January 15, 2011 Protected Index Program Presentation

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This is not investment advice – it is for educational purposes only. It is an example of investment risk management program provided by PTI Securities & Futures LP and may or may not be suitable for every portfolio. Information in this presentation is as of 1/15/2011.

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  • The portfolio protection is in place only for the life of the put. Before the expiration of the put another put, involving an additional expenditure, must be purchased to maintain the protection. That the cost of the protection over the life of the put is the total amount of the cost of the put. The total downside risk of the stock position is then the total cost of the put plus the amount the put strike price is under the price of the stock.
  • The shorter-term call, on a theoretical basis, declines faster than the longer-term put. If the sale of the shorter-term calls is maintained on a month–by-month basis and prices remain stable over the life of the put, the cumulative total of the successive short-call sales should meet or exceed the price of the put. In periods of low volatility (i.e. lower call prices) this may not occur.
  • January 15, 2011 Protected Index Program Presentation

    1. 1. Protected Index Program ® This is not investment advice – it is for educational purposes only. It is an example of investment risk management provided by PTI Securities and may or may not be suitable for every portfolio. Please read the Options Disclosure Document 1
    2. 2. Considerations: <ul><li>Understand the obligations and risks </li></ul><ul><li>Options are not suitable for all investors </li></ul><ul><li>Commissions, Taxes, and Margin Requirements are not calculated here .. and may have significant effects on your returns </li></ul><ul><li>Investors considering option investing should consult their tax advisor as .. to how taxes affect option transactions </li></ul>Options involve risks and are not suitable for all investors. For more information, consult your investment advisor. Prior to buying or selling options, a person must receive a copy of Characteristics and Risks of Standardized Options, which is available from the Chicago Board Options Exchange by calling 1-800-OPTIONS or by writing the Exchange 400 S. LaSalle St., Chicago, IL 60605. “Dow Jones(SM)” and “The Dow”(SM), are service marks of Dow Jones & Company, Inc. and have been licensed for use for certain purposes by the Chicago Board Options Exchange, Inc. (CBOE). CBOE’s options based on Dow Jones Indexes are not sponsored, endorsed, sold or promoted by Dow Jones, and Dow Jones makes no representation regarding the advisability of investing in such a product.  Copyright 1997, The Chicago Board Options Exchange, Inc. 2
    3. 3. PTI Understands the Needs of Traders and Delivers Full Service At Competitive Rates 3 Excellent, Fast Spread Execution: Superior spread execution is critical and all PTI brokers fight to get the best and fastest execution.  Many PTI clients do spread trading and our business is built on premium spread execution.    Competitive Commission Rates: PTI is not the cheapest place to trade, but we know that there is more to gaining your business than simply the commission rate.  Obtaining the best possible executions is what our clients want - at a fair competitive rate. A nd PTI Delivers! Dedicated Team of Highly Qualified Brokers: At PTI our brokers work as a trading team – YOUR trading team! When you call PTI, every broker who picks up the phone is ready to answer our questions AND take your orders.
    4. 4. In order to simplify the computations, commissions have not been included in the examples used in these materials. Commission costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell. Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data, will be supplied upon request. Past performance is not a guarantee of future performance. 4
    5. 5. PIP Investment Program Objectives <ul><li>To achieve a return substantially equivalent to the return of the overall market, with defined risk and considerably less volatility </li></ul>Why Diversification? <ul><li>Three types of risk: </li></ul><ul><ul><ul><ul><ul><li>Company Specific </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Industry </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Market </li></ul></ul></ul></ul></ul>5
    6. 6. Not Just A Recent Phenomenon <ul><ul><li>Former Widely Held Stocks: </li></ul></ul><ul><ul><ul><li>PRD: $74.56 on May 26, 1972 / $.03 May 27, 2003 </li></ul></ul></ul><ul><ul><ul><li>XRX: $28.58 on August 8, 1972 / $10.75 May 27, 2003 </li></ul></ul></ul><ul><ul><ul><li>EK: $66.61 on Jan 3, 1973 / $31.92 May 27, 2003 </li></ul></ul></ul><ul><ul><ul><li>KM: $16.67 on Jan 2, 1973 / $00.00 May 27, 2003 </li></ul></ul></ul>6
