Hong Kong Options Haslett Moran 8 30 08

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

For the Hong Kong Society of Financial AnalystsSaturday, 30th August 2008 9:30 a.m. – 12:00 noon

HKUST Business School Central15th Floor, The Hong Kong Club Building

3A Chater Road, Central, Hong Kong

Presentations by:

Bud Haslett, CFA, FRMChief Executive OfficerMiller Tabak Capital ManagementNew York

and

Matt Moran, JDVice PresidentChicago Board Options Exchange®Chicago

2Summer 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.

Topics to Be Covered1. Historical Price Changes2. Worldwide Derivatives Markets – OTC and Exchange-Listed3. 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 others5. 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 Strategies8. Conclusion


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?

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%

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.

Dai

ly C

losi

ng P

rices

, re-

scal

ed to

100

% o

n Ju

ly 3

1, 2

007 Down 11% S&P 500 TR

Down 66% GM

Down 60% Citigroup

0% Southwest Air

Down 63% American Air

Down 81% United Air


Financial Times July 25, 2008Southwest 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)Prices Since August 2005

0

50

100

150

200

Aug-05

Aug-06

Aug-07(Aug. 2005 - July 2008) Source: Bloomberg

Mon

th-e

nd P

rices

FXE

SPY

USO

TLT

GLD

EEM

Symbol ETF

July 2008 CBOE Options Avg. Daily Volume.

FXE CurrencyShares Euro Trust 795

SPY S&P Depositary Receipts (SPDRs) 443,221

USO United States Oil Fund 20,638

TLT iShares Lehman 20+Year Treasury Bond Fd 2,916

GLD SPDR Gold Trust 30,925

EEM iShares MSCI Emerging Markets Index 43,155


Select Indexes Since Dec. 1998

0%

50%

100%

150%

200%

250%

300%

350%

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

Re-

scal

ed m

onth

-end

pric

es MSCI Hong Kong

MSCI World US$

S&P 500


One-Year Change in Select Indexes(July 31, 2007 - July 31, 2008)How can diversification and risk management help investors?

70%

80%

90%

100%

110%

120%

130%

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.

Dai

ly C

losi

ng P

rices

, re-

scal

ed to

100

% o

n Ju

ly 2

3, 2

007

Down 5% MSCI Hong Kong

Down 11% MSCI World


One-Year Change in Select Indexes How can diversification and risk management help investors?

80%

90%

100%

110%

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.

Dai

ly C

losi

ng P

rices

, re-

scal

ed to

100

%

on J

uly

23, 2

007

Down 11% S&P 500 (TR)

Up 4% PUT

Down 1% BXM


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)

70%

80%

90%

100%

110%

120%

130%

140%

31-Jul-07

30-Sep-07

30-Nov-07

31-Jan-08

31-Mar-08

31-May-08

31-Jul-08


Dai

ly C

losi

ng P

rices

, re-

scal

ed to

100

%

on J

uly

23, 2

007

Down 11% S&P 500 (TR)

