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Overwriting   Jan. 2012
 

Overwriting Jan. 2012

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    Overwriting   Jan. 2012 Overwriting Jan. 2012 Document Transcript

    • ab Global Equity Research Americas UBS Investment Research Derivatives Overwriting Monthly Equity Derivatives Overwriting Conditions Are Average 23 January 2012 Conflicting conditions complicate overwriting, beware the animal spirits www.ubs.com/investmentresearch While conditions are less favorable for overwriting than prior months due to lower absolute levels of volatility and a growing appetite for risk, we can still identify stocks to overwrite. The market is off to a strong start this year, though many stocks are near short-term resistance levels and the SPX is approaching overbought Mitchell S. Revsine territory. We question the amount of upside when companies have limited ability Strategist mitchell.revsine@ubs.com to further grow earnings and macro issues such as those in Europe remain, but +1-212-713 1416 acknowledge rising investor confidence as a risk for overwriting. Brian Russo Overwrite holiday retail winners, homebuilders, avoid semi’s, railroads Associate Analyst We prefer overwriting specialty retail names that have outperformed, as we expect a brian.russo@ubs.com rotation into underperformers. We also overwrite homebuilders, which in our view +1-203-719 3692 have attractive levels of volatility, stretched valuations and appear overbought after a strong rally. We avoid semi’s as the cycle trough appears to be passing, and avoid railroads where we think pricing power could lead to outperformance. Sell March calls on ADSK, CLF, LEN, RCL. Avoid CBS, QCOM, STI We recommend 16 stocks for tactical covered call writing and caution against overwriting 8 stocks due to potential catalysts. Our recommended group has an average strike that is 108% of spot and a 2.1% premium yield. What’s New? We evaluate overwriting in 2011 vs. 20 years of history, and consider the implications for 2012 (pg 3), provide more detailed rationale for industry level overwriting (pg 9) and explain our enhanced stock selection approach (pg 17). Contents Topic This Month Page Overwriting Environment Overview Cautious Market View, But Momentum Could Persist 2 Putting 2011 Performance in Context 2011 a Good Year for Overwriting 3 Fundamental Outlook Market Risks Remain, Beware Animal Spirits 4 Volatility Perspective Volatility Less Attractive, But Still Acceptable 7 Overwriting by Industry Overwrite specialty retail, homebuilders, avoid semi’s, railroads 9 Appendix Overwriting framework, stock selection and more 15 Stock Overwriting Recommendations Overwrite Avoid 11 ADBE CTSH LVS ABX ESV ADSK DVN RCL C FCX AFL FFIV SLB CBS QCOM APA HES TOL ESRX STI CLF KLAC COH LEN This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 21. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
    • Overwriting Monthly 23 January 2012Conflicting Conditions Complicate OverwritingThis month, we focus on the following key themes that relate to overwriting: Environment acceptable for overwriting. While conditions appear less favorable for overwriting than prior months due to lower absolute levels of volatility and a growing appetite for risk, we still view the environment as acceptable. The market is off to a strong start this year, though many stocks are approaching short-term resistance levels and the SPX is approaching overbought territory. We question the amount of upside when companies have limited ability to further expand margins to grow earnings, positive U.S. economic data surprises may slow, and macro issues in Europe remain, but acknowledge investors appear more bullish recently, which adds risk to overwriting. Overwriting by industry. We would look to overwrite specialty retail names that performed well post December comps, as these approach short- term resistance levels, but would recommend avoiding those that performed poorly in December as investors rotate out of the winners into the losers. We also look to overwrite homebuilders, which have attractive levels of volatility, stretched valuations, and have approached overbought territory after a strong rally. We prefer to avoid overwriting semi’s as the cycle trough appears to be passing, and railroads where we think pricing power could lead to outperformance.Fundamentals + Technicals + Volatility = Acceptable Overwriting Environment Overwriting Environment = Last Month’s View Unfavorable Favorable Bullish Bearish Oversold Overbought Sub-Optimal Optimal Fundamental Technical Volatility Outlook Indicators Perspective Weight: 44% Weight: 22% Weight: 33% Structural risks remain, but... Strong rally over short time Implied volatility at lower period absolute levels Investors willing to accept risksSource: UBS. Factor weightings for this “Dashboard” explained in Appendix. UBS 2
    • Overwriting Monthly 23 January 2012Evaluating 2011 Overwriting PerformanceAt the start of 2012 we thought it would be useful to reflect on the 2011performance of overwriting. 2011 was the second best year for Index If 2012 plays out like 2011, we think itoverwriting in the past decade, given a positive Index total return (Chart 2). To may be a good year for overwritingput this in context, we examine performance data of the CBOE Buy-writeIndices (i.e., BXM and BXY), which have 20+ years of history, and are a well-recognized, independent source of overwriting performance data. One drawbackis that these indices overwrite an Index position with Index calls, while the focusof our monthly note is single stock overwriting. Still, generic conclusions foroverwriting can be drawn from this data and we note this approach is similar tousing VIX as a proxy for historical implied vol analysis.Table 1: Overwriting Reduces Std Deviation of Returns, Outperforms in Bear Markets Period Average Return Standard Deviation of Returns SPTR BXM BXY SPTR BXM BXY Last 5 years 2.4% 3.1% 4.8% 24.0% 19.7% 22.8% Last 10 years 5.0% 5.3% 6.8% 20.5% 15.0% 18.0% Last 20 years 9.6% 9.1% 10.4% 19.1% 13.3% 15.9% Bull Market (16 yrs) 17.0% 13.9% 16.4% 11.6% 7.6% 9.8% Bear Market (4 yrs) -20.0% -10.0% -13.2% 12.6% 14.8% 13.7%Source: UBS and CBOE. SPTR is the total return of S&P500 (incl dividends). The CBOE Buy-write indices are longthe SPX Index and at option expiration each month (3rd Friday) they overwrite 100% of the notional with a call to thenext expiry (either a 4 or 5 week maturity). BXM targets an at-the-money strike, BXY targets 2% out of-the-money.Key takeaways include that overwriting tends to: Reduce the standard deviation of portfolio returns Underperform in a bull market and outperform in a bear marketChart 1: Overwriting Outperformed 6 of Last 10 Years Chart 2: Overwriting Negatively Correlated to Market Return Annual Return SPTR BXY 15% BXY Return 2000 20% 10% 2002 2011 2009 5% 2008 1990 1992 0% 1993 1989 2006 0% 1999 1994 2001 20052004 1997 -20% -5% 2007 20101996 1991 1995 y = -2.7x + 0.13 2003 1998 -10% -40% -40% -20% 0% 20% 40% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 S&P500 Total ReturnSource: UBS and CBOE. See Table 3 for definitions of SPTR and BXY. Source: UBS and CBOE. See Table 3 for definitions of BXY. UBS 3