    7. 7. Performance Review Mar’00 to Mar’03 S&P 500: Down from 1498.58 to 848.18 (-43 %) QQQ: Down from 109.50 to 25.25 (-77%) LU: Down from 47.48 to 1.47 (-97 %) CSCO: Down from 77.31 to 12.98 (-83%) SUNW: Down from 46.85 to 3.26 (-93%) JDSU: Down from 115.94 to 3.25 (-98%) * Comparing prices from 3/31/00 to prices on 3/31/03 7
    8. 8. Performance Review Feb’08 to Feb’09 S&P 500: Down from 1330.63 to 735.09 (-45 %) QQQ: Down from 42.75 to 27.48 (-36%) CME : Down from 500.76 to 181.77 (-64%) RIMM: Down from 103.62 to 38.55 (-63%) C: Down from 22.46 to 1.50 (-93%) GM: Down from 22.99 to 2.25 (-90%) * Comparing prices from 2/29/07 to prices on 2/27/09 8
    9. 9. Diversification Solutions <ul><li>Purchase Baskets of Stock (Unit Investment Trusts) </li></ul><ul><ul><ul><li>S&P 500 Index (SPY) </li></ul></ul></ul><ul><ul><ul><li>Russell 2000 Index (IWM) </li></ul></ul></ul><ul><ul><ul><li>NASDAQ 100 Index (QQQ) </li></ul></ul></ul>9
    10. 10. Why Unit Investment Trusts? <ul><li>Tax Efficiency </li></ul><ul><li>Lower Costs* </li></ul><ul><li>Transparency </li></ul><ul><li>Buying & Selling Flexibility </li></ul><ul><li>All Day Tracking & Trading </li></ul><ul><li>Diversification </li></ul><ul><li>A Wide Array of Investment Strategies </li></ul>*Ordinary brokerage commissions apply 10
    11. 11. What Are SPDRs? <ul><li>SPDRs (SPY) represent ownership in the SPDR Trust, a unit investment trust owning substantially the same stocks and in the same percentage as the S&P 500 Index. </li></ul><ul><li>These stocks represent a broadly diversified investment that spans over 90 separate industry groups. </li></ul><ul><li>The price performance and dividend yield of the trust should be substantially the same as the S&P 500 Index. </li></ul>11
    12. 12. SPY Basics <ul><li>SPYs are S&P 500 Depository Receipts </li></ul><ul><li>SPYs are 1/10 value of the S&P 500 </li></ul><ul><li>SPYs trade in increments as little as $.01 </li></ul><ul><li>SPYs can be bought or sold at any time during trading day </li></ul><ul><li>SPYs pay quarterly dividends (2010) (annual $2.27 yield of 1.76%) </li></ul>12
    13. 13. <ul><li>The Russell 2000 Index offers investors access to the small-cap segment of the U.S. equity universe. </li></ul><ul><li>The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer </li></ul><ul><li>The Russell 2000 includes the smallest 2000 securities in the Russell 3000. </li></ul>13 What are IWMs?
    14. 14. What are QQQs? <ul><li>QQQs represent ownership in the NASDAQ 100 Trust, a unit investment trust owning substantially the same stocks and in the same percentage as the NASDAQ 100 Index. </li></ul><ul><li>These stocks represent 100 of the largest non-financial U.S. and non-U.S. companies on the NASDAQ Stock Market. </li></ul><ul><li>The price performance and dividend yield of the trust should be substantially the same as the NASDAQ 100 Index. </li></ul>14
    15. 15. Index Portfolio Example <ul><li>Buy: 1000 shares SPY @ 128.27 - Cost: $127,270 </li></ul><ul><li>Buy: 1000 shares IWM @ 79.86 - Cost: $79,760 </li></ul>* All prices as of 1/13/11 15
    16. 16. Why Portfolio Protection? <ul><li>Impossible for anyone to foresee short- term market shocks: Enron collapse, Sept. 11, UAL disaster of 1989, Kennedy assassination, etc. </li></ul><ul><li>Lessens the need for market timing decisions. </li></ul>The solution – ALWAYS have protection in place. 16
    17. 17. Why Protective Put Options? <ul><li>Define a maximum amount of downside investment risk when purchased to protect an underlying security </li></ul><ul><li>Retain unlimited upside potential for the life of the option </li></ul>17
    18. 18. Why Buy LEAP Puts? <ul><li>Longer period until expiration – a LEAP is an option which has an expiration date in excess of 1year in the future. Short term options are less than 1 year. </li></ul><ul><li>Maintain limited downside investment risk feature. </li></ul><ul><li>The more time an option has until its expiration date, the more slowly the premium declines, and the more time in which an investor’s market opinion may be realized. </li></ul>18
    19. 19. Time Decay of Options Time Value: The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. 19
    20. 20. Protected Portfolio Example <ul><li>Long the S&P 500 Index - Purchase of the SPDRs </li></ul><ul><li>Long the the Russell 2000 Index - Purchase of the IWMs </li></ul><ul><li>Long the SPX and IWM LEAP Puts - To achieve a level of portfolio protection </li></ul>20
    21. 21. Why Sell Near-term Covered Calls? <ul><li>Short term options theoretically decay at a faster rate than LEAP options </li></ul><ul><li>Attempts to offset cost of long-term Put protection </li></ul><ul><li>The sale of Covered Calls limits upside investment potential </li></ul>21
