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Using Options for Risk Management and to Enhance Income and Risk-adjusted Returns

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  • 1. Using Options for Risk Management and to Enhance Income and Risk-adjusted Returns For the Hong Kong Society of Financial Analysts Saturday, 30th August 2008 9:30 a.m. – 12:00 noon HKUST Business School Central 15th Floor, The Hong Kong Club Building 3A Chater Road, Central, Hong Kong Presentations by: and Bud Haslett, CFA, FRM Matt Moran, JD Chief Executive Officer Vice President Miller Tabak Capital Management Chicago Board Options Exchange® New York Chicago
  • 2. Topics to Be Covered 1. Historical Price Changes 2. Worldwide Derivatives Markets – OTC and Exchange-Listed 3. Detailed Analysis of Options, Including Inputs to Pricing, and Evaluation of Risk Determinants (the "Greeks") 4. Strategies to Lower Portfolio Volatility – Protective Puts, BuyWrites, Collars, and others 5. Benchmark Indexes for Strategies to Lower Portfolio Volatility – BXM, BXY, PUT, etc. 6. Benchmark Indexes for Volatility-based Strategies – VIX, VPD, OVX, etc. 7. Volatility-based Strategies 8. Conclusion Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 2
  • 3. 1. Historical Price Changes Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 3
  • 4. One-Year Change in Select Equity Prices (July 31, 2007 - July 31, 2008) How can diversification and risk management help investors? Daily Closing Prices, re-scaled to 100% on 130% 120% 110% 100% 90% 0% Southwest Air Down 11% S&P 500 TR July 31, 2007 80% 70% 60% 50% Down 60% Citigroup 40% Down 63% American Air 30% Down 66% GM 20% 10% Down 81% United Air 0% 31-Jul-07 31-Oct-07 31-Jan-08 30-Apr-08 31-Jul-08 % Change in stock prices (without reinvested dividends) and in Russell 3000 total return index. Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 4
  • 5. Financial Times July 25, 2008 Southwest Airlines' Fuel Hedging Boosts Profits “… Southwest Airlines reported a higher quarterly profit, as hedges locked in most of the low-cost US carrier's jet-fuel expenses well below market prices. Derivatives contracts pinned 80 per cent of Southwest's fuel bill at the average equivalent price of $61 a barrel for crude oil, a commodity whose surge has overwhelmed US airlines and forced them to make unprecedented service cuts, slash jobs and retire older aircraft. … Alaska Air Group, another US carrier that has mimicked Southwest's fuel strategy, also posted a quarterly profit that exceeded analysts' expectations. Favourable settlements from Southwest's fuel hedges added $511m to the airline's quarterly results. Revenue rose 11 per cent to $2.87bn. Southwest's derivatives through 2012 are valued at about $4.3bn, and cover 80 per cent of its fuel bill for the second half of 2008 and 70 per cent of next year's expected costs. …” Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 5
  • 6. Exchange-Traded Funds (ETFs) July 2008 CBOE Prices Since August 2005 Options Avg. 200 Symbol ETF Daily Volume. FXE CurrencyShares Euro FXE Trust 795 150 SPY S&P Depositary Receipts SPY (SPDRs) 443,221 M o n th -en d P rices USO USO United States Oil Fund 20,638 100 TLT iShares Lehman 20+Year TLT Treasury Bond Fd 2,916 50 GLD GLD SPDR Gold Trust 30,925 iShares MSCI Emerging EEM EEM Markets Index 43,155 0 Au g -05 Au g -06 Au g -07 (Aug. 2005 - July 2008) Source: Bloomberg Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 6
  • 7. Select Indexes Since Dec. 1998 350% 300% Re-scaled month-end prices 250% MSCI Hong Kong 200% MSCI World US$ 150% 100% S&P 500 50% 0% Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 (Dec. 1998 - June 2008) All indexes are total return indexes, re-scaled to 100% as of Dec. 1998. Country indexes are in local currencies. Sources: CBOE and Bloomberg Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 7
  • 8. One-Year Change in Select Indexes (July 31, 2007 - July 31, 2008) How can diversification and risk management help investors? Daily Closing Prices, re-scaled to 100% on 130% 120% 110% July 23, 2007 100% Down 5% MSCI Hong Kong 90% Down 11% MSCI World 80% 70% 31-Jul-07 31-Oct-07 31-Jan-08 30-Apr-08 31-Jul-08 All indexes are net total return indexes in local currencies, except that the MSCI World Index is in US $. Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 8
  • 9. One-Year Change in Select Indexes How can diversification and risk management help investors? Daily Closing Prices, re-scaled to 100% 110% Up 4% PUT on July 23, 2007 100% Down 1% BXM 90% Down 11% S&P 500 (TR) 80% 31-Jul-07 30-Sep-07 30-Nov-07 31-Jan-08 31-Mar-08 31-May-08 31-Jul-08 (July 31, 2007 - July 31, 2008) Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 9
  • 10. One-Year Change in Select Index Prices CBOE Lehman 5-Month Constant Maturity VIX Futures Index (VWX) CBOE VIX Premium Strategy Index (VPD) CBOE Capped VIX Premium Strategy Index (VPN) Daily Closing Prices, re-scaled to 100% 140% 130% 120% on July 23, 2007 Up 14% VWX 110% Up 6% VPD 100% Up 3% VPN 90% Down 11% S&P 500 (TR) 80% 70% 31-Jul-07 30-Sep-07 30-Nov-07 31-Jan-08 31-Mar-08 31-May-08 31-Jul-08 (July 31, 2007 - July 31, 2008) Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 10
  • 11. 2. Worldwide Derivatives Markets – OTC and Exchange- Listed Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 11
  • 12. Worldwide Derivatives $677 Trillion in Worldwide Derivatives $700,000 $600,000 O-T-C Derivatives $500,000 $400,000 Exchange-listed $300,000 Options $200,000 Exchange-listed $100,000 Futures $0 Dec.2000 Dec.2001 Dec.2002 Dec.2003 Dec.2004 Dec.2005 Dec.2006 Dec.2007 Notional Principal in $US Billions - Amounts Outstanding Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 12
  • 13. O-T-C Derivatives $596 Trillion Notional in Dec. 2007 $600,000 Unallocated Credit default swaps $400,000 Commodity contracts Equity-linked contracts $200,000 Interest rate contracts $0 Foreign exchange Dec.2000 Dec.2001 Dec.2002 Dec.2003 Dec.2004 Dec.2005 Dec.2006 Dec.2007 contracts Notional principal in US $ Billions – amounts outstanding. Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 13
  • 14. O-T-C Equity Forwards & Swaps O-T-C Equity Forwards & Swaps $2.2 Trillion Notional $3,000 Asian $2,000 European US $1,000 Latin American Other $0 D e c .2 0 0 0 D e c .2 0 0 1 D e c .2 0 0 2 D e c .2 0 0 3 D e c .2 0 0 4 D e c .2 0 0 5 D e c .2 0 0 6 D e c .2 0 0 7 Notional principal in US $ Billions – amounts outstanding. Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 14
  • 15. O-T-C Equity Options O-T-C Equity Options $7,000 $6.3 Trillion Notional $6,000 $5,000 Asian $4,000 European $3,000 US $2,000 Latin American $1,000 Other $0 Dec.2000 Dec.2001 Dec.2002 Dec.2003 Dec.2004 Dec.2005 Dec.2006 Dec.2007 Notional principal in US $ Billions – amounts outstanding. Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 15