    • Overwriting Monthly 23 January 2012Fundamental Outlook Cautious, But MomentumCould ContinueAfter a strong rally to start the year, we can identify two schools of investorthought currently at odds in the market. There are those who believe structural Bears point to the risks, bulls respond:challenges including lack of global growth, decelerating earnings growth and “we are quite familiar with the risks andlooming government budget issues will constrain further upside in equities, and you’ve overly discounted them”those who acknowledge such risks but believe fear of these issues is fading.On the more cautious side are many of our fundamental analysts, who expect 4Qearnings and management guidance to reflect some of these risks, as well as ourU.S. Equity strategists, whose 2012 S&P500 target of 1325 is near currentlevels.The more constructive view is articulated by our Global Asset Allocation andEquity strategists, who recently advised investors to become less defensive. In arecent note, UBS Global Equity Strategist Jeffery Palma expressed his view that: Chances for recession have eased, particularly in the U.S. where the economic data has been positive EPS estimates remain too high, but the worst of the downgrade cycle is over Risk appetite has recovered, has more room to run, and can expand multiples to drive stocks higher despite tepid EPS growthIt should be noted he acknowledges structural issues and risks remain, and thatthere may be a timing issue with respect to his positive view.Chart 3: Are Investors Truly Bullish or Just Complacent? 1,400 SPX 1,300 1,200 1,100 1/19 2/19 3/19 4/19 5/19 6/19 7/19 8/19 9/19 10/19 11/19 12/19 1/19Source: UBS and BloombergWe believe that one’s interpretation of the market rally over the past monthdepends on whether a person is more cautious or positive for 2012. That is, askeptic might attribute the recent rally to complacency, with investors choosingto ignore recent negative European debt crisis headlines and any cautiouscompany guidance. More bullish investors might view the recent rally asconfirmation that “risk on” investing has returned, and that all known risks aremore than fully discounted already. UBS 4
    • Overwriting Monthly 23 January 2012While we tend to agree with the more cautious outlook, we acknowledge an We are in the cautious camp, but areincreasing number of investors are starting to become more constructive on the wary of animal spiritsmarket for 2012. We also recognize that even if the more cautious view provescorrect at some point this year, an increasing cadre of bullish investors can keepmarkets moving higher in the near term.To support our more cautious stance, we highlight three main risks to acontinued market rally: 1) is the momentum of positive U.S. economic surprisessustainable? 2) 4Q earnings have been lackluster; 3) Euro problems remainunresolved.To elaborate on the first concern, we highlight the recent work of UBS SeniorInternational Economist Andrew Cates, who recently published a report on theUBS economic surprise indices. He writes “The UBS economic surprise indicesare specifically designed to capture the frequency and manner in which theincoming economic dataflow misses consensus forecasts. A downward trend inthe growth surprise index, for example, suggests a tendency from economicactivity to disappoint consensus forecasts. …These movements in surpriseindices have coincided with market outcomes, particularly in recent years” (seehis January 3 2012 report “The UBS Surprise Indices” for details).Chart 4: Can Positive U.S. Economic Surprises Continue? 190 UBS U.S. Economic Growth Surprise Index Top of Range? 170 150 130 110 90 1/31/07 8/31/07 3/31/08 10/31/08 5/31/09 12/31/09 7/31/10 2/28/11 9/30/11Source: UBSChart 4 above shows that after a slew of recent positive surprises, the U.S.growth surprise index is at the top of its range over the past 5 years. This givesus pause and makes us wonder the extent to which the U.S. can positivelysurprise further. If the good news slows, we would expect the equity marketsmay as well. UBS 5
    • Overwriting Monthly 23 January 2012Second, on a micro level, 4Q earnings have gotten off to a lackluster start. Asour Chief U.S. Equity Strategist Jonathan Golub points out in his recent notes,early reporters (77 companies or ~23% of the S&P500’s market cap) have Table 2: Key Dates for European Crisissurpassed EPS expectations by a modest 1.5%, and less than half beat top-lineexpectations. Keep in mind 4Q EPS estimates had been revised lower by 6.2% 1/30 European Leaders Meetin the final three months of 2011, substantially more than in prior quarters. 2/20 European Leaders MeetA final point that supports our cautious market outlook is that the European 2/29 Italy redeems €46B of bonds/billssovereign debt crisis has yet to be resolved. While the U.S. markets have seemed 3/1-2 EU Leaders Summitto decouple from the crisis in Europe recently, we can only be skeptical this will S&P CreditWatch Period of 15 Sovereignscontinue when Greece is due to pay its debt on March 20th and nations such as 3/4 Ends (decision likely earlier)Portugal may also come into focus. 3/12 European Leaders MeetTechnicals Supportive for Overwriting 3/20 Greek €14.5bn bond maturesWe believe that the technical setup at present is supportive for overwriting. From atechnical standpoint, we tend to consider how close a stock is to key resistance Source: UBS, Bloomberg, Reuters. List not intendedlevels (e.g., vs. 3-month and 1-year highs) and various measures of price to be exhaustive.momentum. Ideally, we would like a stock to be close to key resistance and havelittle to no price momentum in either direction. Also, while longer-term pricemomentum (i.e., excluding the most recent month’s performance) is not toosignificant, most stocks have rallied strongly in the past month, which can beconstrued as negative for overwriting. However, we point to the RSI (relativestrength index) for the SPX as more supportive for overwriting, as current levelsare moving into overbought territory (9-day RSI = 76 and 14-day RSI = 69).Strong Januarys Have Not Made Great OverwritingOpportunities in the PastGiven that the market was up ~8% from December to January expiration, wewondered if such performance has any predictive capability on future marketperformance. To that end, we looked back at similar situations in the past, startingafter the post World War II period, to see how the market performed during theensuing two option expiration months (calculating returns from 3rd Friday to 3rdFriday of each relevant month). There have been only 7 previous occurrencessince 1945 where the January maturity was up over 5% (Table 3 below).Table 3: When January Up Sharply, Overwriting Not a Great Strategy Historically Index Returns Year Jan Maturity Feb Maturity March Maturity Full Year Prior Year 1946 7.8% 0.8% -6.3% -11.9% 30.7% 1951 10.5% 3.6% -2.2% 16.3% 21.7% 1967 5.5% 2.1% 2.7% 20.1% -13.1% 1975 6.1% 16.4% 0.9% 31.5% -29.7% 1976 9.2% 5.3% -1.5% 19.1% 31.5% 1987 6.6% 7.2% 4.4% 2.0% 14.6% 1992 8.2% -1.8% 0.0% 4.5% 26.3% 2012 7.8% 0.0% Average (ex-’12) 7.7% 4.8% -0.3% 11.7% 11.7%Source: UBS and Bloomberg. A maturity is the period between the 3rd Friday of a month through the 3rd Friday of thefollowing month (e.g. Jan ‘12 Maturity is 12/16/11 – 1/20/12). UBS 6