Up 14% VWX

Up 6% VPDUp 3% VPN


2. Worldwide Derivatives Markets – OTC and Exchange-Listed


Worldwide Derivatives$677 Trillion in Worldwide Derivatives

$0$100,000$200,000$300,000$400,000$500,000$600,000$700,000

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

Exchange-listedOptionsExchange-listedFutures


O-T-C Derivatives$596 Trillion Notional in Dec. 2007

Notional principal in US $ Billions – amounts outstanding. Source: BIS

$0

$200,000

$400,000

$600,000

Dec.2000

Dec.2001

Dec.2002

Dec.2003

Dec.2004

Dec.2005

Dec.2006

Dec.2007

Unallocated

Credit default swaps

Commodity contracts

Equity-linked contracts

Interest rate contracts

Foreign exchangecontracts


O-T-C Equity Forwards & Swaps


O-T-C Equity Forwards & Swaps $2.2 Trillion Notional

$0

$1,000

$2,000

$3,000

Dec.2000

Dec.2001

Dec.2002

Dec.2003

Dec.2004

Dec.2005

Dec.2006

Dec.2007

AsianEuropean US Latin American Other


O-T-C Equity Options


O-T-C Equity Options$6.3 Trillion Notional

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000

Dec.2000

Dec.2001

Dec.2002

Dec.2003

Dec.2004

Dec.2005

Dec.2006

Dec.2007

AsianEuropean US Latin American Other


Exchange-listed

Equity Index Futures


Exchange-listed Equity Index Futures$1.1 Trillion Notional

$0

$600

$1,200

Dec.2000

Dec.2001

Dec.2002

Dec.2003

Dec.2004

Dec.2005

Dec.2006

Dec.2007

Asia and Pacific

Europe

North America

Other Markets


Exchange-listed

Equity Index Options


Exchange-listed Equity Index Options$8.1 Trillion Notional

$0

$3,000

$6,000

$9,000

Dec.2000

Dec.2001

Dec.2002

Dec.2003

Dec.2004

Dec.2005

Dec.2006

Dec.2007

Asia and Pacific

Europe

North America

Other Markets


Leading Futures and Options ExchangesJanuary – May 2008

1,748,6331,756,4782,061,909

4,075,5414,369,7844,531,367

9,096,3609,119,227

12,412,577

NYMEX

Natl SE of India

PHLX

ISE

CBOE

LIFFE

Korea Exchange

Eurex

CME Group

Avg. Daily Volume - Preliminary Estimates Based on 104 Trading Days. Sources: CBOE and FIA.


Select Options & Futures

643,173

797,215

1,646,446

2,291,626

2,981,842

8,787,780

S&P 500 Index Options(CBOE)

5 Year Treasury Note (CME)

DJ Euro Stoxx 50 Index(Eurex)

E-mini S&P 500 Index (CME)

Eurodollar Futures (CME)

Kospi 200 Options (KoreaExchange)

January - May 2008 - Avg. Daily Volume - Preliminary Estimates. Sources: CBOE and FIA.


Growth in Volume in Options and Futures on U.S. Exchanges28.3 million avg. daily volume in Jan.-May 2008

0

10,000,000

20,000,000

30,000,000

2000

2001

2002

2003

2004

2005

2006

2007

Jan-May

2008

Sources: FIA and CBOE

U.S. Options on Securities (SEC)U.S. Options on Futures (CFTC)U.S. Futures (CFTC)


Growth in CBOE Options Volume

4,462,075

3,762,836

2,688,189

1,061,9701,126,772

1,432,8841,858,132

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

2002 2003 2004 2005 2006 2007 JanJun08

Avg

. Dai

ly V

olum

e at

CB

OE

SEC-regulated listed options are cleared and guaranteed by the AAA-rated Options Clearing Corporation.


Leading CBOE Index and ETF Options

25,595

26,066

40,896

52,240

58,954

99,561

268,858

309,215

326,248

627,236

Nasdaq-100 (NDX)

Dow (DJX)

Dow Diamonds (DIA)

S&P 100 (OEX)

Russell 2000 (RUT)

CBOE Volatility Index (VIX)

PowerShares Nasdaq-100 (QQQQ)

iShares Russell 2000 (IWM)

SPDRs (SPY)

S&P 500 (SPX)

Average Daily Volume in January-June, 2008. Source: CBOE.


Select O-T-C Derivatives –

Credit Default Swapsand Equity-linked Derivatives

$58 Trillion in Credit Default Swaps

$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000

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 Default Swaps(O-T-C)Equity-linked O-T-CDerivatives


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 marketplaceCEBOs pay a fixed amount if a credit event is confirmed in a reference entity.

Payment is made at the time of the credit eventCEBOs expire worthless if no credit event is confirmed before expiration

Contract’s value can fluctuate significantly as perceptions of credit quality change

‘Credit Event’:BankruptcyFailure 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 OptionsCalls – Right to buy stock at certain price for certain periodPuts – Right to sell stock at certain price for certain periodUsually represents 100 sharesLimited life – usually expires after third FridayOption Info – 200 DD Jan 50 calls for 1.55

Number of contractsUnderlying SecurityExpiration DateStrike priceCall / PutPremium

One or more can be combined with a stockTwo or more can be combined in a spread


Option Terms to KnowPremium – 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


Increase in: Calls PutsStock 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


Inputs to Option Pricing

Decrease in: Calls PutsStock 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 AnalysisReview of the “Greeks”

Delta – change in value based on stockGamma – change in delta based on stockTheta – change in value based on timeVega – change in value based on volatility


Delta – price movement in the option based on a small movement in the stock

Commonly called the Hedge RatioSimilar to a bond’s DurationCalls positive delta - Puts negative deltaDelta ranges from 0 to 100 (.00 to 1.00)At-the-money has around a 50 deltaAlso dependent upon time, volatility, ratesTHINK OF DELTA AS PERCENTAGE CHANCE THE OPTION WILL FINISH IN-THE-MONEY