  • 16. Exchange-listed Equity Index Futures Exchange-listed Equity Index Futures $1.1 Trillion Notional $1,200 Asia and Pacific Europe $600 North America Other Markets $0 Dec.2000 Dec.2001 Dec.2002 Dec.2003 Dec.2004 Dec.2005 Dec.2006 Dec.2007 Notional principal in US $ Billions – amounts outstanding. Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 16
  • 17. Exchange-listed Equity Index Options Exchange-listed Equity Index Options $8.1 Trillion Notional $9,000 Asia and Pacific $6,000 Europe $3,000 North America $0 Other Markets D ec .2000 D ec .2001 D ec .2002 D ec .2003 D ec .2004 D ec .2005 D ec .2006 D ec .2007 Notional principal in US $ Billions – amounts outstanding. Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 17
  • 18. Leading Futures and Options Exchanges January – May 2008 CME Group 12,412,577 Eurex 9,119,227 Korea Exchange 9,096,360 LIFFE 4,531,367 CBOE 4,369,784 ISE 4,075,541 PHLX 2,061,909 Natl SE of India 1,756,478 NYMEX 1,748,633 Avg. Daily Volume - Preliminary Estimates Based on 104 Trading Days. Sources: CBOE and FIA. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 18
  • 19. Select Options & Futures Kospi 200 Options (Korea Exchange) 8,787,780 Eurodollar Futures (CME) 2,981,842 E-mini S&P 500 Index (CME) 2,291,626 DJ Euro Stoxx 50 Index (Eurex) 1,646,446 5 Year Treasury Note (CME) 797,215 S&P 500 Index Options (CBOE) 643,173 January - May 2008 - Avg. Daily Volume - Preliminary Estimates. Sources: CBOE and FIA. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 19
  • 20. Growth in Volume in Options and Futures on U.S. Exchanges 28.3 million avg. daily volume in Jan.-May 2008 30,000,000 U.S. Options on Securities (SEC) U.S. Options on Futures (CFTC) 20,000,000 U.S. Futures (CFTC) 10,000,000 0 2000 2001 2002 2003 2004 2005 2006 2007 Jan-May 2008 Sources: FIA and CBOE Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 20
  • 21. Growth in CBOE Options Volume 6,000,000 Avg. Daily Volume at CBOE 4,462,075 5,000,000 3,762,836 4,000,000 2,688,189 3,000,000 1,858,132 1,432,884 2,000,000 1,126,772 1,061,970 1,000,000 0 2002 2003 2004 2005 2006 2007 JanJun08 SEC-regulated listed options are cleared and guaranteed by the AAA-rated Options Clearing Corporation. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 21
  • 22. Leading CBOE Index and ETF Options S&P 500 (SPX) 627,236 SPDRs (SPY) 326,248 iShares Russell 2000 (IWM) 309,215 PowerShares Nasdaq-100 (QQQQ) 268,858 CBOE Volatility Index (VIX) 99,561 Russell 2000 (RUT) 58,954 S&P 100 (OEX) 52,240 Dow Diamonds (DIA) 40,896 Dow (DJX) 26,066 Nasdaq-100 (NDX) 25,595 Average Daily Volume in January-June, 2008. Source: CBOE. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 22
  • 23. Select O-T-C Derivatives – Credit Default Swaps and Equity-linked Derivatives $58 Trillion in Credit Default Swaps $80,000 $70,000 $60,000 $50,000 Credit Default Swaps $40,000 (O-T-C) $30,000 Equity-linked O-T-C $20,000 Derivatives $10,000 $0 Dec.2000 Dec.2001 Dec.2002 Dec.2003 Dec.2004 Dec.2005 Dec.2006 Dec.2007 Notional Principal in $US Billions - Amounts Outstanding Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 23
  • 24. Credit Event Binary Options (CEBOs) Credit Event Binary Options (CEBOs) are the CBOE’s translation of credit default swaps (CDS) to a regulated and centralized marketplace CEBOs pay a fixed amount if a credit event is confirmed in a reference entity. Payment is made at the time of the credit event CEBOs expire worthless if no credit event is confirmed before expiration Contract’s value can fluctuate significantly as perceptions of credit quality change ‘Credit Event’: Bankruptcy Failure to pay Contract specifications inspired by language from the 2003 ISDA credit derivatives definitions Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 24
  • 25. 3. Detailed Analysis of Options, Including Inputs to Pricing, and Evaluation of Risk Determinants (the "Greeks") Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 25
  • 26. Exchange Listed Equity Options Calls – Right to buy stock at certain price for certain period Puts – Right to sell stock at certain price for certain period Usually represents 100 shares Limited life – usually expires after third Friday Option Info – 200 DD Jan 50 calls for 1.55 Number of contracts Underlying Security Expiration Date Strike price Call / Put Premium One or more can be combined with a stock Two or more can be combined in a spread Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 26
  • 27. Option Terms to Know Premium – price paid for the option ($1.55 times 20,000 shares = $31,000) Intrinsic Value – Parity value of option Time Premium – Premium minus parity In-the-money (ITM)– option with parity value Out-of-the-money (OTM)– option with only time premium Historical Volatility – past movements Implied Volatility – anticipated movements in the future Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 27
  • 28. Inputs to Option Pricing Increase in: Calls Puts Stock Price +(direct) -(inverse) Interest Rates +(direct) -(inverse) Strike Price -(inverse) +(direct) Dividends -(inverse) +(direct) Time to Expiration* +(direct) +(direct) Volatility +(direct) +(direct) * For all scenarios except deep in-the-money European style puts Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 28
  • 29. Inputs to Option Pricing Decrease in: Calls Puts Stock Price -(direct) +(inverse) Interest Rates -(direct) +(inverse) Strike Price +(inverse) -(direct) Dividends +(inverse) -(direct) Time to Expiration* -(direct) -(direct) Volatility -(direct) -(direct) * For all scenarios except deep in-the-money European style puts Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 29
  • 30. Foundation for Option Analysis Review of the “Greeks” Delta – change in value based on stock Gamma – change in delta based on stock Theta – change in value based on time Vega – change in value based on volatility Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 30
  • 31. Foundation for Option Analysis Delta – price movement in the option based on a small movement in the stock Commonly called the Hedge Ratio Similar to a bond’s Duration Calls positive delta - Puts negative delta Delta ranges from 0 to 100 (.00 to 1.00) At-the-money has around a 50 delta Also dependent upon time, volatility, rates THINK OF DELTA AS PERCENTAGE CHANCE THE OPTION WILL FINISH IN-THE-MONEY Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 31
  • 32. How Delta Changes – 118 Days Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 32
  • 33. How Delta Changes – 15 Days Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 33
  • 34. Foundation for Option Analysis Gamma – change in option’s delta based upon movement in the stock The Delta of the Delta Similar to a bond’s convexity Highest before expiration for at-the-money Lower away from the strike price Lower more time until expiration Gamma tied to time decay and volatility Long an option (Put or Call) = Long Gamma Short an option (Put or Call) = Short Gamma Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 34