    • Overwriting Monthly 23 January 2012We note that in these few cases: February maturity returns were strong on average. However, in 1992 (the most recent case) February maturity return was negative, and in 1975 (the strongest February return case) the market was likely rebounding off a disastrous prior year (market fell 30% in 1974). The March maturity performance was small on average. 2012 appears to be an anomaly, in that it is the only year in which a strong January was preceded by a year with a small return. The other cases followed either a strongly positive year (perhaps momentum was continuing) or a very negative year (possibly a momentum reversal).If one had to make an overwriting determination based solely on the above data(which we are not suggesting), they might decide to wait another month beforeoverwriting. Given the strong price momentum in January, it certainly seemsreasonable to think the momentum could continue a bit longer.Volatility Less Attractive, But Still AcceptableThis month, analysis of the current state of volatility is particularly relevant foroverwriters. Key points include: There has been a sharp drop in near-term implied volatility over the past two months (detrimental for overwriting), and even more severe decline in short- term realized volatility Extreme upward-sloping shape of front end of the term structure of implied volatility (which necessitates a decision about which maturity to overwrite)Chart 5: Implied Volatility Low? Depends On Your Perspective SPX 3 Month Implied Volatility 35 30 25 20 15 10 1/19/2011 3/19/2011 5/19/2011 7/19/2011 9/19/2011 11/19/2011Source: UBS and BloombergAs can be seen in Chart 5 above, which shows SPX 3-month implied volatility,note that implied is currently at the low end of the post-August crisis regime ofhigh volatility, but also at the upper end of the pre-crisis regime. While much of Implied vol has come down, but is stillthis drop is a consequence of realized volatility falling as well, overwriters have acceptable for overwriting UBS 7
    • Overwriting Monthly 23 January 2012been active so far this year and contributed to the declining levels of impliedvolatility. Given how far implied volatility has fallen over the past 5 months, thepsychology among many option investors may be that implied volatility feelslow. We are a bit more constructive in that only 6 months ago these premiumswould have seemed attractive, so net-net current volatility levels are acceptablefor overwriting in our view (but admittedly not exciting).A related point to evaluating the fair value of volatility is one’s view on the If you’re a bull, volatility may actuallytiming, likelihood and severity of renewed macro shocks. An investor who appear expensivebelieves that more shocks are likely to occur sooner rather than later mightconclude that volatility appears cheap. Conversely, a very bullish investor mightenvision volatility to continue to drift lower as the U.S. economy recovers.Chart 6: Medium-Term Volatility Expectations Significantly Greater Than Near-Term 24% SPX Term Structure of Implied Volatility 23% 22% 21% 20% 19% 18% 17% 16% 15% Jan-12 Mar-12 May -12 Jul-12 Sep-12 Nov -12 Jan-13 Mar-13 May -13Source: UBS EDGESecond, not surprisingly, given expected news from Europe within the next fewmonths, options are currently pricing in an expectation of increasing volatility.This can be seen by observing the term structure of implied volatility (Chart 6),which is very steeply upward sloping, especially at the front end. The shape ofthe term structure raises the topical question of whether it is preferable tooverwrite to a shorter or longer term, the former having lower premiums but lesstime (i.e., period of uncertainty), while the latter having higher premiums butmore uncertainty.Given the shape of the term structure, we would advocate overwriting to alonger maturity. At present it appears macro concerns may supersede stock-specific catalysts (e.g., earnings) in terms of driving increases in impliedvolatility, and thus a volatility bet is akin to a view on the potential for the nextmacro shock. UBS 8
    • Overwriting by Industry Overwriting Monthly 23 January 2012 In this section we drill further down from our macro outlook to the industry group level (GICS level 2) and provide our overwriting preferences along with the current investment themes, volatility and technical factors that influenced our decision. We note investors should be selective when overwriting stocks within industry groups, particularly during earnings. Table 4: Overwriting by S&P 500 Industry – Part 1 of 2 Industry Group # Stocks Overwrite Comments from Analyst and Derivative Strategist Recommendation With many companies having provided guidance, expect generally limited upside for suppliers and OEMs, while our analyst is slightly more cautious on auto suppliers Automobiles & Components 4 Overwrite than OEMs. These names are approaching overbought territory, have acceptable levels of volatility and appear attractive for overwriting. Capital Goods 40 Overwrite machinery Based on high levels of implied volatility and proximity to short term resistance levels, machinery stocks appear attractive for overwriting. While brands catering to higher income segments have been resilient, potential impact from weakening Europe could limit near-term upside. Homebuilders valuations Caution on luxury brands, Consumer Durables 14 are stretched after a strong rally (limiting upside), have attractive levels of volatility and are approaching overbought territory. overwrite homebuilders Avoid fast food, overwrite Expected continued food inflation in 1H12 positive for fast food chains, negative for casual dining. Casual dining, along with lodging & leisure stocks are close to Consumer Services 13 casual dining, lodging & short-term resistance and appear attractive for overwriting. leisure Diversified Financials 28 Overwrite Based on high levels of implied volatility and proximity to short term resistance levels, these stocks appear attractive for overwriting. Near-term caution on E&Ps. Absence of weather-related demand and stronger shale gas production weighs on natural gas prices and gassy E&P CFPS estimates, while oil-weighted E&Ps have rallied sharply on the back of oil price increases partly fuelled by geopolitical tensions. Expect weak earnings for refiners as coastal Overwrite