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 Chief Executive Officer Miller Tabak Capital Management New York
Matt Moran, JD Vice President Chicago Board Options ExchangeÂŽ Chicago
Topics to Be Covered 1. 2. 3. 4. 5. 6. 7. 8.
Historical Price Changes Worldwide Derivatives Markets – OTC and Exchange-Listed Detailed Analysis of Options, Including Inputs to Pricing, and Evaluation of Risk Determinants (the "Greeks") Strategies to Lower Portfolio Volatility – Protective Puts, BuyWrites, Collars, and others Benchmark Indexes for Strategies to Lower Portfolio Volatility – BXM, BXY, PUT, etc. Benchmark Indexes for Volatility-based Strategies – VIX, VPD, OVX, etc. Volatility-based Strategies 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.
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1.
Historical Price Changes
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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One-Year Change in Select Equity Prices (July 31, 2007 - July 31, 2008)
130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
0% Southwest Air Down 11% S&P 500 TR Down 60% Citigroup Down 63% American Air Down 66% GM Down 81% United Air 31-Jul-08
30-Apr-08
31-Jan-08
31-Oct-07
31-Jul-07
Daily Closing Prices, re-scaled to 100% on July 31, 2007
How can diversification and risk management help investors?
% Change in stock prices (without reinvested dividends) and in Russell 3000 total return index. Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Financial Times July 25, 2008
Southwest Airlines' Fuel Hedging Boosts Profits
“… Southwest Airlines reported a higher quarterly profit, as hedges locked in most of the low-cost US carrier's jet-fuel expenses well below market prices. Derivatives contracts pinned 80 per cent of Southwest's fuel bill at the average equivalent price of $61 a barrel for crude oil, a commodity whose surge has overwhelmed US airlines and forced them to make unprecedented service cuts, slash jobs and retire older aircraft. … Alaska Air Group, another US carrier that has mimicked Southwest's fuel strategy, also posted a quarterly profit that exceeded analysts' expectations. Favourable settlements from Southwest's fuel hedges added $511m to the airline's quarterly results. Revenue rose 11 per cent to $2.87bn. Southwest's derivatives through 2012 are valued at about $4.3bn, and cover 80 per cent of its fuel bill for the second half of 2008 and 70 per cent of next year's expected costs. …”
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Exchange-Traded Funds (ETFs) Prices Since August 2005
FXE SPY
150 M o n th -en d P rices
ETF
Symbol
200
USO
July 2008 CBOE Options Avg. Daily Volume.
CurrencyShares Euro
FXE Trust
S&P Depositary Receipts
SPY (SPDRs)
443,221
USO United States Oil Fund
20,638
100
50
0
795
TLT
TLT Treasury Bond Fd
2,916
GLD
GLD SPDR Gold Trust
30,925
EEM
EEM Markets Index
iShares Lehman 20+Year
iShares MSCI Emerging
43,155
Au g -07
Au g -06
Au g -05
(Aug. 2005 - July 2008) Source: Bloomberg
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Select Indexes Since Dec. 1998 350% Re-scaled month-end prices
300%
MSCI Hong Kong
250% 200%
MSCI World US$
150%
S&P 500
100% 50% 0% Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-98
(Dec. 1998 - June 2008) All indexes are total return indexes, re-scaled to 100% as of Dec. 1998. Country indexes are in local currencies. Sources: CBOE and Bloomberg
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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One-Year Change in Select Indexes (July 31, 2007 - July 31, 2008) 130% 120% 110% 100%
Down 5% MSCI Hong Kong 90%
Down 11% MSCI World
80% 70% 31-Jul-08
30-Apr-08
31-Jan-08
31-Oct-07
31-Jul-07
Daily Closing Prices, re-scaled to 100% on July 23, 2007
How can diversification and risk management help investors?