  • 35. Foundation for Option Analysis Theta – time decay in the option Options are wasting assets Gradually lose their time premium Long options = negative decay Short options = positive decay Vega – change in option’s price based on change in volatility Long options = Long Vega Short Option = Short Vega Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 35
  • 36. Theta – 118 to 15 Days Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 36
  • 37. Vega – 21 to 41 Volatility Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 37
  • 38. What is the Key to Options? Understanding… All of these factors happen at the same time Delta Theta Gamma ixzt Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 38
  • 39. Options Provide an Effective Way to: Take risk-modified and leveraged directional exposures Provide downside protection Enhance Returns Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 39
  • 40. Directional Exposures - Price May be as simple as buying calls or puts Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 40
  • 41. Directional Exposures - Price Or more sophisticated like using spreads Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 41
  • 42. Directional Exposures Or contain strategies with calls and puts Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 42
  • 43. 4. Strategies to Lower Portfolio Volatility – Protective Puts, BuyWrites, Collars, and Collateralized Short Puts Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 43
  • 44. Downside Protection – Many Types 1. Protective Put 2. Collar 3. Bear Put Spread* 4. Bear Call Spread* 5. Combination Bear Spread* 6. Put Spread Collar* 7. VIX Call Options* * Limited Downside Protection Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 44
  • 45. Downside Protection The most popular methods Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 45
  • 46. Have We Seen These Before? Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 46
  • 47. Downside Protection Bear Put Spread – Pay for (Debit) Bear Call Spread – Receive (Credit) Combined into a low cost bearish position Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 47
  • 48. Downside Protection - Hybrids Put Spread Collar Add sale of OTM put to collar Use proceeds of sale to “buy-up” strike price of long put or short call VIX Call Purchase Negative correlation with equity prices provides hedging value Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 48
  • 49. Enhancing Returns Covered Call the most popular Appears easy on the surface Effective adjustment strategy is critical Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 49
  • 50. 5. Benchmark Indexes for Strategies to Lower Portfolio Volatility – BXM, BXY, PUT, etc. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 50
  • 51. Key Performance Benchmark Indexes Index Ticker Introduced Data beginning Website CBOE S&P 2002 500 BuyWrite BXMSM June 30, 1986 www.cboe.com/BXM 2006 CBOE S&P 500 2% OTM BXYSM June 1, 1988 www.cboe.com/BXY BuyWrite Russell 2006 CBOE 2000 BuyWrite BXRSM Dec. 29, 2000 www.cboe.com/BXR CBOE DJIA 2005 BuyWrite BXDSM Oct. 16, 1997 www.cboe.com/BXD CBOE 2005 NASDAQ-100 BXNSM Dec. 30, 1994 www.cboe.com/BXN BuyWrite 2007 CBOE S&P 500 PutWrite PUT June 1, 1988 www.cboe.com/PUT Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 51
  • 52. CBOE S&P 500 BuyWrite Index (BXM) Benchmark for strategy -- buy portfolio of S&P 500 stocks write (sell) cash-settled S&P 500 Index options every 3rd Friday for income Announced in 2002 Data history back to June 30, 1986 “Innovative Index of the Year” in 2004 More than $30 billion in buywrite funds www.cboe.com/BXM Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 52
  • 53. CBOE S&P 500 PutWrite Index (PUT) Benchmark index, announced in June 2007, with price history back to June 1988. CBOE is publishing daily closing price data. Bloomberg ticker is PUT [Index] PUT strategy is designed to sell a sequence of one- month, at-the-money, S&P 500 Index puts and invest cash at one- and three-month Treasury Bill rates. PUT won Innovative Index of the Year Award at Super Bowl of Indexing www.cboe.com/PUT Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 53
  • 54. Indexes Since June 1986 $11 Month-end prices for total return indexes, re- $10 $8.71 BXM $9 $8.43 S&P 500 scaled to $1 on June 30, 1986 $8 $7 $6 $5.98 - MSCI $5 World (in $) $4 $3 $2 $1 $- 30-Jun-86 30-Jun-93 06/30/2000 29-Jun-07 (June 30, 1986 - July 31, 2008) Sources: CBOE and Bloomberg Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 54
  • 55. BXY, BXM, PUT and “Traditional” Indexes Total Return Indexes (June 1988* – July 31, 2008) $1,200 Month-end prices (scaled so that all = $100 PUT PutWrite $979 $1,000 on inception date of June 1, 1988) BXY OTM BW $919 $800 BXM $803 S&P 500 $743 $600 30-yr TBonds $484 $400 $200 3-m o.T-Bills $244 $0 Jun-88 Jun-93 Jun-98 Jun-03 Jun-08 * June 1988 is the first month for daily prices for the SPTR, BXY, and PUT indexes. Sources: CBOE & Bloomberg. The BuyWrite Indexes are designed to represent hypothetical buy-write strategies. Like many passive indexes, the BuyWrite Indexes do not take into account significant factors such as transaction costs and taxes and, because of factors such as these, many or most investors should be expected to underperform passive indexes. T-Bills and T-Bonds are represented by Citigroup indexes. See Risk Disclosure at www.cboe.com/BXM for more information. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 55
  • 56. Returns and Volatility PUT – CBOE S&P 500 PutWrite Index (1 June 1988 – 30 June 2008) BXM – CBOE S&P 500 BuyWrite Index BXY – CBOE S&P 500 2% OTM BuyWrite Index 15% PUT BXY Annualized Returns S&P 500 10% BXM Russell 2000 MSCI World (in US$) T-bond 30-yr. 5% T-note 5-yr. T-bill 3-mo. 0% 0% 5% 10% 15% 20% Standard Deviation of Monthly Returns Sources: CBOE and Bloomberg. The figures above represent total return indexes; Citigroup indexes are used for the fixed income numbers. Time period starts in June 1988 because that is the 1st month for the S&P 500 (TR) & PUT index daily prices. Please see risk disclosures. Past performance is not a guarantee of future returns. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 56