E&Ps, refiners, refiners face increased competition from capacity additions and mid continent refiners face narrowing WTI-Brent spread. These stocks, along with equipment & Energy 40 equipment & services, services, appear attractive for overwriting due to high volatility and proximity to short term resistance levels. For thermal coal names, while stocks being down ~50% thermal coal over the past 6 months is not ideal for overwriting, positive catalysts are lacking and the threat of natgas will likely keep the stocks range-bound for the next 12 months. Overwrite beverages, Upside appears limited for beverage makers KO and PEP due to limited volume upside, strengthening US dollar and valuation. Expected continued food inflation in Food & Staples Retailing 8 1H12 negative for supermarkets. We caution these stocks currently have lower than ideal levels of volatility for overwriting. supermarkets Expected continued food inflation in 1H12 negative for packaged food companies. We caution these stocks currently have lower than ideal levels of volatility for Food, Beverage & Tobacco 25 Overwrite packaged food overwriting. Source: UBS. We use a 14-day RSI indicator as a gauge of overbought or oversold.UBS 9
    • Table 5: Overwriting by S&P 500 Industry – Part 2 of 2 Overwriting Monthly 23 January 2012 Industry Group # Stocks Overwrite Comments from Analyst and Derivative Strategist Recommendation For P&C, Thailand flood losses and declining investment portfolio yields are generally known, while favorable pricing trends are also mostly expected by the market, Insurance 22 Overwrite P&C limiting upside surprise potential. These names are approaching overbought territory and have acceptable levels of volatility for overwriting. Capital outflows from emerging markets hitting commodity demand are negative for industrial commodities and miners, though gold/gold miners expected to outperform Overwrite industrial commodities, 1H12. Steel stock earnings expected to be modestly positive with upbeat outlooks provided. Metals & mining stocks generally appear attractive for overwriting based on Materials 31 chemicals, fertilizers; avoid steel, proximity to short-term resistance levels and high volatility. Pricing for fertilizers is expected to decline due to macro concerns, negatively impacting POT, AGU and MOS gold miners among others, while demand weakness impacts chemical firms (DOW, HUN, GGC). We note chemicals currently have lower than ideal volatility for overwriting. Overwrite holiday performers, High holiday spending expectations were met by only some retailers. Stocks that performed post Dec SSS may be due for a breather, while stocks that missed and sold Retailing 31 off materially should be avoided. Specialty retail names are generally attractive for overwriting based on current volatility and proximity to short-term resistance levels. avoid those that missed Avoid semi’s generally, overwrite The cyclical recovery for semi’s appears to have begun earlier than expected based on guidance from early reporters. For solar, 20%+ oversupply in the industry Semiconductors 19 combined with weaker than expected demand weighs on margins and uncertain regulation in Europe are positive for overwriting, beware industry consolidation. solar Software names are close to short term resistance levels, and the first few months of the year are typically weak as IT budgets are not yet finalized and spending slows Overwrite software, avoid IT Software & Services 32 after any year-end budget flush. Potential impact of European recession and customer hesitation around large deals also weighs. For IT Services specifically, volatility Services appears too low to be attractive for overwriting. Overwrite computers & Overwriting could be good for computers & peripherals, as these have attractive volatility levels and are close to short-term resistance levels. Slowing carrier capex Technology Hardware 22 peripherals, caution on comm weighs on comm equip and supply chains, including certain chip and EMS companies, and while these stocks are approaching overbought territory recent earnings have equipment positively surprised. Railroad stocks outperformed SPX for 8th consecutive year and trend should continue in 2012 driven primarily by continued pricing power with solid 4Q11 earnings Transportation 9 Avoid railroads expected. Source: UBS. We use a 14-day RSI indicator as a gauge of overbought or oversold.UBS 10
    • Overwriting Monthly 23 January 2012Stock Analysis and OverwritingRecommendationsTables in this section include: Table 6: Stocks to overwrite with analyst/strategist commentary Table 7: Suggested call maturities and strikes for Table 6 stocks Table 8: Stocks to avoid overwritingConsider Longer-Dated MaturitiesHow investors should think about selecting ideal strikes and maturities foroverwriting depends on a view of several factors that we discuss in theAppendix. Considering the steepness of the term structure as discussed earlier inthis report, we prefer selling longer-dated maturities to capture the extrapremium associated with higher levels of volatility. While that is our preference,we note strikes and maturities must be tailored to individual investor stockviews.Figure 1: Term Structure Steepness Makes Longer-Dated Maturities Worth Considering Current Recommendation Strike Maturity Further from February the Money Closer to the March/Further MoneySource: UBS UBS 11
    • Overwrite Candidates Overwriting Monthly 23 January 2012 Table 6: Stocks Recommended for Overwriting – No Material Catalysts Expected 2M Ticker Sector Commentary from Analyst and Derivative Strategist Earnings 8Q Historical Return 110% Date Est Earnings Reaction 1M 3M Impl Vol Not in ADBE Tech No material catalysts expected until earnings 3/19 and a user conference “Digital Marketing” on 3/20-3/23. - 8.2% 9.9% 27.8% period While earnings represents an upside risk, this stock is highly levered to macro conditions in Europe and elsewhere, and our overwrite recommendation ADSK Tech 02/28/2012 6.4% 14.4% 8.9% 36.8% is predicated on the expectation that global macro conditions will not improve meaningfully in the near term. This stock is highly levered to global macro conditions, and our overwrite recommendation is predicated on the expectation that these will not improve AFL Financials 01/31/2012 4.1% 12.6% 16.2% 27.6% meaningfully in the near term. Outside of macro risks, the main catalyst is earnings. APA Energy Expecting in-line earnings in mid-February. 02/16/2012 2.9% 6.2% 2.4% 29.8% Given the stock’s strong performance over the past month, believe overwriting makes sense if target is in the $80 area. Expecting an EPS miss on CLF Materials earnings however, commentary from mgmt and steel companies expected to be upbeat. Risks include weather issues in iron ore producing regions 02/22/2012 5.2% 11.8% 20.8% 40.8% help iron ore pricing and the post-Chinese New Year buying season could influence spot pricing and support the stock. COH Discretionary Biggest upside risks include earnings on 1/24 and RL earnings read-throughs for luxury in early Feb. 01/24/2012 3.8% 5.5% 4.9% 32.7% CTSH Tech Material near-term upside not expected. Catalysts include earnings on 2/8 and NASSCOM conference 2/14. 