Using options to enhance returns and manage risks

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

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

1. Historical Price Changes


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.

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. …”


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


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


One-Year Change in Select Indexes
(July 31, 2007 - July 31, 2008)
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.


One-Year Change in Select Indexes
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.


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.


2. Worldwide Derivatives
Markets – OTC and Exchange-
Listed


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


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


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


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


Exchange-listed

Equity Index Futures
Exchange-listed Equity Index Futures
$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


Exchange-listed
Equity Index Options
Exchange-listed Equity Index Options
$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


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.


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.

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


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.


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.


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


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

3. Detailed Analysis of Options,
Including Inputs to Pricing, and
Evaluation of Risk Determinants
(the "Greeks")


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

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

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

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

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


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


How Delta Changes – 118 Days


How Delta Changes – 15 Days


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

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


Theta – 118 to 15 Days


Vega – 21 to 41 Volatility


What is the Key to Options?

Understanding…
All of these factors happen at the same time

Delta Theta
Gamma ixzt

Options Provide an Effective Way to:

Take risk-modified and leveraged
directional exposures

Provide downside protection

Enhance Returns


Directional Exposures - Price
May be as simple as buying calls or puts


Directional Exposures - Price
Or more sophisticated like using spreads


Directional Exposures
Or contain strategies with calls and puts


4. Strategies to Lower Portfolio
Volatility – Protective Puts,
BuyWrites, Collars, and
Collateralized Short Puts


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

Downside Protection
The most popular methods


Have We Seen These Before?


Downside Protection
Bear Put Spread – Pay for (Debit)
Bear Call Spread – Receive (Credit)
Combined into a low cost bearish position


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


Enhancing Returns
Covered Call the most popular
Appears easy on the surface
Effective adjustment strategy is critical


5. Benchmark Indexes for
Strategies to Lower Portfolio
Volatility – BXM, BXY, PUT, etc.


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


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


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


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


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.


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.


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.

Source of Returns- Sell “Rich” Options
From: Paper by Goldman Sachs. "Finding Alpha via Covered Index Writing," Financial Analysts Journal.
(September/October 2006).


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.


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%


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”


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).


Risk-adjusted Returns
Exhibit 6 from the Callan Study


Exhibit 8 from Callan Associates’ 2006 Study



Rolling 5-Year Annualized Returns


Rolling 5-Year Annualized Standard Deviation


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.

Income Graph from 2007 Study by Fund Evaluation Group

The avg. monthly call premium received was 1.84%. www.cboe.com/BXD.


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


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.

6. Benchmark Indexes for
Volatility-based Strategies –
VIX, VPD, OVX, etc.


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


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)

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


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

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


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


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)

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


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


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)


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).


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


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.


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.


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

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


% 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%


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