  • 57. Returns & Standard Deviation For periods ending July 31, 2008 CBOE CBOE CBOE MSCI Citigroup S&P 500 S&P 500 S&P 500 World 30-yr BuyWrite 2% OTM PutWrite S&P 500 Russell Index (TR) Treasury Index BuyWrite Index (TR) 2000 (TR) Net US$ Index BXM BXY PUT SPTR One-Year Annualized Return -1.2% -4.2% 3.5% -11.1% -6.2% -10.9% 9.1% Three-Year Annualized Return 4.5% 4.6% 7.4% 2.9% 3.1% 6.8% 3.1% Five-Year Annualized Return 6.9% 7.8% 9.4% 7.0% 9.9% 11.0% 6.6% Ten-Year Annualized Return 5.9% 5.5% 7.7% 2.9% 6.9% 4.0% 5.7% Annualized Return Since 1-Jun-88 10.9% 11.6% 12.0% 10.5% 9.9% 7.4% 8.1% Annualized Return Since 30-Jun-86 10.3% n/a n/a 10.1% 8.9% 8.4% 7.0% One-Year Standard Deviation 10.3% 11.7% 9.5% 13.7% 16.3% 14.8% 8.8% Three-Year Standard Deviation 6.9% 8.3% 6.5% 10.1% 13.7% 10.8% 9.4% Five-Year Standard Deviation 6.3% 7.9% 5.8% 9.5% 14.3% 10.1% 9.6% Ten-Year Standard Deviation 11.0% 12.6% 10.3% 15.0% 19.9% 14.5% 10.7% Standard Deviation Since 1-Jun-88 9.2% 11.0% 8.3% 13.7% 17.6% 13.9% 10.1% Standard Deviation Since 30-Jun-86 10.2% n/a n/a 14.9% 18.8% 14.4% 10.3% Sharpe Ratio* Since 1-Jun-88 0.69 0.65 0.90 0.44 0.31 0.21 0.36 Sources: CBOE and Bloomberg. *Please see BXM paper by Ibbotson at www.cboe.com/BXM for a discussion about caveats and use of Sharpe Ratio. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 57
  • 58. Source of Returns- Sell “Rich” Options From: Paper by Goldman Sachs. "Finding Alpha via Covered Index Writing," Financial Analysts Journal. (September/October 2006). Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 58
  • 59. Gross Monthly Income from Options Premiums Avg. premium received was 1.6% since June 1988. BXM Index - Monthly Premiums Received as a % of the Underlying Average was about 1.67% per month 5% 4% 3% 2% 1% 0% (June 1986 - June 2008). Source: CBOE. Caution: Please note that the above amounts do not reflect the net amount received, as the buywrite strategy’s stock position does have truncated upside potential. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 59
  • 60. Recent Select Monthly Statistics Month-end As a % of Price Underlying Monthly Returns BXM Monthly CBOE CBOE S&P S&P 500 CBOE Premium S&P 500 500 PutWrite Total Volatility Index Received BuyWrite Index Return VIX BXM PUT SPTR Apr-07 14.22 1.1% 0.7% 1.1% 4.4% May-07 13.05 1.3% 2.3% 1.9% 3.5% Jun-07 16.23 1.5% -0.1% -0.2% -1.7% Jul-07 23.52 1.5% -2.1% -1.3% -3.1% Aug-07 23.38 3.7% 1.1% 2.0% 1.5% Sep-07 18.00 1.9% 1.4% 1.7% 3.7% Oct-07 18.53 2.1% 2.4% 2.8% 1.6% Nov-07 22.87 3.3% -1.9% -1.1% -4.2% Dec-07 22.50 2.0% 1.8% 1.2% -0.7% Jan-08 26.20 2.4% -5.9% -5.4% -6.0% Feb-08 26.54 2.8% 0.9% 1.7% -3.2% Mar-08 25.61 2.7% 1.7% 1.2% -0.4% Apr-08 20.79 2.0% 2.4% 2.3% 4.9% Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 60
  • 61. New CBOE Developments in 2008 – - Extended BXM price history back to June 30, 1986 - Plan to introduce a 95-110 collar index with ticker “CLL” Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 61
  • 62. Studies on BuyWrites Fund Evaluation Group. Study of BXD and VXD Indexes (2007) at www.cboe.com/BXD http://www.feg.com/documents/EvaluationofBuyWriteandVolatilityIndexes.pdf • Callan Associates. An Historical Evaluation of the CBOE S&P 500 BuyWrite Index (BXM). (Oct. 2006). at www.cboe.com/BXM http://www.cboe.com/micro/bxm/Callan_CBOE.pdf • Goldman Sachs. "Finding Alpha via Covered Index Writing," Financial Analysts Journal. (September/October 2006). www.888options.com/institutional/research/pdfs/finding_alpha_via_covered_index_writing.pdf • Ibbotson Associates. Feldman, Barry, and Dhruv Roy, "Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index." The Journal of Investing. (Summer 2005). at www.cboe.com/BXM www.cboe.com/micro/bxm/IbbotsonAug30final.pdf • Duke University. Whaley, Robert. "Risk and Return of the CBOE BuyWrite Monthly Index" The Journal of Derivatives (Winter 2002). University of Massachusetts. Schneeweis, Thomas, and Richard Spurgin. "The Benefits of Index Option-Based Strategies for Institutional Portfolios" The Journal of Alternative Investments, (Spring 2001). Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 62
  • 63. Risk-adjusted Returns Exhibit 6 from the Callan Study Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 63
  • 64. Exhibit 8 from Callan Associates’ 2006 Study Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 64
  • 65. Exhibit 9 from Callan Associates’ 2006 Study Rolling 5-Year Annualized Returns Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 65
  • 66. Exhibit 10 from Callan Associates’ 2006 Study Rolling 5-Year Annualized Standard Deviation Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 66
  • 67. Exhibit 12 from Callan Associates’ 2006 Study Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 67
  • 68. Exhibit 17 from Callan Associates’ 2006 Study Annualized Return versus Risk (June 1, 1988 - August 31, 2006) 10.25% 10.00% Aggressive + BXM 9.75% Moderate + BXM Aggressive 9.50% Moderate Returns 9.25% 9.00% Conservative + BXM 8.75% Conservative 8.50% 8.25% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% Standard Deviation Measuring the impact of adding CBOE BXM to diversified portfolios. Calculated with monthly rebalancing over the period June 1, 1988 to August 31, 2006. BXM substituted for 10% of large cap equity exposure in each asset mix. In all cases, return is essentially unchanged while risk is reduced, improving the risk-adjusted return as measured by the Sharpe ratio. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 68
  • 69. Income Graph from 2007 Study by Fund Evaluation Group The avg. monthly call premium received was 1.84%. www.cboe.com/BXD. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 69
  • 70. More than $30 Billion in 45 BuyWrite Products Samples include: Ticker Investment Product BWC BlackRock World Investment Trust PBN Citigroup Funding PISTONS linked to BXM Index DPD Dow 30 Premium & Dividend Income Fund Inc ETW Eaton Vance Tax-MgdGlobal Buy-Write Opportunity Fund BEO Enhanced S&P 500 Covered Call Fund GATEX Gateway Fund GSPAX Goldman Sachs U.S. Equity Dividend and Premium Fund IGA ING Global Advantage and Premium Opportunity Fd MCN Madison/Claymore Covered Call Fund BXU Merrill Lynch 8% Return Notes Linked to BXM Index MBS Morgan Stanley Strategic Total Return Securities (STARS) linked to BXM Index NFJ NFJ Dividend Interest & Premium Strategy Fund NAI Nicholas-Applegate International & Premium Strategy Fund JPZ Nuveen Equity Premium Income Fund PGP PIMCO Global StocksPLUS & Income Fund BEP S&P 500 Covered Call Fund Inc. (IQ Inv. Adv., Merrill Lynch) VEPBX Van Kampen Equity Premium Income Fund BWV Barclays iPath CBOE S&P 500 BuyWrite Index (ETN based on BXM Index) PBP PowerShares S&P 500 BuyWrite Portfolio (ETF based on BXM Index) CBOE does not provide endorsements or recommendations for any fund. Investors in some Asian countries might not be permitted to invest in these funds Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 70
  • 71. Sample U.S. Fund Performance Three- Standard One-Year Year Beta - Trailing Mkt Return Thru Mkt Return, Deviation - 3-yr Thru 31-July- 1-Aug-2008 Trailing 3-yr Thru 2008 Annualized, Thru 1- 31-July-2008 Aug-2008 Gateway Fund (GATEX) 0.68% 5.57% 4.34 0.38 Eaton Vance Enh Eq Inc (EOI) -4.14% 1.29% 7.88 0.76 NFJ Div., Int., & Prem Str Fd (NFJ) -6.79% 3.51% 7.76 0.70 iShares Russell 2000 (IWM) -6.82% 2.85% 13.62 1.14 iShares Russell 1000 (IWB) -11.64% 2.82% 10.12 1.00 Source: www.morningstar.com on 4-August-2008 CBOE does not provide investment advice or recommendations for any funds, including the funds listed above. Please read the applicable prospectus. Investors in some Asian countries might not be allowed to invest in these U.S. funds. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 71