02/08/2012 3.1% 9.0% 0.3% 30.2% DVN Energy Expecting in-line earnings mid-February. With an analyst day in early April, company likely will hold back meaningful news post earnings until that date. 02/15/2012 2.3% 3.6% 5.1% 28.5% Earnings from peer companies RVBD and other “cloud stocks” like VMW and CTRX could be important, along with the Mobile World Congress wireless Not in FFIV Tech - 13.6% 36.2% 41.1% trade show the week of February 27th, though we do not expect these to represent materially positive catalysts. period HES Energy Expecting weak earnings and guidance results on 1/25 along with Anadalan well offshore Indonesia. 01/25/2012 2.1% 7.8% 4.4% 29.9% While earnings and investor conferences on 2/13 and 2/27 are risks, we believe the most significant risk to overwriting is the potential for takeout, as 2 KLAC Tech 01/26/2012 2.2% 5.5% 14.2% 29.8% peers were acquired in 2011. KLAC’s size limits likely buyers, however, and we are less concerned about this risk near term. Not in LEN Discretionary Upside limited given recent performance and outlook for slower recovery than would justify valuation. - 15.5% 39.9% 37.8% period Catalysts include earnings, LVS’s 70%-owned Sands China will vote on instating its first dividend on 1/31, and LVS’s Macau resort will open in March LVS Discretionary 02/06/2012 6.2% 10.2% 14.1% 37.5% and could support shares if Chinese New Year volumes look strong. RCL Discretionary Expect negative headlines regarding the cruise industry post the shipwreck of a CCL cruise ship. 02/02/2012 7.1% 10.7% 1.7% 42.4% Not in SLB Energy No material catalysts expected. - 7.4% 9.2% 27.2% period TOL Discretionary Upside limited given recent performance and outlook for slower recovery than would justify valuation. 02/29/2012 2.6% 14.5% 29.6% 35.2% Source: UBS and Bloomberg. As of 1/23 intra-day, expected earnings date, absolute value average of past 8 quarters’ stock reaction to earnings, 1-month and 3-month return, 2-month implied volatility of 110% option. Returns exclude fees and commissions.UBS 12
    • Overwriting Monthly 23 January 2012 Investors may have a minimum acceptable threshold for the amount of premium collected for selling a call. This threshold may vary for each investor, depending on factors including: their stock view, volatility environment, rationale for considering overwriting and risk tolerance. Further, some investors may have criteria for determining the call strike (e.g., at least 5% above the stock price). Given that we are recommending exchange-listed options the strikes/premiums do not always conform to a rigid set of investment criteria. Therefore, this report shows two call strikes for each overwrite recommendation. Depending on the number of strikes available, we show either the two nearest to-the-money calls, or two call strikes that seem reasonable for consideration. Table 7: Covered Call Recommendation Detail Closer Call Strike Further Call Strike Stock Strike Premium Call Away Strike Premium Call Away Delta Impl Vol Delta Impl Vol Ticker Price Maturity $ % $ % Return % $ % $ % Return % ADBE $30.64 March 32 104% 0.61 2.0% 6.4% 0.33 26.1 ADSK $35.16 March 37 105% 1.30 3.7% 8.9% 0.39 39.5 39 111% 0.72 2.0% 13.0% 0.26 38.3 AFL $48.31 March 50 103% 1.22 2.5% 6.0% 0.38 27.1 APA $97.95 March 100 102% 3.25 3.3% 5.4% 0.42 30.4 105 107% 1.66 1.7% 8.9% 0.26 29.7 CLF $72.65 March 77.5 107% 2.43 3.3% 10.0% 0.36 38.9 80 110% 1.64 2.3% 12.4% 0.27 37.8 COH $64.59 March 67.5 105% 1.95 3.0% 7.5% 0.38 32.7 70 108% 1.15 1.8% 10.2% 0.27 31.5 CTSH $70.75 March 72.5 102% 2.60 3.7% 6.1% 0.44 31.3 75 106% 1.60 2.3% 8.3% 0.33 30.3 DVN $65.19 March 67.5 104% 1.81 2.8% 6.3% 0.39 28.4 FFIV $121.71 March 130 107% 3.30 2.7% 9.5% 0.32 37.8 135 111% 2.06 1.7% 12.6% 0.23 37.0 HES $61.82 March 65 105% 1.42 2.3% 7.4% 0.34 29.2 KLAC $51.33 March 55 107% 0.90 1.8% 8.9% 0.27 30.2 LEN $22.38 March 23 103% 0.95 4.2% 7.0% 0.44 36.9 24 107% 0.58 2.6% 9.8% 0.32 35.5 LVS $47.37 March 50 106% 1.79 3.8% 9.3% 0.40 37.2 52.5 111% 0.99 2.1% 12.9% 0.27 36.0 RCL $28.50 March 30 105% 1.16 4.1% 9.3% 0.40 42.0 31 109% 0.83 2.9% 11.7% 0.32 41.2 SLB $73.86 March 77.5 105% 1.83 2.5% 7.4% 0.36 27.6 TOL $23.10 March 24 104% 0.80 3.5% 7.4% 0.40 35.8 25 108% 0.50 2.2% 10.4% 0.29 35.3 Source: UBS and Bloomberg. Data columns are ticker, maturity, stock price, strike price and strike as % of stock price, premium and premium as % of stock price. Call away return % is defined as premium + strike over the stock price. Delta is mid and implied vol is bid side. Data as of 11am 1/23/12 and excludes fees and commissions.UBS 13
    • Stocks to Avoid Overwriting Overwriting Monthly 23 January 2012 Table 8: Avoid Overwriting – Material Catalysts or Volatility Expected 2M Ticker Sector Commentary from Analyst and Derivative Strategist Earnings 8Q Historical Return 110% Date Est Earnings Reaction 1M 3M Impl Vol Main catalysts include earnings and a possible preliminary production report ahead of earnings as peers have done. UBS sees near-term upside in ABX Materials 02/16/2012 2.2% 1.1% -1.4% 29.5% gold. Not in C Financials CCAR “stress test” results by 3/15 could be a positive for sentiment. - 10.2% -2.0% 39.1% period Main catalyst is February earnings, where company may increase the dividend and provide an update on pace of buybacks. CBS will also be CBS Discretionary 02/15/2012 3.2% 6.6% 16.4% 30.7% presenting at 2 investor conferences the week of 2/27 and has the potential to announce an online video distribution deal. ESRX Health Care FTC ruling on proposed ESRX/MHS merger very likely in 1H12, represents material potential catalyst. 02/29/2012 4.8% 14.9% 35.1% 33.4% ESV Energy Expecting a strong earnings report. 03/01/2012 4.2% 6.2% 6.5% 29.1% While the UBS macro call on industrial commodities is for limited upside near term, we do favor copper, and we view the company’s ability to restart Not in FCX Materials - 14.5% 14.9% 34.4% production at two key mines and execute its growth story as a key upside risk. period Potentially positive catalysts include earnings on February 1 and an industry trade show – Mobile World Congress (MWC) in last week of February. QCOM Tech 02/01/2012 6.6% 7.2% 12.0% 24.0% At MWC, we expect to see significant product announcements, which will point to widening competitive gap that QCOM enjoys over its competitors. While housing, unemployment data and 3 investor conferences are potential positive catalysts, our main concern is the CCAR “stress test” results Not in STI Financials - 19.9% 13.4% 34.4% due by 3/15 that we think could green-light STI to raise dividends and increase buybacks. period Source: UBS and Bloomberg. As of 1/20, expected earnings date, absolute value average of past 8 quarters’ stock reaction to earnings, 1-month and 3-month return, 2-month implied volatility of 110% option.UBS 14