All indexes are net total return indexes in local currencies, except that the MSCI World Index is in US $. Sources: CBOE and Bloomberg.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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One-Year Change in Select Indexes 110%
Up 4% PUT 100%
Down 1% BXM
Down 11% S&P 500 (TR)
90%
80% 31-Jul-08
31-May-08
31-Mar-08
31-Jan-08
30-Nov-07
30-Sep-07
31-Jul-07
Daily Closing Prices, re-scaled to 100% on July 23, 2007
How can diversification and risk management help investors?
(July 31, 2007 - July 31, 2008) Sources: CBOE and Bloomberg.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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One-Year Change in Select Index Prices
140% 130% 120%
Up 14% VWX
110% Up 6% VPD Up 3% VPN
100% 90%
Down 11% S&P 500 (TR)
80% 70% 31-Jul-08
31-May-08
31-Mar-08
31-Jan-08
30-Nov-07
30-Sep-07
31-Jul-07
Daily Closing Prices, re-scaled to 100% on July 23, 2007
CBOE Lehman 5-Month Constant Maturity VIX Futures Index (VWX) CBOE VIX Premium Strategy Index (VPD) CBOE Capped VIX Premium Strategy Index (VPN)
(July 31, 2007 - July 31, 2008) Sources: CBOE and Bloomberg.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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2. Worldwide Derivatives Markets – OTC and ExchangeListed
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.
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Worldwide Derivatives $677 Trillion in Worldwide Derivatives $700,000 $600,000
O-T-C Derivatives
$500,000 $400,000
Exchange-listed Options Exchange-listed Futures
$300,000 $200,000 $100,000 $0 Dec.2007
Dec.2006
Dec.2005
Dec.2004
Dec.2003
Dec.2002
Dec.2001
Dec.2000
Notional Principal in $US Billions - Amounts Outstanding Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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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
Dec.2007
Dec.2006
Dec.2005
Dec.2004
Dec.2003
Dec.2002
Dec.2001
Dec.2000
$0
Foreign exchange contracts
Notional principal in US $ Billions – amounts outstanding. Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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O-T-C Equity Forwards & Swaps O-T-C Equity Forwards & Swaps $2.2 Trillion Notional
$3,000 Asian European US Latin American Other
$2,000 $1,000 $0 D e c .2 0 0 7
D e c .2 0 0 6
D e c .2 0 0 5
D e c .2 0 0 4
D e c .2 0 0 3
D e c .2 0 0 2
D e c .2 0 0 1
D e c .2 0 0 0
Notional principal in US $ Billions – amounts outstanding. Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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O-T-C Equity Options O-T-C Equity Options
$6.3 Trillion Notional
$7,000 $6,000
Asian European US Latin American Other
$5,000 $4,000 $3,000 $2,000 $1,000 $0 Dec.2007
Dec.2006
Dec.2005
Dec.2004
Dec.2003
Dec.2002
Dec.2001
Dec.2000
Notional principal in US $ Billions – amounts outstanding. Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Exchange-listed
Equity Index Futures Exchange-listed Equity Index Futures
$1.1 Trillion Notional Asia and Pacific
$1,200
Europe $600
North America Other Markets Dec.2007
Dec.2006
Dec.2005
Dec.2004
Dec.2003
Dec.2002
Dec.2001
Dec.2000
$0
Notional principal in US $ Billions – amounts outstanding. Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Exchange-listed
Equity Index Options Exchange-listed Equity Index Options
$8.1 Trillion Notional
$9,000
Asia and Pacific
D ec .2007
D ec .2006
D ec .2005
Other Markets D ec .2004
$0
D ec .2003
North America
D ec .2002
$3,000
D ec .2001
Europe
D ec .2000
$6,000
Notional principal in US $ Billions – amounts outstanding. Source: BIS Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Leading Futures and Options Exchanges January – May 2008 12,412,577
CME Group Eurex
9,119,227
Korea Exchange
9,096,360 4,531,367
LIFFE
4,369,784
CBOE ISE PHLX
4,075,541 2,061,909
Natl SE of India
1,756,478
NYMEX
1,748,633
Avg. Daily Volume - Preliminary Estimates Based on 104 Trading Days. Sources: CBOE and FIA.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Select Options & Futures Kospi 200 Options (Korea Exchange)
8,787,780
Eurodollar Futures (CME) E-mini S&P 500 Index (CME) DJ Euro Stoxx 50 Index (Eurex) 5 Year Treasury Note (CME) S&P 500 Index Options (CBOE)
2,981,842 2,291,626 1,646,446 797,215 643,173