  • 72. 6. Benchmark Indexes for Volatility-based Strategies – VIX, VPD, OVX, etc. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 72
  • 73. Volatility Indexes at CBOE Index Options Index Ticker Available? Website ® CBOE Volatility Index® VIX Yes www.cboe.com/VIX CBOE DJIA Volatility Index VXD www.cboe.com/VXD CBOE NASDAQ-100 Volatility Index VXN Yes www.cboe.com/VXN CBOE Russell 2000 Volatility Index RVX Yes www.cboe.com/RVX CBOE S&P 100 Volatility Index VXO www.cboe.com/VXO CBOE S&P 500 3-Month Volatility Index VXV www.cboe.com/VXV CBOE VIX Premium Strategy Index VPD www.cboe.com/VPD CBOE Capped VIX Premium Strategy Index VPN www.cboe.com/VPN CBOE S&P 500® VARB-XTM Benchmark VTY www.cboe.com/VTY CBOE Crude Oil Volatility Index OVX www.cboe.com/OVX CBOE Lehman 5-Month Constant Maturity VIX Futures Index VWX CBOE Gold Volatility Index GVZ www.cboe.com/GVZ CBOE EuroCurrency Volatility Index EVZ www.cboe.com/EVZ www.cboe.com/volatility Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 73
  • 74. News Clip Barron’s 21st July 2008 ”… the current financial crisis has made CBOE's VIX a market darling … … In May, the Mumbai-based National Stock Exchange licensed VIX to create India VIX. CBOE also has agreements with the Taiwan Futures Exchange, Germany's Eurex, and Euronext. VIX indexes will be listed on London's FTSE 100, Amsterdam Exchange Index (AEX), France's CAC 40 and Belgium's BEL20 Index. … Last week, VIX was applied to crude oil, marking the start of a series of non-stock VIX indexes. By year's end, CBOE will introduce VIX indexes on gold, foreign currencies and interest rates. This will complement Dow (DJX), Nasdaq (VXN), Russell 2000 (RVX) and Standard & Poor's 100 (VXO) VIX indexes. … “ (emphasis added) Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 74
  • 75. CBOE Volatility Index® (VIX® ) Since 1993 a premier barometer of investor sentiment and market volatility. In Sept. 2003 new VIX methodology. Implied volatility index -- measures the market's expectation of 30- day volatility implicit in the prices of near-term S&P 500 (SPX) options. VIX is quoted in percentage points, just like the standard deviation of a rate of return, e.g. 23.26. The SPX options used in the VIX calculation are – O-T-M puts and call covering the entire range of strike prices (the “ volatility skew”) From the nearby and next-to-nearby expiration months for a constant 30-day volatility measure VIX futures in 2004 and VIX options in 2006, with settlement date on Wednesday (30 days before SPX expiration) www.cboe.com/VIX Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 75
  • 76. Unique Features of Volatility Index Products Futures Pricing Based on Forward Value of Volatility Index Pricing Can Be Different for a Number of Reasons Wednesday Settlement Special Opening Quotation Price Negative Correlation to Stock Indexes High Volatility of Volatility Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 76
  • 77. Why Trade Volatility? Negative correlation to most equity indexes Positive correlation to credit prices Efficient way to manage unwanted market risk Unique properties of volatility create trading opportunities Historical difference between realized and implied volatility Volatility Term Structure High Volatility of Volatility Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 77
  • 78. CBOE Volatility Index (VIX) VIX and S&P 500 75 1800 VIX Daily Closing Prices S&P 500 (SPX) 50 1200 SPX 25 600 VIX 0 0 01/02/90 01/04/93 01/05/96 01/08/99 01/18/02 26-Jan-05 2/4/2008 Sources: CBOE and Bloomberg. (2-Jan-1990 - 22-July-2008). www.cboe.com/VIX Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 78
  • 79. Four Volatility Indexes Since Jan. 2007 CBOE Crude Oil Volatility Index (OVX) CBOE NASDAQ-100 Volatility Index (VXN) CBOE Russell 2000 Volatility Index (RVX) CBOE Volatility Index® (VIX) 60 Select volatility indexes at CBOE 50 OVX Daily Closing Prices 40 VXN 30 RVX 20 VIX 10 0 3-Jan-2007 5-Jul-2007 3-Jan-2008 3-Jul-2008 (3-Jan-2007 to 22-July-2008) Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 79
  • 80. One Year of Prices US Oil Fund ETF (USO) CBOE Crude Oil Volatility Index (OVX) CBOE Volatility Index® (VIX) 120 100 USO ETF 80 OVX 60 Index 40 VIX 20 Index 0 23-Jul-2007 23-Oct-2007 23-Jan-2008 23-Apr-2008 Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 80
  • 81. ETFs and Volatility Indexes (July 23, 2007 – July 30, 2008) 200 FXE ETF FXE – CurrencyShares Euro Trust 150 USO ETF USO - US Oil Fund GLD - SPDR Gold Shares GLD ETF 100 OVX - CBOE Crude Oil OVX Volatility Index 50 GVZ GVZ - CBOE Gold Volatility Index VIX VIX - CBOE Volatility Index 0 EVZ - CBOE EuroCurrency 23-Jul-2007 23-Dec-2007 23-May-2008 EVZ Volatility Index Sources: CBOE and Bloomberg Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 81
  • 82. Three Volatility Indexes Since Jan. 2007 CBOE S&P 100 Volatility Index (VXO) CBOE Volatility Index (VIX) CBOE DJIA Volatility Index (VXD) 40 Select volatility indexes at CBOE Daily Closing Prices 30 VXO VIX 20 VXD 10 0 3-Jan-2007 5-Jul-2007 3-Jan-2008 3-Jul-2008 (3-Jan-2007 to 22-July-2008) Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 82
  • 83. High Volatility of Volatility 140% 132.0% 120% 94.2% 100% 83.3% VIX (spot) 78.5% 80% 56.0% VIX Near-term 60% 45.8% Futures 40% 20% 0% 2005 2006 2007 Historic Volatility of Daily Returns (Source: CBOE). Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 83
  • 84. Volatilities of VIX, Stocks, & Stock Index Historic Volatility in Years 2005, 2006, & 2007 150% VIX (spot) 132.0% VIX Near-term Futures 94.2% GM 100% 83.3% AAPL GOOG 50% IBM S&P 500 (SPX) 0% 2005 2006 2007 Historic Volatility Source: CBOE 2005 2006 2007 VIX (spot) 83.3% 94.2% 132.0% VIX Near-term Futures 45.8% 56.0% 78.5% GM 42.6% 41.3% 39.8% AAPL 38.8% 38.1% 37.6% GOOG 32.1% 34.0% 24.3% IBM 17.9% 14.2% 20.6% S&P 500 (SPX) 10.3% 10.0% 16.0% Source: CBOE Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 84
  • 85. Negative Correlations Negative Correlations The VIX and S&P 500 Indexes had a negative correlation of daily returns (-0.85) in 2007. 0.5 VIX and SPX VXD and DJX RVX and RUT VXN and NDX 0.0 -0.5 -0.76 -0.83 -0.82 -0.85 -1.0 2004 2005 2006 2007 Correlation of Daily Returns for Volatility and Stock Indexes. Source: CBOE. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 85