Foundation for Option Analysis


How Delta Changes – 118 Days


How Delta Changes – 15 Days


Foundation for Option AnalysisGamma – change in option’s delta based upon movement in the stock

The Delta of the DeltaSimilar to a bond’s convexityHighest before expiration for at-the-moneyLower away from the strike price Lower more time until expirationGamma tied to time decay and volatilityLong an option (Put or Call) = Long GammaShort an option (Put or Call) = Short Gamma


Foundation for Option AnalysisTheta – time decay in the option

Options are wasting assetsGradually lose their time premiumLong options = negative decayShort options = positive decay

Vega – change in option’s price based on change in volatility

Long options = Long VegaShort Option = Short Vega


Theta – 118 to 15 Days


Vega – 21 to 41 Volatility


What is the Key to Options?

All of these factors happen at the same time

DeltaGamma ixzt

Theta

Understanding…


Take risk-modified and leveraged directional exposures

Provide downside protection

Enhance Returns

Options Provide an Effective Way to:


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 Types1. 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 CollarAdd sale of OTM put to collarUse proceeds of sale to “buy-up” strike price of long put or short call

VIX Call PurchaseNegative correlation with equity prices provides hedging value


Enhancing Returns

Covered Call the most popularAppears easy on the surfaceEffective adjustment strategy is critical


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


Key Performance Benchmark Indexes

www.cboe.com/PUTJune 1, 19882007PUTCBOE S&P 500

PutWrite

www.cboe.com/BXNDec. 30, 19942005BXNSMCBOE

NASDAQ-100 BuyWrite

www.cboe.com/BXYJune 1, 19882006BXYSMCBOE S&P 500

2% OTMBuyWrite

www.cboe.com/BXRDec. 29, 20002006BXRSMCBOE Russell

2000 BuyWrite

www.cboe.com/BXDOct. 16, 19972005BXDSMCBOE DJIA

BuyWrite

www.cboe.com/BXMJune 30, 19862002BXMSMCBOE S&P

500 BuyWrite

WebsiteData beginningIntroducedTickerIndex


CBOE S&P 500 BuyWrite Index (BXM)Benchmark for strategy --

buy portfolio of S&P 500 stockswrite (sell) cash-settled S&P 500 Index options every 3rd Friday for income

Announced in 2002Data history back to June 30, 1986“Innovative Index of the Year” in 2004More than $30 billion in buywrite fundswww.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 Indexingwww.cboe.com/PUT


Indexes Since June 1986 $8.71 BXM

$8.43 S&P 500

$5.98 - MSCI World (in $)

$-$1$2$3$4$5$6$7$8$9

$10$11

30-Jun-86

30-Jun-93

06/30/2000

29-Jun-07

(June 30, 1986 - July 31, 2008) Sources: CBOE and Bloomberg

Mon

th-e

nd p

rices

for t

otal

retu

rn in

dexe

s, re

-sc

aled

to $

1 on

Jun

e 30

, 198

6


BXY, BXM, PUT and “Traditional” IndexesTotal Return Indexes (June 1988* – July 31, 2008)

BXY OTM BW $919

BXM $803S&P 500 $743

30-yr TBonds $484

3-mo.T-Bills $244

PUT PutWrite $979

$0

$200

$400

$600

$800

$1,000

$1,200

Jun-88

Jun-93

Jun-98

Jun-03

Jun-08

Mon

th-e

nd p

rices

(sca

led

so th

at a

ll = $

100

on

ince

ptio

n da

te o

f Jun

e 1,

198

8)

* 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(1 June 1988 – 30 June 2008)

BXYPUT

Russell 2000

MSCI World (in US$)

0%

5%

10%

15%

0% 5% 10% 15% 20%

Standard Deviation of Monthly Returns

Ann

ualiz

ed R

etur

ns

BXM

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.

T-bill 3-mo.

T-note 5-yr.T-bond 30-yr.

S&P 500

PUT – CBOE S&P 500 PutWrite IndexBXM – CBOE S&P 500 BuyWrite IndexBXY – CBOE S&P 500 2% OTM BuyWrite Index


Returns & Standard DeviationFor periods ending July 31, 2008

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.