January - May 2008 - Avg. Daily Volume - Preliminary Estimates. Sources: CBOE and FIA. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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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
Jan-May 2008
2007
2006
2005
2004
2003
2002
2001
2000
Sources: FIA and CBOE Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Growth in CBOE Options Volume Avg. Daily Volume at CBOE
6,000,000
4,462,075 5,000,000
3,762,836 4,000,000
2,688,189
3,000,000
1,858,132 1,432,884
2,000,000
1,126,772 1,061,970
1,000,000 0
2002
2003
2004
2005
2006
2007
JanJun08
SEC-regulated listed options are cleared and guaranteed by the AAA-rated Options Clearing Corporation.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Leading CBOE Index and ETF Options 627,236
S&P 500 (SPX) 326,248
SPDRs (SPY)
309,215
iShares Russell 2000 (IWM)
268,858
PowerShares Nasdaq-100 (QQQQ) CBOE Volatility Index (VIX)
99,561
Russell 2000 (RUT)
58,954
S&P 100 (OEX)
52,240
Dow Diamonds (DIA)
40,896
Dow (DJX)
26,066
Nasdaq-100 (NDX)
25,595
Average Daily Volume in January-June, 2008. Source: CBOE.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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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 $40,000 $30,000 $20,000 $10,000 $0
Credit Default Swaps (O-T-C) Equity-linked O-T-C Derivatives Dec.2007
Dec.2006
Dec.2005
Dec.2004
Dec.2003
Dec.2002
Dec.2001
Dec.2000
Notional Principal in $US Billions - Amounts Outstanding Source: BIS
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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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.
CEBOs expire worthless if no credit event is confirmed before expiration
Payment is made at the time of the credit event
Contract’s value can fluctuate significantly as perceptions of credit quality change
‘Credit Event’:
Bankruptcy Failure to pay
Contract specifications inspired by language from the 2003 ISDA credit derivatives definitions
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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3. Detailed Analysis of Options, Including Inputs to Pricing, and Evaluation of Risk Determinants (the "Greeks")
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Exchange Listed Equity Options
Calls – Right to buy stock at certain price for certain period
Puts – Right to sell stock at certain price for certain period Usually represents 100 shares Limited life – usually expires after third Friday Option Info – 200 DD Jan 50 calls for 1.55
Number of contracts Underlying Security Expiration Date Strike price Call / Put Premium
One or more can be combined with a stock
Two or more can be combined in a spread Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Option Terms to Know
Premium – price paid for the option ($1.55 times 20,000 shares = $31,000)
Intrinsic Value – Parity value of option
Time Premium – Premium minus parity
In-the-money (ITM)– option with parity value
Out-of-the-money (OTM)– option with only time premium
Historical Volatility – past movements
Implied Volatility – anticipated movements in the future
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Inputs to Option Pricing Calls
Puts
Increase in: Stock Price Interest Rates
+(direct) +(direct)
-(inverse) -(inverse)
Strike Price Dividends
-(inverse) -(inverse)
+(direct) +(direct)
Time to Expiration* Volatility
+(direct) +(direct)
+(direct) +(direct)
* For all scenarios except deep in-the-money European style puts Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Inputs to Option Pricing Decrease in: Stock Price Interest Rates
Calls
Puts
-(direct) -(direct)
+(inverse) +(inverse)
Strike Price Dividends
+(inverse) +(inverse)
-(direct) -(direct)
-(direct) -(direct)
-(direct) -(direct)
Time to Expiration* Volatility
* For all scenarios except deep in-the-money European style puts Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Foundation for Option Analysis
Review of the “Greeks”
Delta – change in value based on stock Gamma – change in delta based on stock Theta – change in value based on time Vega – change in value based on volatility
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Foundation for Option Analysis
Delta – price movement in the option based on a small movement in the stock