  • 86. Key Dates for VIX Prices Closing Price % Change VIX SPX VIX SPX Three days on which VIX rose by more than 50% 27-Feb-2007 18.19 358.76 64.2% -3.5% 15-Nov-1991 19.22 355.66 51.7% -3.7% 23-Jul-1990 20.11 352.20 51.5% -1.7% Two days on which VIX fell by more than 24% 5-Apr-1994 25.01 1260.32 -24.0% 2.1% 15-Jun-2006 24.05 1260.68 -25.9% 2.1% Seven days on which VIX closed above 43.70 8-Oct-1998 45.74 959.44 5.1% -1.2% 10-Sep-1998 45.29 980.19 14.2% -2.6% 5-Aug-2002 45.08 834.60 9.2% -3.4% 23-Jul-2002 44.92 797.70 7.3% -2.7% 31-Aug-1998 44.28 957.28 11.8% -6.8% 11-Sep-1998 43.74 1009.06 -3.4% 2.9% 20-Sep-2001 43.74 984.54 7.8% -3.1% Survey of Trading Days from 2-Jan-1990 to 22-July-2008. Source: CBOE. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 86
  • 87. Key Specifications & Volume- VIX Futures & Options Futures Options Exchange CFE CBOE Ticker VX VIX Multiplier $1,000 $100 Last Day of Trading Generally on Tuesday, the day before expiration date. Expiration Date Generally on Wednesday 30 days prior to the 3rd Friday of calendar month immediately following the expiring month. Trading Hours 8:30 a.m. – 3:15 p.m. Chicago Time Avg. Daily Volume 4,387 102,110 (Jan-July 2008) Open Interest 44,640 1,130,515 (July 31, 2008) Launch Date March 26, 2004 Feb. 24, 2006 Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 87
  • 88. VIX Spot, Futures & Options in Feb.-Mar. 2007 On Feb. 27 the S&P 500 fell by 3.5%, the VIX Index rose 64%, and VIX Mar. 07 futures were up 29.5%. 20 VIX Spot 15 VIX Mar '07 10 Futures VIX Nov '07 5 Futures 2/1/2007 2/15/2007 3/2/2007 3/16/2007 On Feb. 27 the March '07 15.0 VIX calls rose 483%. 2.5 2.0 VIX May '07 15.0 1.5 Calls 1.0 VIX 0.5 March '07 15.0 Calls 0.0 2/1/2007 2/15/2007 3/2/2007 3/16/2007 Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 88
  • 89. % Change in Prices on 27 Feb. 2007 S&P 500 (SPX) -3.5% VIX Nov '07 Futures 3.2% VIX Mar '07 Futures 29.5% VIX Spot Index 64.2% VIX May '07 15.0 Calls 77.3% VIX March '07 15.0 Calls 483.3% Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 89
  • 90. VIX and VIX Futures in July 2008 30 28 VIX Spot 26 VX July08 Fut 24 VX Nov08 Fut 22 20 1-Jul 3-Jul 5-Jul 7-Jul 9-Jul 11-Jul 13-Jul 15-Jul 17-Jul 19-Jul 21-Jul 23-Jul 25-Jul 27-Jul 29-Jul 31-Jul The 2-week % change from 1-July to 15-July was 21% for VIX spot, 17% for VIX July’08 Futures, and 8% for VIX Nov’08 Futures. Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 90
  • 91. Benchmark Indexes and VIX Futures CBOE Lehman 5-Month Constant Maturity VIX Futures Index (VWX) - reflects the performance of a strategy that systematically holds a "long volatility" position consisting of VIX futures with expiries ranging from 4 to 7 months. The strategy's objective is to maintain a constant maturity exposure to 5-month VIX forward implied volatility. The portfolio is adjusted daily by selling a portion of the 4th month VIX futures and buying an equal amount of 7th month VIX futures, effectively spreading the futures "roll" over each month. CBOE VIX Premium Strategy Index (VPD) - tracks the performance of a strategy that systematically sells 1-month VIX futures. This index tracks the value of a portfolio that overlays a sequence of short one-month VIX futures on a money market account. The VIX futures are held until expiration and new VIX futures are then sold. The money market account decreases leverage relative to a stand-alone short position in VIX futures. To further limit risk, the number of VIX futures sold at each roll is set to preserve 75% of the initial value of the portfolio in the event that VIX futures increase by 25 points. CBOE Capped VIX Premium Strategy Index (VPN) - tracks the performance of a strategy that systematically sells 1-month VIX futures, capped by the purchase of a VIX call option. The short VIX futures position is capped with long VIX calls struck 25 points higher than the VIX futures price, or calls at the closest strike below if this strike is not listed. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 91
  • 92. Month-end Price Levels -- CBOE VIX Premium Strategy Index (VPD) -- CBOE Capped VIX Premium Strategy Index (VPN) -- CBOE Lehman 5-Month Constant Maturity VIX Futures Index (VWX) -- CBOE Volatility Index (VIX) 200 VPD 150 VPN 100 VWX 50 VIX 0 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 (June 2004 - June 2008). Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 92
  • 93. One-Year Change in Select Index Prices CBOE Lehman 5-Month Constant Maturity VIX Futures Index (VWX) CBOE VIX Premium Strategy Index (VPD) CBOE Capped VIX Premium Strategy Index (VPN) Daily Closing Prices, re-scaled to 100% 140% 130% 120% on July 23, 2007 Up 14% VWX 110% Up 6% VPD 100% Up 3% VPN 90% Down 11% S&P 500 (TR) 80% 70% 31-Jul-07 30-Sep-07 30-Nov-07 31-Jan-08 31-Mar-08 31-May-08 31-Jul-08 (July 31, 2007 - July 31, 2008) Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 93
  • 94. 7. Volatility-based Strategies Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 94
  • 95. Volatility Trading 1. Negative Correlation? 2. Mean Reverting? 3. Implied versus Historical? 4. Other Issues… Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 95
  • 96. Sources of Volatility Trading Ideas Volatility Report: Macro Themes Relationships Term Structure Relative Volatility Range Volatility Surfaces Ranking Screening/Scanning Correlation/Dispersion Trading Activity Backtesting Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 96
  • 97. Volatility Report - Relationships 52- 52- Index Closing Weekly Week 52-Week Week 52-Week 10-Day 30-Day HV 30-Day IV Symbol Value Change High High Date Low Low Date HV HV Percentile IV Percentile VIX 24.06 -3.84% 37.57 1/22/2008 9.70 2/22/2007 54.08 91.92 17% 65.33 9% VXV 24.40 -4.09% 30.29 1/22/2008 11.32 2/22/2007 29.15 53.06 9% - - VXN 26.30 -1.46% 40.77 1/22/2008 14.54 6/15/2007 72.01 88.97 37% 81.48 26% RVX 29.58 0.51% 42.60 8/16/2007 14.25 2/22/2007 51.92 68.65 7% 59.90 16% VXD 21.75 -3.76% 34.21 8/16/2007 8.93 2/22/2007 64.34 92.78 15% - - VXO 26.51 -3.00% 38.88 1/22/2008 9.03 2/22/2007 54.52 106.47 21% - - SPX 1353.11 0.23% 1576.09 10/11/2007 1270.05 1/23/2008 14.53 22.19 85% 22.58 68% SPY 135.62 0.36% 157.52 10/11/2007 126.00 1/22/2008 11.13 20.51 74% 23.19 69% 1. Spreads between volatility indexes 2. IV and HV percentiles 3. 10-day to 30-day HV 4. Proximity to high and low readings Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 97
  • 98. Term Structure of Volatility Term Structure of VIX (2-18-08) Term Structure of VXN / RVX (2-18-08) 27 32 31.39 31.39 26.07 30.97 25.91 26 31 30.27 30.42 25.50 25.36 25.93 VXV 25.44 VIX 25.02 30 RVX 25 RVX 29.43 25.17 VXN 24.68 29 24.45 24.41 RVX Spot 24 28.92 28.8 VXN Spot 28.4 28.5 28 28.2 23 27 08 08 08 08 08 08 08 08 08 20 20 20 20 20 20 20 20 20 st VXN 26.69 y er ch r ay ly l e ri be ar 26 n gu Ju b p M ar Ju em ru m A u M Fe bruary M arch April M ay June ve eb A ec o F 2008 2008 2008 2008 2008 D N 1. Relationship between spot and future volatility prices 2. Provides valuable insights into market expectations 3. Is the market fading recent gains or losses in spot? 4. Is the info. consistent for the various products? Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 98