CBOE S&P 500 BuyWrite

Index

CBOE S&P 500 2% OTM BuyWrite

CBOE S&P 500 PutWrite

IndexS&P 500

(TR)Russell

2000 (TR)

MSCI World

Index (TR) Net US$

Citigroup 30-yr

Treasury Index

BXM BXY PUT SPTROne-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


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


Gross Monthly Income from Options PremiumsAvg. 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

0%

1%

2%

3%

4%

5%

(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 StatisticsMonth-end

PriceAs a % of Underlying

CBOE Volatility Index

BXM Monthly Premium Received

CBOE S&P 500 BuyWrite

CBOE S&P 500 PutWrite

Index

S&P 500 Total

Return

VIX BXM PUT SPTRApr-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.

Monthly Returns


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 ReturnsExhibit 6 from the Callan Study


Exhibit 8 from Callan Associates’ 2006 Study



Rolling 5-Year Annualized Returns


Exhibit 10 from Callan Associates’ 2006 StudyRolling 5-Year Annualized 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.

3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0%8.25%

8.50%

8.75%

9.00%

9.25%

9.50%

9.75%

10.00%

10.25%

Standard Deviation

Ret

urns

(June 1, 1988 - August 31, 2006)Annualized Return versus Risk

Moderate

Conservative

Aggressive

Conservative + BXM

Moderate + BXM

Aggressive + BXM



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 ProductsSamples include:

CBOE does not provide endorsements or recommendations for any fund. Investors in some Asian countries might not be permitted to invest in these funds

Ticker Investment ProductBWC BlackRock World Investment TrustPBN Citigroup Funding PISTONS linked to BXM IndexDPD Dow 30 Premium & Dividend Income Fund IncETW Eaton Vance Tax-MgdGlobal Buy-Write Opportunity FundBEO Enhanced S&P 500 Covered Call Fund

GATEX Gateway FundGSPAX Goldman Sachs U.S. Equity Dividend and Premium Fund

IGA ING Global Advantage and Premium Opportunity Fd MCN Madison/Claymore Covered Call FundBXU Merrill Lynch 8% Return Notes Linked to BXM IndexMBS Morgan Stanley Strategic Total Return Securities (STARS) linked to BXM IndexNFJ NFJ Dividend Interest & Premium Strategy FundNAI Nicholas-Applegate International & Premium Strategy FundJPZ Nuveen Equity Premium Income FundPGP PIMCO Global StocksPLUS & Income FundBEP 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)


Sample U.S. Fund PerformanceOne-Year Mkt Return Thru

1-Aug-2008

Three-Year

Mkt Return, Annualized, Thru 1-

Aug-2008

Standard Deviation - Trailing 3-yr Thru

31-July-2008

Beta - Trailing 3-yr Thru 31-July-

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, includingthe 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

www.cboe.com/volatility

Index Index Ticker

Options 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 VWXCBOE Gold Volatility Index GVZ www.cboe.com/GVZ

CBOE EuroCurrency Volatility Index EVZ www.cboe.com/EVZ


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 indexesPositive correlation to credit pricesEfficient way to manage unwanted market risk Unique properties of volatility create trading opportunities

Historical difference between realized and implied volatilityVolatility Term StructureHigh Volatility of Volatility


CBOE Volatility Index (VIX)VIX and S&P 500

VIX

S&P 500 (SPX)

0

25

50

75

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

VIX

Dai

ly C

losi

ng P

rices

0

600

1200

1800

SPX


Four Volatility Indexes Since Jan. 2007CBOE Crude Oil Volatility Index (OVX) CBOE NASDAQ-100 Volatility Index (VXN)CBOE Russell 2000 Volatility Index (RVX) CBOE Volatility Index® (VIX)

Select volatility indexes at CBOE

0

10

20

30

40

50

60

3-Jan-2007 5-Jul-2007 3-Jan-2008 3-Jul-2008

(3-Jan-2007 to 22-July-2008) Sources: CBOE and Bloomberg.

Dai

ly C

losi

ng P

rices

OVX

VXN

RVX

VIX


One Year of PricesUS Oil Fund ETF (USO) CBOE Crude Oil Volatility Index (OVX) CBOE Volatility Index® (VIX)

0

20

40

60

80

100

120

23-Jul-2007 23-Oct-2007 23-Jan-2008 23-Apr-2008

USO ETF

OVXIndex

VIXIndex


ETFs and Volatility Indexes (July 23, 2007 – July 30, 2008)

0

50

100

150

200

23-Jul-2007 23-Dec-2007 23-May-2008

FXE ETF

USO ETF

GLD ETF

OVX

GVZ

VIX

EVZ

FXE – CurrencySharesEuro Trust

USO - US Oil Fund

GLD - SPDR Gold Shares

OVX - CBOE Crude Oil Volatility Index

GVZ - CBOE Gold Volatility Index

VIX - CBOE Volatility Index

EVZ - CBOE EuroCurrencyVolatility 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)

Select volatility indexes at CBOE

0

10

20

30

40

3-Jan-2007 5-Jul-2007 3-Jan-2008 3-Jul-2008

(3-Jan-2007 to 22-July-2008) Sources: CBOE and Bloomberg.