Commonly called the Hedge Ratio Similar to a bond’s Duration Calls positive delta - Puts negative delta Delta ranges from 0 to 100 (.00 to 1.00) At-the-money has around a 50 delta Also dependent upon time, volatility, rates THINK OF DELTA AS PERCENTAGE CHANCE THE OPTION WILL FINISH IN-THE-MONEY
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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How Delta Changes – 118 Days
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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How Delta Changes – 15 Days
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Foundation for Option Analysis
Gamma – change in option’s delta based upon movement in the stock
The Delta of the Delta Similar to a bond’s convexity Highest before expiration for at-the-money Lower away from the strike price Lower more time until expiration Gamma tied to time decay and volatility Long an option (Put or Call) = Long Gamma Short an option (Put or Call) = Short Gamma
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Foundation for Option Analysis
Theta – time decay in the option
Options are wasting assets Gradually lose their time premium Long options = negative decay Short options = positive decay
Vega – change in option’s price based on change in volatility
Long options = Long Vega Short Option = Short Vega
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Theta – 118 to 15 Days
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Vega – 21 to 41 Volatility
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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What is the Key to Options?
Understanding‌ All of these factors happen at the same time
Theta
Delta
Gamma
ixzt
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Options Provide an Effective Way to:
Take risk-modified and leveraged directional exposures
Provide downside protection
Enhance Returns
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Directional Exposures - Price „
May be as simple as buying calls or puts
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Directional Exposures - Price „
Or more sophisticated like using spreads
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Directional Exposures „
Or contain strategies with calls and puts
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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4. Strategies to Lower Portfolio Volatility – Protective Puts, BuyWrites, Collars, and Collateralized Short Puts
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Downside Protection – Many Types 1. Protective Put 2. Collar 3. Bear Put Spread* 4. Bear Call Spread* 5. Combination Bear Spread* 6. Put Spread Collar* 7. VIX Call Options* * Limited Downside Protection Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Downside Protection „
The most popular methods
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Have We Seen These Before?
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Downside Protection
Bear Put Spread – Pay for (Debit) Bear Call Spread – Receive (Credit) Combined into a low cost bearish position
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Downside Protection - Hybrids
Put Spread Collar
Add sale of OTM put to collar Use proceeds of sale to “buy-up” strike price of long put or short call
VIX Call Purchase
Negative correlation with equity prices provides hedging value
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Enhancing Returns
Covered Call the most popular Appears easy on the surface Effective adjustment strategy is critical
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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5. Benchmark Indexes for Strategies to Lower Portfolio Volatility – BXM, BXY, PUT, etc.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Key Performance Benchmark Indexes Index
Ticker
Introduced
CBOE S&P 500 BuyWrite
BXMSM
2002
CBOE S&P 500
BXYSM
2006
Russell 2000 BuyWrite
BXRSM
2006
CBOE DJIA
BXDSM
2005
BXNSM
2005
PUT
2007
2% OTM
Data beginning
Website
June 30, 1986
www.cboe.com/BXM
June 1, 1988
www.cboe.com/BXY
Dec. 29, 2000
www.cboe.com/BXR
Oct. 16, 1997
www.cboe.com/BXD
Dec. 30, 1994
www.cboe.com/BXN
June 1, 1988
www.cboe.com/PUT
BuyWrite CBOE
BuyWrite
CBOE
NASDAQ-100 BuyWrite
CBOE S&P 500
PutWrite
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