    • Overwriting Monthly 23 January 2012Appendix I. Overwriting Framework…………………….…………...………...……15 II. Stock Selection Methodology…..……………………………………….17 III. View Dictates Strike and Maturity Selection………………………...…18 IV. What Overwriters Should Expect to Receive ………………………......19I. Overwriting Framework: Ideal EnvironmentsIn considering how optimal the current environment is for overwriting, wehighlight two market environments that we view as most ideal for overwriting: When stocks have rallied a lot and appear to be over bought, either from a fundamental or technical perspective. In this an instance, even if volatility is at worst slightly below average, the strong fundamental/technical signals compensate for below average vol levels. When macro uncertainty causes implied volatility to increase and markets to become choppy, even without a market correction. In this instance, the macro uncertainty and unclear technical picture (which may be neutral for overwriting) are offset by well above average levels of volatility. UBS 15
    • Overwriting Monthly 23 January 2012I. Overwriting FrameworkWe incorporate 3 perspectives in our overwriting framework: our fundamentalview is most important, followed by our volatility perspective and then technicalindicators. We weight fundamental over volatility views since we would sell acall even if volatility was low, presuming we could accurately predict a stockhad limited upside. By contrast, if we knew that the realized volatility over thelife of the option would be lower than the implied volatility, this informationalone would not reveal anything about the direction of the stock. That is, it couldgrind up slowly over time and finish well above the strike price.In considering fundamentals we weigh each analyst’s stock-specific view asmost important. However, we also overlay the macro market views of ourstrategists. When evaluating volatility, we focus on the absolute level of impliedvolatility as opposed to a comparison with realized volatility for two reasons: We are most concerned with the absolute amount of premium we can collect for selling a covered call Since realized volatility is a historical measure, we view it as less significant than the absolute level of implied volatility and our forward-looking fundamental stock viewFor example, assume we have identified a stock suitable for overwriting basedon the fundamental perspective (no near-term catalyst). We then prefer theimplied volatility to be as high as possible even if it is slightly below recentrealized volatility (e.g. prefer 1-month implied of 30% when 1-month realized is32% vs. 1-month implied of 25% vs. 1-month realized of 21%).However, regardless of the fundamental/technical view, we want to avoid sellingoptions when implied volatility is far below recent realized volatility. Such asituation could serve as a “red flag” warning, for selling options too cheaply, ifthe option market may be under-estimating future stock uncertainty.With respect to technical indicators, our primary focus is at the stock level, butwe also overlay sector and Index-level indicators as well.Overwriting Framework – Relative Importance of Decision Factors Fundamental Outlook 44% Source: UBS Stock-Specific Macro Relative Stock-Specific Volatility Technical Perspective Indicators 33% Absolute 22% Index / Sector UBS 16
    • Overwriting Monthly 23 January 2012II. Stock Selection MethodologyWe employ a systematic approach to identifying stocks that we deem favorableto overwrite. The ideal stock would have insignificant price momentum in eitherdirection, be close to key resistance levels, have a high absolute level of impliedvolatility, a relatively high implied-to-realized volatility and no known materialcatalysts during the life of the option term. In reality, the “ideal” setup rarelyexists. Rather, by reducing our expectation slightly for various factors we oftenare able to identify a set of stocks that appear reasonable to overwrite. Also,some discretion is employed in our process.In order to seek to identify such stocks as described above, we focus on theuniverse of UBS-covered stocks with sufficient option liquidity, we select stocksto consider for overwriting based on a multi-step approach. We aim to identifyaround 30-40 stocks to consider, from a universe of ~300+ UBS-covered stockswith sufficient option liquidity.To help narrow the universe of stocks, the first step is to consider only technicaland volatility factors. Technical factors include price momentum and resistance,and volatility factors include both the absolute level of implied volatility as wellas the traditional implied-to-realized volatility comparison.Until now we employed strict thresholds for including stocks for consideration,such as requiring the one-month price return to be within -8% to +8% orrequiring a minimum implied volatility of 30%. However, we have decided torelax strict thresholds for all factors under consideration. Instead, stocks with aless desirable level for a factor are penalized for that factor, but are still inconsideration for overwriting, especially if the stock scores well on otherfactors. For example, a stock with a 26% implied volatility would notautomatically be excluded from consideration. Rather, it would be viewed lessfavorably, although still in consideration if other factors, such as lack of pricemomentum, were favorable. The rationale for the change in approach is to take amore holistic view of a stock, and not be overly concerned with a single lessfavorable factor.Once a set of stocks is selected for overwriting consideration, based on bothprice and volatility factors, we next solicit the view of our fundamental analyststo determine if any important catalysts exist during the life of the option term.We seek to avoid recommending stocks to overwrite if an important catalyst isimminent, especially if it is likely to be positive, while we favor overwritingstocks that have been downgraded over the past month.When the option term includes earnings for many stocks (earnings season), as anadditional pre-step to fundamental consideration we exclude stocks that havehad numerous positive earnings surprises in the past. The rationale for this stepis that surprises tend to repeat for a given company, and we thus wish to avoidstocks with a history of having positive earnings surprises, which is unfavorablefor overwriting. UBS 17