Dai

ly C

losi

ng P

rices VXO

VIX

VXD


High Volatility of Volatility

83.3%

45.8%

94.2%

56.0%

132.0%

78.5%

0%

20%

40%

60%

80%

100%

120%

140%

2005 2006 2007Historic Volatility of Daily Returns (Source: CBOE).

VIX (spot)

VIX Near-termFutures


Volatilities of VIX, Stocks, & Stock IndexHistoric Volatility in Years

2005, 2006, & 2007

132.0%

94.2%83.3%

0%

50%

100%

150%

2005 2006 2007

Source: CBOE

VIX (spot)

VIX Near-term Futures

GM

AAPL

GOOG

IBM

S&P 500 (SPX)

Historic Volatility2005 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 CorrelationsNegative Correlations

The VIX and S&P 500 Indexes had a negative correlation of daily returns (-0.85) in 2007.

-0.76 -0.83 -0.82 -0.85-1.0

-0.5

0.0

0.5

2004 2005 2006 2007

Correlation of Daily Returns for Volatility and Stock Indexes. Source: CBOE.

VIX and SPX VXD and DJXRVX and RUT VXN and NDX


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

102,1104,387Avg. Daily Volume (Jan-July 2008)

1,130,51544,640Open Interest(July 31, 2008)

Generally on Wednesday 30 days prior to the 3rd Friday ofcalendar month immediately following the expiring month.

Expiration DateGenerally on Tuesday, the day before expiration date.Last Day of Trading

Feb. 24, 2006 March 26, 2004 Launch Date

8:30 a.m. – 3:15 p.m. Chicago Time Trading Hours

$100$1,000Multiplier

VIXVXTicker

CBOECFEExchangeOptionsFutures


VIX Spot, Futures & Options in Feb.-Mar. 2007On Feb. 27 the S&P 500 fell by 3.5%, the VIX Index rose 64%,

and VIX Mar. 07 futures were up 29.5%.

5

10

15

20

2/1/2007

2/15/2007

3/2/2007

3/16/2007

VIX Spot

VIX Mar '07Futures

VIX Nov '07Futures

On Feb. 27 the March '07 15.0 VIX calls rose 483%.

0.0

0.5

1.0

1.5

2.0

2.5

2/1/2007

2/15/2007

3/2/2007

3/16/2007

VIX May'07 15.0Calls

VIXMarch '0715.0 Calls


% Change in Prices on 27 Feb. 2007

77.3%

64.2%

29.5%

3.2%

-3.5%

483.3%VIX March '07 15.0 Calls

VIX May '07 15.0 Calls

VIX Spot Index

VIX Mar '07 Futures

VIX Nov '07 Futures

S&P 500 (SPX)


VIX and VIX Futures in July 2008

20

22

24

26

28

30

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-JulVIX Spot

VX July08 Fut

VX Nov08 Fut

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.


Benchmark Indexes and VIX FuturesCBOE 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.


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)

0

50

100

150

200

Jun-04 Jun-05 Jun-06 Jun-07 Jun-08

(June 2004 - June 2008). Sources: CBOE and Bloomberg.

VPD

VPN

VWX

VIX


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)

70%

80%

90%

100%

110%

120%

130%

140%

31-Jul-07

30-Sep-07

30-Nov-07

31-Jan-08

31-Mar-08

31-May-08

31-Jul-08


Dai

ly C

losi

ng P

rices

, re-

scal

ed to

100

%

on J

uly

23, 2

007

Down 11% S&P 500 (TR)