51
CBOE S&P 500 BuyWrite Index (BXM)
Benchmark for strategy -
buy portfolio of S&P 500 stocks write (sell) cash-settled S&P 500 Index options every 3rd Friday for income
Announced in 2002 Data history back to June 30, 1986 “Innovative Index of the Year” in 2004 More than $30 billion in buywrite funds www.cboe.com/BXM
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
52
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 onemonth, at-the-money, S&P 500 Index puts and invest cash at one- and three-month Treasury Bill rates. PUT won Innovative Index of the Year Award at Super Bowl of Indexing www.cboe.com/PUT
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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$11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $-
$8.71 BXM $8.43 S&P 500
$5.98 - MSCI World (in $)
29-Jun-07
06/30/2000
30-Jun-93
30-Jun-86
Month-end prices for total return indexes, rescaled to $1 on June 30, 1986
Indexes Since June 1986
(June 30, 1986 - July 31, 2008) Sources: CBOE and Bloomberg
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
54
BXY, BXM, PUT and “Traditional” Indexes Total Return Indexes (June 1988* – July 31, 2008)
PUT PutWrite
$1,000
$979
BXY OTM BW $919 BXM $803
$800
S&P 500 $743 $600 30-yr TBonds $484
$400 3-m o.T-Bills $244
$200 $0 Jun-08
Jun-03
Jun-98
Jun-93
Jun-88
Month-end prices (scaled so that all = $100 on inception date of June 1, 1988)
$1,200
* June 1988 is the first month for daily prices for the SPTR, BXY, and PUT indexes. Sources: CBOE & Bloomberg. The BuyWrite Indexes are designed to represent hypothetical buy-write strategies. Like many passive indexes, the BuyWrite Indexes do not take into account significant factors such as transaction costs and taxes and, because of factors such as these, many or most investors should be expected to underperform passive indexes. T-Bills and T-Bonds are represented by Citigroup indexes. See Risk Disclosure at www.cboe.com/BXM for more information.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Returns and Volatility
PUT – CBOE S&P 500 PutWrite Index BXM – CBOE S&P 500 BuyWrite Index BXY – CBOE S&P 500 2% OTM BuyWrite Index
(1 June 1988 – 30 June 2008)
Annualized Returns
15%
PUT
BXY S&P 500
BXM
10%
MSCI World
T-note 5-yr.
5%
Russell 2000
(in US$)
T-bond 30-yr.
T-bill 3-mo.
0% 0%
5%
10%
15%
20%
Standard Deviation of Monthly Returns Sources: CBOE and Bloomberg. The figures above represent total return indexes; Citigroup indexes are used for the fixed income numbers. Time period starts in June 1988 because that is the 1st month for the S&P 500 (TR) & PUT index daily prices. Please see risk disclosures. Past performance is not a guarantee of future returns.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
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Returns & Standard Deviation For periods ending July 31, 2008 CBOE S&P 500 BuyWrite Index
CBOE S&P 500 2% OTM BuyWrite
CBOE S&P 500 PutWrite Index
S&P 500 (TR)
BXM
BXY
PUT
SPTR
One-Year Annualized Return Three-Year Annualized Return Five-Year Annualized Return Ten-Year Annualized Return Annualized Return Since 1-Jun-88 Annualized Return Since 30-Jun-86
-1.2% 4.5% 6.9% 5.9% 10.9% 10.3%
-4.2% 4.6% 7.8% 5.5% 11.6% n/a
3.5% 7.4% 9.4% 7.7% 12.0% n/a
One-Year Standard Deviation Three-Year Standard Deviation Five-Year Standard Deviation Ten-Year Standard Deviation
10.3% 6.9% 6.3% 11.0% 9.2% 10.2%
11.7% 8.3% 7.9% 12.6% 11.0% n/a
0.69
0.65
Standard Deviation Since 1-Jun-88 Standard Deviation Since 30-Jun-86 Sharpe Ratio* Since 1-Jun-88
Russell 2000 (TR)
Index (TR) Net US$
Citigroup 30-yr Treasury Index
-11.1% 2.9% 7.0% 2.9% 10.5% 10.1%
-6.2% 3.1% 9.9% 6.9% 9.9% 8.9%
-10.9% 6.8% 11.0% 4.0% 7.4% 8.4%
9.1% 3.1% 6.6% 5.7% 8.1% 7.0%
9.5% 6.5% 5.8% 10.3% 8.3% n/a
13.7% 10.1% 9.5% 15.0% 13.7% 14.9%
16.3% 13.7% 14.3% 19.9% 17.6% 18.8%
14.8% 10.8% 10.1% 14.5% 13.9% 14.4%
8.8% 9.4% 9.6% 10.7% 10.1% 10.3%
0.90
0.44
0.31
0.21
0.36
MSCI World
Sources: CBOE and Bloomberg. *Please see BXM paper by Ibbotson at www.cboe.com/BXM for a discussion about caveats and use of Sharpe Ratio. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
57
Source of Returns- Sell “Rich� Options From: Paper by Goldman Sachs. "Finding Alpha via Covered Index Writing," Financial Analysts Journal. (September/October 2006).