  • 99. Changes in Term Structure Term Structure of VIX (2-18-08) Term Structure of VIX (6-23-08) 27 25 26.07 25.91 26 23.87 25.50 25.36 23.70 23.72 23.72 25.93 VXV 25.44 24 23.51 23.54 23.43 23.38 VIX 25.02 25 25.17 23.43 VXV 23.57 24.68 23 24.45 24.41 24 VIX 22.87 23 22 08 09 08 08 08 08 08 08 08 08 08 08 08 09 09 08 08 08 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 y st y er ch y r ay ly er g. ch l ly r t. e er ri be be ar ar ar ep n gu Ju Ju u b b p b M ar ar Ju nu em em A ru m ru m A o S u M M ct ve ve eb eb Ja A ec ec O o o F F D D N N Term Structure of VXN / RVX (2-18-08) Term Structure of VXN / RVX (6-23-08) 32 31.39 31.39 30 30.97 31 30.27 30.42 28.90 28.89 29 28.63 30 RVX RVX RVX 29.43 VXN VXN 29 RVX Spot 28 RVX Spot 27.63 28.92 28.8 VXN Spot VXN Spot 28.4 28.5 27.55 27.55 28 27.55 28.2 27.15 27 27 VXN 26.75 VXN 26.69 RVX 26.35 26 26 Fe bruary M arch April M ay June July 2008 August Se pte mbe r Nov e mbe r 2008 2008 2008 2008 2008 2008 2008 2008 Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 99
  • 100. Relative Volatility Range Select Sector SPDR Relative Volatility Range 2/18/08 XLB-Materials SPDR -12.53% XLE-Energy SPDR -21.59% XLF-Financial SPDR -12.69% XLI-Industrial SPDR -28.29% XLK-Technology SPDR -35.91% XLP-Consum er Staples SPDR -35.48% XLU-Utilities SPDR -20.24% XLV-Health Care SPDR -27.64% XLY-Consum er Discretionary SPDR -33.48% -40% -30% -20% -10% 0% Undervalued Premiums (Negative %)Overvalued Premiums (Positive %) 1. IV forward looking / HV backward looking 2. Compares IV Percentile to HV Percentile 3. Understand the challenges 4. Interpretation is important Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 100
  • 101. Relative Volatility Range Select Sector SPDR Relative Volatility Range 2/18/08 XLB-Mate rials SPDR -12.53% XLE-Ene rgy SPDR -21.59% XLF-Financial SPDR -12.69% XLI-Indus trial SPDR -28.29% XLK-Te chnology SPDR -35.91% XLP-Cons um e r Staple s SPDR -35.48% XLU-Utilitie s SPDR -20.24% XLV-He alth Care SPDR -27.64% XLY-Cons um e r Dis cre tionary SPDR -33.48% -40% -30% -20% -10% 0% Undervalued Premiums (Negative %)Overvalued Premiums (Positive %) Select Sector SPDR Relative Volatility Range 6/23/08 XLB-M ate rials SPDR 28.03% XLE-Ene rgy SPDR 22.73% XLF-Financial SPDR 17.11% XLI-Indus trial SPDR 16.77% XLK-Te chnology SPDR 10.00% XLP-Cons um e r Staple s SPDR -8.11% XLU-Utilitie s SPDR 9.21% XLV-He alth Care SPDR 2.72% XLY-Cons um e r Dis cre tionary SPDR 2.21% -10% 0% 10% 20% 30% Undervalued Premiums (Negative %) Overvalued Premiums (Positive %) Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 101
  • 102. Volatility Surfaces SPX Volatility Surface - 2-28-08 VIX Volatility Surface - 2-28-08 0.40 1.00 0.80 0.30 0.60 0.8000-1.0000 IV 0.20 0.3000-0.4000 IV 0.40 0.6000-0.8000 0.2000-0.3000 0.10 0.4000-0.6000 0.1000-0.2000 0.20 0.2000-0.4000 0.0000-0.1000 0.00 30 0.00 30 0.0000-0.2000 50 50 30 30 10 10 0 0 720 720 20 20 OTM Term OTM Term 40 40 1. Valuable insights into intricacies of volatility 2. Easily visualize skews, smiles and smirks 3. Pinpoints possibly profitable aberrations 4. Ask why the surface is shaped like it is 5. Make sure VIX data is based off of futures! Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 102
  • 103. Ranking – IV Percentile S&P 500 Stocks with Highest IV as % of 52 Week Range S&P 500 Stocks with Lowest IV as % of 52 Week Range IV IV Ratio HV IV IV Ratio HV Symbol Underlying Asset Range Last IV/HV Last Symbol Underlying Asset Range Last IV/HV Last AMERICAN AMT TOWER CORP 100% 47.45 113.14 41.94 1 TT Trane Inc 4% 16.61 137.15 12.11 ANALOG DEVICES COMMERCE ADI INC 100% 47.89 127.72 37.50 2 CBH BANCORP INC. 9% 21.18 81.01 26.14 EXPRESS SCRIPTS INC CINCINNATI ESRX [class A] 100% 45.75 125.03 36.60 3 CINF FINANCIAL CORP 17% 32.89 89.07 36.93 FOREST LABORATORIES FISV FISERV INC 100% 38.19 140.63 27.15 4 FRX INC 20% 35.11 111.81 31.40 CISCO SYSTEMS CSCO INC 100% 49.91 146.39 34.10 5 TDC Teradata Corp. 25% 41.12 121.50 33.85 1. Ranks stocks for high and low IV Percentile 2. Critical – find out why they are on the list!!! a) Takeover b) Earnings c) Corporate News - Clinical Trial results, etc. 3. Interpretation is critical Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 103
  • 104. Ranking – Ratio of IV to HV S&P 500 Stocks with Highest Ratio of IV to HV S&P 500 Stocks with Lowest Ratio of IV to HV Ratio IV IV HV Ratio IV IV HV Sym. Underlying Asset IV/HV Last Range Last Sym. Underlying Asset IV/HV Last Range Last CLEAR CHANNEL YHO CCU COMMUNICTNS INC 214% 96.35 91% 45.07 1 O YAHOO INC 34% 43.13 42% 126.93 MOODY'S HARMAN INT L MCO CORPORATION 187% 75.90 100% 40.65 2 HAR IND INC 36% 54.81 77% 151.57 LAB CORP OF COUNTRYWIDE LH AMERICA HOLDINGS 161% 31.06 83% 19.32 3 CFC CREDIT INDS INC 46% 85.87 27% 188.35 WATSON PHARMACEUTICALS WPI INC 160% 39.01 91% 24.31 4 WAT WATERS CORP 46% 34.12 67% 73.59 COMPUTER ASSOCIATES INTL TLAB TELLABS INC 151% 83.93 49% 55.46 5 CA INC 56% 34.65 64% 61.70 1. Ranks stocks for high and low IV / HV Ratio 2. Find out why they are here!!! 3. Distinguish between temporary aberration or real opportunity Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 104
  • 105. Screening / Scanning Option Expiration Option Stock Call Return if Called Return if Unchanged Downside Downside Stock Ticker Month Strike Last Bid Return Annualized Return Annualized Break Protection Symbol Symbol (Year) Price Price Price (percent) (percent)* (percent) (percent) Even (percent) AJG AJGDE Apr08 25 $23.97 $0.85 9.47% 34.10% 5.02% 18.06% $22.81 4.84% BAC BACAH Jan08 40 $39.30 $0.65 3.49% 139.72% 1.68% 67.27% $38.65 1.65% BAC BACBH Feb08 40 $39.30 $1.75 6.52% 63.48% 4.66% 45.34% $37.55 4.45% BAC BACBV Feb08 42 1/2 $39.30 $0.70 10.10% 98.31% 1.81% 17.64% $38.60 1.78% BBT BBTBF Feb08 30 $27.61 $0.60 11.07% 107.71% 2.22% 21.61% $27.01 2.17% BBT BBTCF Mar08 30 $27.61 $1.00 12.74% 63.70% 3.76% 18.79% $26.61 3.62% $105.9 BEN BENBB Feb08 110 6 $4.00 7.89% 76.72% 3.92% 38.17% $101.96 3.78% $105.9 BEN BENDB Apr08 110 6 $7.60 12.04% 43.33% 7.93% 28.55% $98.16 7.36% $105.9 BEN BENDC Apr08 115 6 $5.50 14.67% 52.82% 5.67% 20.43% $100.26 5.38% 1.Scan massive trading data for valuable insights 2. Very powerful when combined with backtesting 3. Don’t confuse macro issues as micro opportunities 4. Understand what the numbers are telling you and the interaction between factors Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 105