Up 14% VWX

Up 6% VPDUp 3% VPN


7. Volatility-based Strategies


Volatility Trading

1. Negative Correlation?2. Mean Reverting?3. Implied versus Historical?4. Other Issues…


Sources of Volatility Trading IdeasVolatility Report: Macro Themes

RelationshipsTerm StructureRelative Volatility RangeVolatility Surfaces

RankingScreening/ScanningCorrelation/DispersionTrading ActivityBacktesting


Volatility Report - Relationships

1. Spreads between volatility indexes2. IV and HV percentiles3. 10-day to 30-day HV4. Proximity to high and low readings

69%23.1974%20.5111.131/22/2008126.0010/11/2007157.520.36%135.62SPY

68%22.5885%22.1914.531/23/20081270.0510/11/20071576.090.23%1353.11SPX

--21%106.4754.522/22/20079.031/22/200838.88-3.00%26.51VXO

--15%92.7864.342/22/20078.938/16/200734.21-3.76%21.75VXD

16%59.907%68.6551.922/22/200714.258/16/200742.600.51%29.58RVX

26%81.4837%88.9772.016/15/200714.541/22/200840.77-1.46%26.30VXN

--9%53.0629.152/22/200711.321/22/200830.29-4.09%24.40VXV

9%65.3317%91.9254.082/22/20079.701/22/200837.57-3.84%24.06VIX

PercentileIVPercentileHVHVLow DateLowHigh DateHighChange ValueSymbol

IV30-DayHV30-Day10-Day52-Week52-

Week52-Week52-

WeekWeeklyClosingIndex


Term Structure of VolatilityTerm Structure of VIX (2-18-08)

24.4124.4524.68

25.17

25.3625.5025.91

25.93

26.07

VIX 25.02

VXV 25.44

23

24

25

26

27

Febr

uary

2008

March

2008

April 2

008

May 20

08Ju

ne 20

08Ju

ly 20

08Aug

ust 2

008

Novem

ber 2

008

Decem

ber 2

008

Term Structure of VXN / RVX (2-18-08)

31.39 31.39

30.27 30.4230.97

28.228.5

28.828.9228.4

RVX 29.43

VXN 26.6926

27

28

29

30

31

32

February2008

March 2008

April2008

May2008

June2008

RVXVXNRVX SpotVXN Spot

1. Relationship between spot and future volatility prices2. Provides valuable insights into market expectations3. Is the market fading recent gains or losses in spot? 4. Is the info. consistent for the various products?


Changes in Term StructureTerm Structure of VIX (2-18-08)

24.4124.4524.68

25.17

25.3625.5025.91

25.93

26.07

VIX 25.02

VXV 25.44

23

24

25

26

27

Febr

uary

2008

March

2008

April 2

008

May 20

08Ju

ne 20

08Ju

ly 20

08Aug

ust 2

008

Novem

ber 2

008

Decem

ber 2

008


31.39 31.39

30.27 30.4230.97

28.228.5

28.828.9228.4

RVX 29.43

VXN 26.6926

27

28

29

30

31

32

February2008

March 2008

April2008

May2008

June2008


Term Structure of VIX (6-23-08)

23.7223.87

23.3823.4323.5423.7223.70

23.43

23.51

VIX 22.87

VXV 23.57

22

23

24

25

July

2008

Aug. 2

008

Sept

. 200

8Octo

ber 2

008

Novem

ber 2

008

Decem

ber 2

008

Janu

ary 2

009

Febr

uary

2009

March

2009


28.90

27.63

28.8928.63

27.5527.5527.5527.15

RVX 26.35

VXN 26.75

26

27

28

29

30

July 2008 August2008

September2008

November2008



Relative Volatility Range

-33.48%

-27.64%-20.24%

-35.48%-35.91%

-28.29%-12.69%

-21.59%-12.53%

-40% -30% -20% -10% 0%

Undervalued Premiums (Negative %)Overvalued Premiums (Positive %)

XLB-Materials SPDR

XLE-Energy SPDR

XLF-Financial SPDR

XLI-Industrial SPDR

XLK-Technology SPDR

XLP-Consumer Staples SPDR

XLU-Utilities SPDR

XLV-Health Care SPDR

XLY-Consumer Discretionary SPDR

Select Sector SPDR Relative Volatility Range2/18/08

1. IV forward looking / HV backward looking2. Compares IV Percentile to HV Percentile3. Understand the challenges4. Interpretation is important


Relative Volatility Range

-33.48%

-27.64%-20.24%

-35.48%-35.91%

-28.29%-12.69%

-21.59%-12.53%

-40% -30% -20% -10% 0%

Undervalued Premiums (Negative %)Overvalued Premiums (Positive %)

XLB-Materials SPDR

XLE-Energy SPDR

XLF-Financial SPDR

XLI-Industrial SPDR

XLK-Technology SPDR


XLU-Utilities SPDR




2.21%

2.72%

9.21%

-8.11%

10.00%16.77%

17.11%22.73%

28.03%

-10% 0% 10% 20% 30%

Undervalued Premiums (Negative %) Overvalued Premiums (Positive %)

XLB-Materials SPDR

XLE-Energy SPDR

XLF-Financial SPDR

XLI-Industrial SPDR

XLK-Technology SPDR


XLU-Utilities SPDR





Volatility Surfaces

30

720

50 30 10 0

20

400.00

0.10

0.20

0.30

0.40

IV

TermOTM

SPX Volatility Surface - 2-28-08

0.3000-0.40000.2000-0.30000.1000-0.20000.0000-0.1000

1. Valuable insights into intricacies of volatility2. Easily visualize skews, smiles and smirks 3. Pinpoints possibly profitable aberrations4. Ask why the surface is shaped like it is5. Make sure VIX data is based off of futures!

