges or the deduction of an investment-management fee, the
incurrence of which would have the effect of decreasing historical performance results. Economic
factors, market conditions, and investment strategies will affect the performance of any portfolio and
there are no assurances that it will match or outperform any particular benchmark. Swan Wealth
Advisors, “the Firm”, claims compliance with the Global Investment Performance Standards (GIPS®).
To receive a complete list and description of the firm’s composites and/or a presentation that adheres
to the GIPS® standards, please contact the Firm at the address listed.
©2012 Brookstone Capital Management, LLC. All rights reserved.