    • Overwriting Monthly 23 January 2012III. View Dictates Strike and Maturity SelectionHow investors should think about selecting ideal strikes and maturities foroverwriting depends on a view of several factors.As illustrated in Figure 2 below, high implied volatility makes it more attractive Higher implied volatility makes higher(greater premium) to sell calls with strikes further from the money than if strikes and shorter maturities moreimplied volatility was lower. Conversely with lower implied volatility, strikes attractive than lower volatilityneed to be closer to the money to earn more attractive premiums. Highervolatility also makes the premium of shorter dated maturities more attractive,while in periods of low volatility, investors may need to choose maturitiesfurther out in time to collect attractive premiums.Additionally, investors’ bias or view of which direction they believe the stock is Select higher strikes given moderatelylikely to go will influence choice of strikes. If a stock is seen as more likely to bullish stock view, lower strikes givenrise over the maturity, strikes further from the money are best and vice versa. neutral/negative stock viewLast, when investors have a clear view of stock drivers over a specific timeperiod they can tailor the most attractive strikes and maturities to their view. Forexample, if visibility is good that the stock has limited upside due to lack of Tailor strikes and maturities aroundpositive catalysts over the next several months, investors may earn more catalysts and visibilitypremium by choosing strikes closer to the money and maturities that are furtherout in time. If visibility is poor however, it would be prudent to select shortermaturities with higher strikes to minimize the risk of loss due to upside surprisein the stock.Figure 2: Strike and Maturity Selection Factors Framework View Strike Maturity High Volatility Low Stock Price Bias Good Visibility PoorSource: UBS UBS 18
    • Overwriting Monthly 23 January 2012IV. How Much Premium Should OverwritersExpect to Receive For Selling a Call?Investors may not have a feel for the amount they should receive for selling acall option. However, it is possible to look at a table that shows the premiumreceived, for the combination of a given maturity, strike and level of impliedvolatility. Studying such a table would help an investor gain perspective on theamount of premium that it is possible or reasonable to receive.To that end, we show options prices, represented as a percentage of the stockprice, for maturities of one, two, three, four, six, nine and twelve months, forvarious strikes, for implied volatility levels of 20%, 30%, 40% and 50%. Forsimplicity, we assume no dividend and 0% interest rates.In general, such table could be created, for any maturity, for any set of strikesand for any range of implied volatility levels.Table 9: Premium as % of Stock Price by Maturity, Strike and Implied Volatility (1, 2, 3-Month Maturities)1-Month Strike -----> 100% 105% 107.5% 110% IMPL Vol 20% 2.3% 0.6% 0.3% 0.1% 30% 3.4% 1.6% 1.0% 0.6% 40% 4.6% 2.6% 1.9% 1.4% 50% 5.7% 3.7% 2.9% 2.3%2-Month Strike -----> 100% 105% 110% 115% IMPL Vol 20% 3.2% 1.4% 0.5% 0.2% 30% 4.8% 2.9% 1.6% 0.8% 40% 6.5% 4.4% 2.9% 1.9% 50% 8.1% 6.0% 4.4% 3.2%3-Month Strike -----> 100% 110% 115% 120% IMPL Vol 20% 4.0% 1.0% 0.4% 0.1% 30% 6.0% 2.5% 1.5% 0.9% 40% 8.0% 4.3% 3.1% 2.1% 50% 9.9% 6.2% 4.8% 3.7%Source: UBS. Assumes no dividend and 0% interest rates. UBS 19
    • Overwriting Monthly 23 January 2012Table 10: Premium as % of Stock Price by Maturity, Strike and Implied Volatility (4, 6, 9,12-Month Maturities)4-Month Strike -----> 100% 110% 115% 120% IMPL Vol 20% 4.6% 1.4% 0.7% 0.3% 30% 6.9% 3.3% 2.2% 1.4% 40% 9.2% 5.5% 4.1% 3.1% 50% 11.5% 7.7% 6.3% 5.1%6-Month Strike -----> 100% 110% 120% 130% IMPL Vol 20% 5.6% 2.2% 0.7% 0.2% 30% 8.5% 4.8% 2.5% 1.3% 40% 11.3% 8.5% 4.8% 2.5% 50% 14.1% 8.5% 4.8% 2.5%9-Month Strike -----> 100% 110% 120% 130% IMPL Vol 20% 6.9% 3.3% 1.4% 0.6% 30% 10.3% 6.6% 4.0% 2.4% 40% 13.8% 10.0% 7.2% 5.1% 50% 17.1% 13.4% 10.5% 8.2%12-Month Strike -----> 100% 110% 120% 130% IMPL Vol 20% 8.0% 4.3% 2.1% 1.0% 30% 11.9% 8.1% 5.4% 3.6% 40% 15.9% 12.1% 9.2% 5.4% 50% 19.7% 16.1% 13.1% 10.7%Source: UBS. Assumes no dividend and 0% interest rates. UBS 20
    • Overwriting Monthly 23 January 2012 Statement of RiskInvesting in options involves numerous risks. Such risks include, but are notlimited to, the following: a long option position is negatively impacted by adecrease in implied volatility, lack of movement in the underlying stock orIndex and the passage of time. A short option investor is negatively impacted byan increase in implied volatility, a large directional movement in the underlyingstock or Index and the lack of the passage of time. For options purchased themaximum loss is the premium. For an uncovered call sold the maximum loss isunlimited, while for an uncovered put sold the maximum loss is put strike minuspremium. For uncovered options margin must be posted. Because uncoveredoption selling involves significant risks this strategy should be under taken onlyby sophisticated investors.Complex option strategies involve either the simultaneous purchase or sale ofmultiple options or the simultaneous purchase and sale of numerous options,such as spreads or collars. Their pay off profile and risks can be complicated,and should only be undertaken by sophisticated investors. Complex optionstrategies can often be broken down into individual component options, andtheir risks can be identified and analyzed. Complex strategies may have limitedor unlimited loss potential, and in cases where uncovered options are soldmargin is required to be posted.Also see options risk disclosure within the Required Disclosures section of thisdocument. Analyst CertificationEach research analyst primarily responsible for the content of this researchreport, in whole or in part, certifies that with respect to each security or issuerthat the analyst covered in this report: (1) all of the views expressed accuratelyreflect his or her personal views about those securities or issuers and wereprepared in an independent manner, including with respect to UBS, and (2) nopart of his or her compensation was, is, or will be, directly or indirectly, relatedto the specific recommendations or views expressed by that research analyst inthe research report. UBS 21
    • Overwriting Monthly 23 January 2012Required DisclosuresThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches andaffiliates are referred to herein as UBS.For information on the ways in which UBS manages conflicts and maintains independence of its research product;historical performance information; and certain additional disclosures concerning UBS research recommendations,please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance isnot a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co.Limited is licensed to conduct securities investment consultancy businesses by the China Securities RegulatoryCommission.UBS Investment Research: Global Equity Rating Allocations 1 2 UBS 12-Month Rating Rating Category Coverage IB Services Buy Buy 57% 36% Neutral Hold/Neutral 37% 35% Sell Sell 7% 17% 3 4 UBS Short-Term Rating Rating Category Coverage IB Services Buy Buy less than 1% 0% Sell Sell less than 1% 12%1:Percentage of companies under coverage globally within the 12-month rating category.2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided withinthe past 12 months.3:Percentage of companies under coverage globally within the Short-Term rating category.4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were providedwithin the past 12 months.Source: UBS. Rating allocations are as of 31 December 2011.UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition Buy: Stock price expected to rise within three months from the time the rating was assigned Buy because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned Sell because of a specific catalyst or event. UBS 22