30

720

50 30 10 0

20

40

0.00

0.20

0.40

0.60

0.80

1.00

IV

TermOTM

VIX Volatility Surface - 2-28-08

0.8000-1.00000.6000-0.80000.4000-0.60000.2000-0.40000.0000-0.2000


Ranking – IV Percentile

1. Ranks stocks for high and low IV Percentile2. Critical – find out why they are on the list!!!

a) Takeoverb) Earningsc) Corporate News - Clinical Trial results, etc.

3. Interpretation is critical

33.85121.5041.1225%Teradata Corp.TDC534.10146.3949.91100%CISCO SYSTEMS INCCSCO

31.40111.8135.1120%

FOREST LABORATORIES INCFRX427.15140.6338.19100%FISERV INCFISV

36.9389.0732.8917%CINCINNATI FINANCIAL CORPCINF336.60125.0345.75100%

EXPRESS SCRIPTS INC [class A]ESRX

26.1481.0121.189%COMMERCE BANCORP INC.CBH237.50127.7247.89100%

ANALOG DEVICES INCADI

12.11137.1516.614%Trane IncTT141.94113.1447.45100%AMERICAN TOWER CORPAMT

LastIV/HVLastRangeUnderlying AssetSymbolLastIV/HVLastRangeUnderlying AssetSymbol

HVRatioIVIVHVRatioIVIV

S&P 500 Stocks with Lowest IV as % of 52 Week RangeS&P 500 Stocks with Highest IV as % of 52 Week Range


Ranking – Ratio of IV to HV

1. Ranks stocks for high and low IV / HV Ratio2. Find out why they are here!!!3. Distinguish between temporary aberration or real

opportunity

61.7064%34.6556%

COMPUTER ASSOCIATES INTL INCCA555.4649%83.93151%TELLABS INCTLAB

73.5967%34.1246%WATERS CORPWAT424.3191%39.01160%

WATSON PHARMACEUTICALS INCWPI

188.3527%85.8746%COUNTRYWIDE CREDIT INDS INCCFC319.3283%31.06161%

LAB CORP OF AMERICA HOLDINGSLH

151.5777%54.8136%HARMAN INT L IND INCHAR240.65100%75.90187%

MOODY'S CORPORATIONMCO

126.9342%43.1334%YAHOO INCYHO

O145.0791%96.35214%CLEAR CHANNEL COMMUNICTNS INCCCU

LastRangeLastIV/HVUnderlying AssetSym.LastRangeLastIV/HVUnderlying AssetSym.

HVIVIVRatioHVIVIVRatio

S&P 500 Stocks with Lowest Ratio of IV to HVS&P 500 Stocks with Highest Ratio of IV to HV


Screening / Scanning

1. Scan massive trading data for valuable insights2. Very powerful when combined with backtesting3. Don’t confuse macro issues as micro opportunities4. Understand what the numbers are telling you and

the interaction between factors

5.38%$100.2620.43%5.67%52.82%14.67%$5.50$105.9

6115 Apr08BENDCBEN

7.36%$98.1628.55%7.93%43.33%12.04%$7.60$105.9

6110 Apr08BENDBBEN

3.78%$101.9638.17%3.92%76.72%7.89%$4.00$105.9

6110 Feb08BENBBBEN

3.62%$26.6118.79%3.76%63.70%12.74%$1.00$27.6130 Mar08BBTCFBBT

2.17%$27.0121.61%2.22%107.71%11.07%$0.60$27.6130 Feb08BBTBFBBT

1.78%$38.6017.64%1.81%98.31%10.10%$0.70$39.3042 1/2Feb08BACBVBAC

4.45%$37.5545.34%4.66%63.48%6.52%$1.75$39.3040 Feb08BACBHBAC

1.65%$38.6567.27%1.68%139.72%3.49%$0.65$39.3040 Jan08BACAHBAC

4.84%$22.8118.06%5.02%34.10%9.47%$0.85$23.9725 Apr08AJGDEAJG

(percent)Even(percent)(percent)(percent)*(percent)PricePricePrice(Year)SymbolSymbol