  • 106. Correlations - Dispersion Ticker Equiv Beta Corr Specific Contribution HV IV Mean IV/HV Vol Weight Weight Select Index IV % Variance To Index Voly % % Ratio % Multipli er A 7.09 1.3 43.11 23.63 0.02 26.19 21.41 0.82 0.33 0.11 1 AA 10.39 1.26 33.25 30.95 0.04 32.82 39.31 1.2 0.26 0.25 1 AAPL 10.95 0.54 21.54 21.22 0.05 21.73 27.43 1.26 0.4 0.67 1 ABC 7.53 -0.18 -5.25 29.94 0 29.98 26.05 0.87 0.29 0.07 1 ABI 7.6 0.7 21.93 26.95 0 27.62 24.21 0.88 0.31 0.04 1 ABK 10.44 0.97 59.95 11.23 0.01 14.03 16.89 1.2 0.62 0.07 1 ABT 10.23 1.16 62.73 12.44 0.09 15.98 18.85 1.18 0.54 0.65 1 ACE 9.02 0.97 47.87 15.48 0.02 17.63 18.35 1.04 0.49 0.15 1 ACS 11.45 -0.01 -0.84 14.53 0 14.53 19.18 1.32 0.6 0.04 1 ADBE 15.67 1.36 60.26 15.57 0.03 19.51 35.27 1.81 0.44 0.18 1 1. Ability to go long or short correlation 2. Profit from large movements in individual stocks versus the index (or vice versa) 3. Tends to experience periods where it “sets-up” and periods when it doesn’t Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 106
  • 107. Trading Activity Quantity Symbol Expiry Strike Type Price Side Exch. Volume Ivol Delta OI(t) 1300 ADBE Feb08 35 Puts $0.45 SELLER ISE 1933 37.90% -0.495 3788 3000 AIG Jan09 55 Calls $4.45 BUYER ISE 3000 42.47% 0.35 17458 1502 AIG Feb08 65 Puts $19.50 BUYER ARCA 3004 229.42% -1 18581 1502 AIG Feb08 65 Puts $19.50 BUYER ARCA 1502 236.25% -1 18581 1500 AIG Jan09 55 Calls $4.45 MIDMKT ISE 4520 42.52% 0.3425 17458 2000 BAC Mar08 45 Calls $0.85 SELLER ISE 2567 33.28% 0.345 19440 2000 BAC May08 40 Puts $2.35 BUYER ISE 4673 44.35% -0.31 36620 2000 BAC May08 47.5 Calls $1.35 BUYER ISE 2269 33.58% 0.315 25001 1925 BAC Mar08 45 Calls $0.97 SELLER ISE 5900 32.35% 0.385 19440 1. Increases/decreases in: a) Trading volume/Open interest b) Implied volatility levels 2. Determine possible pins near expiration 3. Effective for analyzing roll activity for covered calls 4. Watch out for dividend plays Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 107
  • 108. Backtesting Trade Date Asset C/P Strike Expiration Contracts Price B/S Trade Net P+L 1/24/1996 SPX Put 615 2/17/1996 -100 4.50 Sell 45,000.00 45,000.00 2/15/1996 SPX Put 615 2/17/1996 100 0.06 Buy -625.00 44,375.00 2/21/1996 SPX Put 640 3/16/1996 -100 4.00 Sell 40,000.00 84,375.00 3/14/1996 SPX Put 640 3/16/1996 100 0.62 Buy -6,250.00 78,125.00 3/27/1996 SPX Put 640 4/20/1996 -100 7.50 Sell 75,000.00 153,125.00 4/18/1996 SPX Put 640 4/20/1996 100 0.38 Buy -3,750.00 149,375.00 4/24/1996 SPX Put 640 5/18/1996 -100 5.00 Sell 50,000.00 199,375.00 5/16/1996 SPX Put 640 5/18/1996 100 0.06 Buy -625.00 198,750.00 5/29/1996 SPX Put 660 6/22/1996 -100 6.38 Sell 63,750.00 262,500.00 1. Can provide extremely valuable insights 2. Does the Past = the Future? 3. Small changes can make big differences 4. Be aware of macro issues impacting results 5. Be careful of data mining and timeframe used for analysis Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 108
  • 109. Summary – Volatility Idea Generation 1. Many sources of information for ideas 2. Some data extremely valuable, other data requires some work and interpretation 3. Understand what the data is telling you and its limitations 4. Watch macro issues = micro opportunities 5. Be careful of data mining and the timeframe There is always a better way to do things… Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 109
  • 110. 8. Conclusion Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 110
  • 111. Potpourri of Option Knowledge Can be good without being complicated If it is too good to be true find out why Understand how your position changes as asset changes and time passes Volatility is extremely important Know the probability of success It is worth the effort to understand options, their use is rapidly expanding Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 111
  • 112. In conclusion Diversification and risk management Options-based strategies and benchmark indexes have attracted more interest Please see the last slide for important risk disclosures Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 112
  • 113. In conclusion Diversification and risk management Options-based strategies and benchmark indexes have attracted more interest Please see the last slide for important risk disclosures Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 113
  • 114. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the “ODD”). The ODD and supporting documentation for any claims, comparisons, recommendations, statistics or other technical data in these materials are available by calling 1-888- OPTIONS, or contacting CBOE at www.cboe.com/Contact. The information in these materials is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in these materials. No statement within this material should be construed as a recommendation to buy or sell a security or to provide investment advice. The CBOE S&P 500 BuyWrite Index (BXMSM), CBOE S&P 500 2% OTM BuyWrite Index (BXYSM), CBOE DJIA BuyWrite Index (BXDSM), CBOE Russell 2000 BuyWrite Index (BXRSM) and CBOE NASDAQ-100 BuyWrite Index (BXNSM) (the “Indexes”) are designed to represent proposed hypothetical buy-write strategies. Like many passive benchmarks, the Indexes do not take into account significant factors such as transaction costs and taxes. Transaction costs and taxes for a buy-write strategy could be significantly higher than transaction costs for a passive strategy of buying-and-holding stocks. Investors attempting to replicate the Indexes should discuss with their brokers possible timing and liquidity issues. Past performance does not guarantee future results. These materials contain comparisons, assertions, and conclusions regarding the performance of indexes based on backtesting, i.e., calculations of how the indexes might have performed in the past if they had existed. Backtested performance information is purely hypothetical and is provided in this document solely for informational purposes. The methodology of the Indexes is owned by Chicago Board Options Exchange, Incorporated (CBOE) may be covered by one or more patents or pending patent applications. Standard & Poor's®, S&P®, and S&P 500® are registered trademarks of The McGraw-Hill Companies, Inc. and are licensed for use by CBOE. "Dow Jones", "The Dow", "DJIA" and “Dow Jones Industrial Average” are trademarks of Dow Jones & Company, Inc. and have been licensed for use for certain purposes by CBOE. CBOE's options based on Dow Jones indexes and financial products based on the CBOE DJIA BuyWrite Index are not sponsored, endorsed, marketed or promoted by Dow Jones and Dow Jones makes no representations regarding the advisability of investing in such products. Nasdaq®, Nasdaq-100®, and Nasdaq-100 Index®, are trademarks of The Nasdaq Stock Market, Inc. (which with its affiliates is referred to as the "Corporations") and are licensed for use by CBOE. The CBOE NASDAQ-100 BuyWrite Index (the "BXN Index") is not derived, maintained, published, calculated or disseminated by the Corporations. CBOE Volatility Index®, VIX®, CBOE® and Chicago Board Options Exchange® are registered trademarks and BXM, BXD, BXN and BXY are servicemarks of CBOE. Copyright © 2008 Chicago Board Options Exchange, Incorporated. All Rights Reserved. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice. 114