    22. 22. Protected Index Investment Strategy <ul><li>Long the SPDRs, IWMs and/or QQQs To achieve overall market exposure </li></ul><ul><li>Long the corresponding LEAP Puts To achieve a level of portfolio protection </li></ul><ul><li>Sale of nearer term Covered Calls To enhance yield and offset cost of Put insurance </li></ul>22
    23. 23. PTI Proprietary Management Program <ul><li>Attempts to maximize returns and diversification through a blend of S&P 500, Russell and/or NASDAQ 100 indexes, as requires. </li></ul><ul><li>Looks to limit initial total risk to 10-15% of portfolio value. </li></ul><ul><li>Uses the faster time decay of the short Call to pay for the Put protection. </li></ul><ul><li>Looks to roll the Calls and/or Puts in volatile or trending markets as needed. </li></ul>23
    24. 24. Example of An Initial Position <ul><li>Buy 1000 shares SPY @ 128.27 - Cost: $128,270 </li></ul><ul><li>Buy 10 SPY Dec’13 120 Put @ 16.25 - Cost: $16,250 ($46 per month) </li></ul><ul><li>Sale of 10 SPY Feb 133 Call @ .55 or $550 </li></ul><ul><li>Total Cost: $143,970 </li></ul><ul><li>Total Risk $23,970 or 16% </li></ul>* All prices as of 1/13/11 24
    25. 25. Example of An Initial Put Spread Position <ul><li>Buy 1000 shares SPY @ 128.27 - Cost: $128,270 </li></ul><ul><li>Buy 10 SPY Dec’13 120 – 70 Put Spreads @ 12.50 - Cost: $12,500 ($35 per month per put) </li></ul><ul><li>Sale of 10 SPY Feb 133 Call @ .55 or $550 </li></ul><ul><li>Total Cost: $140,220 </li></ul><ul><li>Total Risk $20,220 or 14.4% (assuming SPY above 70) </li></ul>* All prices as of 1/13/11 25
    26. 26. Protected Index Strategy Expectations <ul><li>This strategy will under-perform the underlying index during periods of rapid price advances, due to the short Calls which limit upside potential and declining LEAP Put values. </li></ul><ul><li>This strategy should outperform the underlying index in static markets, due to the faster time decay of the short Call vs. the long LEAP Put. </li></ul><ul><li>This strategy should significantly outperform the underlying index in decreasing markets due to both the short Call premium and the long LEAP Put. </li></ul>26
    27. 27. Profit & Loss at Call Expiration 27
    28. 28. Protected Index Strategy Objective <ul><li>This is a conservative strategy suitable for investors looking for market participation with finite risk parameters. </li></ul><ul><li>The Protected Index s trategy goals are to equal or exceed the long-term return of the market averages . </li></ul><ul><li>Utilizing this strategy, a portfolio has less total risk and less short term volatility . </li></ul>28
    29. 29. A Decade: Lessons Learned Over the past decade the performance of the Protected Index Program®, relative to the S&P, has exceeded even our expectations. As Howard Cosell once said, &quot;That's why you play the game.&quot; 29
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    32. 32. Possible Reasons for the Over-performance <ul><li>It seems a little easier to have patience and to do some minor market timing with the Calls when you are never in a panic situation. We were always protected and always knew what our risk was. </li></ul><ul><li>It is easier to take some small chances with the Calls within the framework of a successful program. Once the program starts to work and it is exceeding the return on the S&P you almost develop a “momentum”. </li></ul><ul><li>The ability to roll &quot;up and out&quot; has worked better than anticipated. We have solid brokerage relationships with brokers in the various pits that have surprised us with some amazing executions on several occasions. </li></ul>32
    33. 33. Possible Reasons for the Over-performance <ul><li>We really had only one nightmare month, the wild swings in November, 1999 brought about by the Long-Term Capital situation and resulting bail-out. </li></ul><ul><li>Maybe, just maybe, part of it is because we have some talent and work hard for every dollar the market gives us. We believe in the program and think it is the right strategy for a lot of customers and institutions for the long term. We are motivated to prove ourselves correct. The first eight years only makes us more convinced.     </li></ul>33
    34. 34. PTI Securities News: For full articles and media coverage, visit www.PTISecurities.com 34
    35. 35. Interested In Joining PTI Now? Please speak with Dan after this seminar or visit www.PTISecurities.com to download an application. Possibly Interested In Joining PTI Later? Call PTI to set up an individual meeting to review your goals. Call PTI toll free at 800.821.4968 to request an application. Visit www.PTISecurities.com to download an application. 35

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