ProtectionBreakAnnualizedReturn AnnualizedReturnBidLastStrikeMonthTickerStock

DownsideDownsideReturn if UnchangedReturn if CalledCallStockOptionExpirationOption


Correlations - Dispersion

1. Ability to go long or short correlation2. 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

10.180.441.8135.2719.510.0315.5760.261.3615.67ADBE

10.040.61.3219.1814.53014.53-0.84-0.0111.45ACS

10.150.491.0418.3517.630.0215.4847.870.979.02ACE

10.650.541.1818.8515.980.0912.4462.731.1610.23ABT

10.070.621.216.8914.030.0111.2359.950.9710.44ABK

10.040.310.8824.2127.62026.9521.930.77.6ABI

10.070.290.8726.0529.98029.94-5.25-0.187.53ABC

10.670.41.2627.4321.730.0521.2221.540.5410.95AAPL

10.250.261.239.3132.820.0430.9533.251.2610.39AA

10.110.330.8221.4126.190.0223.6343.111.37.09A

Multiplier

%Ratio%%To Index VolyVariance%Index IV

SelectWeightWeightVolIV/HVIV MeanHVContributionSpecificCorrBetaEquivTicker


Trading Activity

1. Increases/decreases in:a) Trading volume/Open interestb) Implied volatility levels

2. Determine possible pins near expiration 3. Effective for analyzing roll activity for covered calls 4. Watch out for dividend plays

194400.38532.35%5900ISESELLER$0.97Calls45Mar08BAC1925

250010.31533.58%2269ISEBUYER$1.35Calls47.5May08BAC2000

36620-0.3144.35%4673ISEBUYER$2.35Puts40May08BAC2000

194400.34533.28%2567ISESELLER$0.85Calls45Mar08BAC2000

174580.342542.52%4520ISEMIDMKT$4.45Calls55Jan09AIG1500

18581-1236.25%1502ARCABUYER$19.50Puts65Feb08AIG1502

18581-1229.42%3004ARCABUYER$19.50Puts65Feb08AIG1502

174580.3542.47%3000ISEBUYER$4.45Calls55Jan09AIG3000

3788-0.49537.90%1933ISESELLER$0.45Puts35Feb08ADBE1300

OI(t)DeltaIvolVolumeExch.SidePriceTypeStrikeExpirySymbolQuantity


Backtesting

1. Can provide extremely valuable insights 2. Does the Past = the Future? 3. Small changes can make big differences4. Be aware of macro issues impacting results5. Be careful of data mining and timeframe used for

analysis

262,500.0063,750.00Sell6.38-1006/22/1996660PutSPX5/29/1996

198,750.00-625.00Buy0.061005/18/1996640PutSPX5/16/1996

199,375.0050,000.00Sell5.00-1005/18/1996640PutSPX4/24/1996

149,375.00-3,750.00Buy0.381004/20/1996640PutSPX4/18/1996

153,125.0075,000.00Sell7.50-1004/20/1996640PutSPX3/27/1996

78,125.00-6,250.00Buy0.621003/16/1996640PutSPX3/14/1996

84,375.0040,000.00Sell4.00-1003/16/1996640PutSPX2/21/1996

44,375.00-625.00Buy0.061002/17/1996615PutSPX2/15/1996

45,000.0045,000.00Sell4.50-1002/17/1996615PutSPX1/24/1996

P+LTrade NetB/SPriceContractsExpirationStrikeC/PAssetTrade Date


Summary – Volatility Idea Generation1. Many sources of information for ideas2. Some data extremely valuable, other data

requires some work and interpretation3. Understand what the data is telling you and

its limitations4. Watch macro issues = micro opportunities5. Be careful of data mining and the timeframe

There is alwaysa better way

to do things…


8. Conclusion


Potpourri of Option KnowledgeCan be good without being complicatedIf it is too good to be true find out whyUnderstand how your position changes as asset changes and time passesVolatility is extremely importantKnow the probability of successIt is worth the effort to understand options, their use is rapidly expanding


In conclusionDiversification and risk management Options-based strategies and benchmark indexes have attracted more interestPlease see the last slide for important risk disclosures


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.

Hong Kong Options Haslett Moran 8 30 08

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Transcript of Hong Kong Options Haslett Moran 8 30 08