    • Overwriting Monthly 23 January 2012KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not aforecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stocks price target and/or rating aresubject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect anychange in the fundamental view or investment case.Equity Price Targets have an investment horizon of 12 months.EXCEPTIONS AND SPECIAL CASESUK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management,performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell:Negative on factors such as structure, management, performance record, discount.Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment ReviewCommittee (IRC). Factors considered by the IRC include the stocks volatility and the credit spread of the respective companysdebt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating.When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are notregistered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained inthe NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by aresearch analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any,follows.UBS Securities LLC: Mitchell S. Revsine; Brian Russo. UBS 23
    • Overwriting Monthly 23 January 2012Company Disclosures Company Name Reuters 12-mo rating Short-term rating Price Price date 6c, 7, 16 Adobe Systems Inc. ADBE.O Buy N/A US$30.50 20 Jan 2012 6b, 7, 16 AFLAC Inc. AFL.N Sell N/A US$47.91 20 Jan 2012 16 Agrium Inc. AGU.N Buy N/A US$80.01 20 Jan 2012 4a, 6a, 6c, 7, 16 Apache Corporation APA.N Buy N/A US$96.80 20 Jan 2012 8a, 8b, 16 Autodesk Inc. ADSK.O Buy N/A US$35.04 20 Jan 2012 2, 4b, 5b, 6a, Barrick Gold Corporation 16, 18b, 22 ABX.N Buy N/A US$45.83 20 Jan 2012 4a, 6a, 13, 16, 22 CBS Corp. CBS.N Buy N/A US$28.04 20 Jan 2012 2, 4a, 5a, 6a, 6b, 6c, 7, 16 Citigroup Inc C.N Buy N/A US$29.64 20 Jan 2012 6c, 7, Cliffs Natural Resources, Inc. 16 CLF.N Buy N/A US$71.50 20 Jan 2012 16 Coach Inc. COH.N Neutral N/A US$64.84 20 Jan 2012 2, 4a, 6a, 6b, 6c, 7, 16 Coca-Cola Co. KO.N Neutral N/A US$68.09 20 Jan 2012 Cognizant Technology Solutions 4a, 6a, 13, 16 CTSH.O Buy N/A US$70.17 20 Jan 2012 Corp. 2, 4a, 6a, Devon Energy Corporation 6c, 7, 16, 22 DVN.N Buy N/A US$63.29 20 Jan 2012 6a, 6b, 6c, 7, 13, 16, 22 Dow Chemical DOW.N Buy N/A US$33.39 20 Jan 2012 16 ENSCO PLC ESV.N Buy N/A US$51.28 20 Jan 2012 6a, 16 Express Scripts Inc. ESRX.O Buy N/A US$51.90 20 Jan 2012 16, 20 F5 Networks, Inc. FFIV.O Neutral (CBE) N/A US$120.27 20 Jan 2012 4a, 6a, 13, 16 Freeport-McMoRan FCX.N Buy N/A US$43.10 20 Jan 2012 16 Georgia Gulf Corp. GGC.N Buy N/A US$34.50 20 Jan 2012 4a, 6a, 16 Hess Corp. HES.N Buy N/A US$61.27 20 Jan 2012 16 Huntsman Corp. HUN.N Buy N/A US$11.47 20 Jan 2012 16 KLA-Tencor Corp. KLAC.O Buy N/A US$51.50 20 Jan 2012 4a, 5a, 6a, 16, 20 Las Vegas Sands Corp. LVS.N Buy (CBE) N/A US$46.46 20 Jan 2012 2, 4a, 5a, 6a, 6b, 7, 16, 20 Lennar LEN.N Neutral (CBE) N/A US$22.06 20 Jan 2012 2, 4a, 16 Mosaic Co MOS.N Buy N/A US$55.01 20 Jan 2012 3, 4a, 5a, 6a, 6b, 6c, 7, 16, 18c PepsiCo Inc. PEP.N Neutral N/A US$66.28 20 Jan 2012 Potash Corporation of 4b, 6a, 13, 16 POT.N Buy N/A US$44.75 20 Jan 2012 Saskatchewan Inc. 6b, 7, 16, 18a Qualcomm Inc. QCOM.O Buy N/A US$57.73 20 Jan 2012 16 Royal Caribbean RCL.N Neutral N/A US$28.03 20 Jan 2012 16, 18d Schlumberger Ltd. SLB.N Buy N/A US$73.80 20 Jan 2012 2, 4a, 5a, 6a, 6b, 6c, SunTrust Banks, Inc. 7, 16 STI.N Buy N/A US$21.29 20 Jan 2012 16, 20, 22 Toll Brothers TOL.N Neutral (CBE) N/A US$22.89 20 Jan 2012Source: UBS. All prices as of local market close.Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricingdate2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months.3. UBS AG Hong Kong Branch is acting as financial advisor to PepsiCo (China) on the formation of a strategic alliance with Tingyi Cayman Islands Holdings Corp.4a. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.4b. Within the past 12 months, UBS Securities Canada Inc or an affiliate has received compensation for investment banking services from this company/entity.5a. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months.5b. UBS Securities Canada Inc or an affiliate expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. UBS 24
    • Overwriting Monthly 23 January 20126a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided.7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity.8a. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company.8b. The equity analyst covering this company, a member of his or her team, or one of their household members has a long options position in this company.13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).16. UBS Securities LLC makes a market in the securities and/or ADRs of this company.18a. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Qualcomm Inc.18b. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Barrick Gold Corp.18c. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in PepsiCo Inc.18d. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Schlumberger.20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system).22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).Options, structured derivative products and futures are not suitable for all investors, and trading in these instruments isconsidered risky and may be appropriate only for sophisticated investors. Past performance is not necessarily indicative offuture results. Various theoretical explanations of the risks associated with these instruments have been published. Prior tobuying or selling an option, and for the complete risks relating to options, you must receive a copy of "The Characteristics andRisks of Standardized Options." You may read the document at http://www.optionsclearing.com/about/publications/character-risks.jsp or ask your salesperson for a copy.Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.For a complete set of disclosure statements associated with the companies discussed in this report, including information onvaluation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention:Publishing Administration. UBS 25
    • Overwriting Monthly 23 January 2012Global DisclaimerThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG isreferred to as UBS SA.This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy orrecommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for informationpurposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. 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