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
58
Gross Monthly Income from Options Premiums Avg. premium received was 1.6% since June 1988.
BXM Index - Monthly Premiums Received as a % of the Underlying Average was about 1.67% per month
5% 4% 3% 2% 1% 0% (June 1986 - June 2008). Source: CBOE. Caution: Please note that the above amounts do not reflect the net amount received, as the buywrite strategy’s stock position does have truncated upside potential. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
59
Recent Select Monthly Statistics Month-end Price
As a % of Underlying
BXM Monthly CBOE Premium Volatility Index Received
Monthly Returns CBOE CBOE S&P S&P 500 S&P 500 500 PutWrite Total BuyWrite Index Return
VIX
BXM
PUT
SPTR
14.22 1.1% Apr-07 13.05 1.3% May-07 Jun-07 16.23 1.5% Jul-07 23.52 1.5% 23.38 3.7% Aug-07 18.00 1.9% Sep-07 Oct-07 18.53 2.1% 22.87 3.3% Nov-07 22.50 2.0% Dec-07 Jan-08 26.20 2.4% Feb-08 26.54 2.8% 25.61 2.7% Mar-08 Apr-08 20.79 2.0% Sources: CBOE and Bloomberg.
0.7% 2.3% -0.1% -2.1% 1.1% 1.4% 2.4% -1.9% 1.8% -5.9% 0.9% 1.7% 2.4%
1.1% 1.9% -0.2% -1.3% 2.0% 1.7% 2.8% -1.1% 1.2% -5.4% 1.7% 1.2%
4.4% 3.5% -1.7% -3.1% 1.5% 3.7% 1.6% -4.2% -0.7% -6.0% -3.2% -0.4% 4.9%
2.3%
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
60
New CBOE Developments in 2008 – - Extended BXM price history back to June 30, 1986 - Plan to introduce a 95-110 collar index with ticker “CLL”
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
61
Studies on BuyWrites
Fund Evaluation Group. Study of BXD and VXD Indexes (2007) at www.cboe.com/BXD http://www.feg.com/documents/EvaluationofBuyWriteandVolatilityIndexes.pdf
•
Callan Associates. An Historical Evaluation of the CBOE S&P 500 BuyWrite Index (BXM). (Oct. 2006). at www.cboe.com/BXM http://www.cboe.com/micro/bxm/Callan_CBOE.pdf
•
Goldman Sachs. "Finding Alpha via Covered Index Writing," Financial Analysts Journal. (September/October 2006).
•
www.888options.com/institutional/research/pdfs/finding_alpha_via_covered_index_writing.pdf
Ibbotson Associates. Feldman, Barry, and Dhruv Roy, "Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index." The Journal of Investing. (Summer 2005). at www.cboe.com/BXM www.cboe.com/micro/bxm/IbbotsonAug30final.pdf
•
Duke University. Whaley, Robert. "Risk and Return of the CBOE BuyWrite Monthly Index" The Journal of Derivatives (Winter 2002).
University of Massachusetts. Schneeweis, Thomas, and Richard Spurgin. "The Benefits of Index Option-Based Strategies for Institutional Portfolios" The Journal of Alternative Investments, (Spring 2001).
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
62
Risk-adjusted Returns Exhibit 6 from the Callan Study
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
63
Exhibit 8 from Callan Associates’ 2006 Study
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
64
Exhibit 9 from Callan Associates’ 2006 Study Rolling 5-Year Annualized Returns
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
65
Exhibit 10 from Callan Associates’ 2006 Study Rolling 5-Year Annualized Standard Deviation
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
66
Exhibit 12 from Callan Associates’ 2006 Study
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
67
Exhibit 17 from Callan Associates’ 2006 Study Annualized Return versus Risk (June 1, 1988 - August 31, 2006) 10.25% Aggressive + BXM
10.00% Moderate + BXM
9.75%
Returns
9.50%
Aggressive
Moderate
9.25% 9.00%
Conservative + BXM
8.75%
Conservative
8.50% 8.25%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0% 11.0% 12.0% 13.0%
Standard Deviation
Measuring the impact of adding CBOE BXM to diversified portfolios. Calculated with monthly rebalancing over the period June 1, 1988 to August 31, 2006. BXM substituted for 10% of large cap equity exposure in each asset mix. In all cases, return is essentially unchanged while risk is reduced, improving the risk-adjusted return as measured by the Sharpe ratio. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
68
Income Graph from 2007 Study by Fund Evaluation Group
The avg. monthly call premium received was 1.84%. www.cboe.com/BXD. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
69
More than $30 Billion in 45 BuyWrite Products Samples include: Ticker
Investment Product
BWC PBN DPD ETW BEO GATEX GSPAX IGA MCN BXU MBS NFJ NAI JPZ PGP BEP VEPBX
BlackRock World Investment Trust Citigroup Funding PISTONS linked to BXM Index Dow 30 Premium & Dividend Income Fund Inc Eaton Vance Tax-MgdGlobal Buy-Write Opportunity Fund Enhanced S&P 500 Covered Call Fund Gateway Fund Goldman Sachs U.S. Equity Dividend and Premium Fund ING Global Advantage and Premium Opportunity Fd Madison/Claymore Covered Call Fund Merrill Lynch 8% Return Notes Linked to BXM Index Morgan Stanley Strategic Total Return Securities (STARS) linked to BXM Index NFJ Dividend Interest & Premium Strategy Fund Nicholas-Applegate International & Premium Strategy Fund Nuveen Equity Premium Income Fund PIMCO Global StocksPLUS & Income Fund S&P 500 Covered Call Fund Inc. (IQ Inv. Adv., Merrill Lynch) Van Kampen Equity Premium Income Fund
BWV PBP
Barclays iPath CBOE S&P 500 BuyWrite Index (ETN based on BXM Index) PowerShares S&P 500 BuyWrite Portfolio (ETF based on BXM Index)
CBOE does not provide endorsements or recommendations for any fund. Investors in some Asian countries might not be permitted to invest in these funds Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
70
Sample U.S. Fund Performance One-Year
ThreeYear
Mkt Return Thru Mkt Return, 1-Aug-2008 Annualized, Thru 1Aug-2008
Standard Beta - Trailing Deviation - 3-yr Thru 31-JulyTrailing 3-yr Thru 31-July-2008
2008
Gateway Fund (GATEX)
0.68%
5.57%
4.34
0.38
Eaton Vance Enh Eq Inc (EOI)
-4.14%
1.29%
7.88
0.76
NFJ Div., Int., & Prem Str Fd (NFJ)
-6.79%
3.51%
7.76
0.70
iShares Russell 2000 (IWM)
-6.82%
2.85%
13.62
1.14
iShares Russell 1000 (IWB)
-11.64%
2.82%
10.12
1.00
Source: www.morningstar.com on 4-August-2008
CBOE does not provide investment advice or recommendations for any funds, including the funds listed above. Please read the applicable prospectus. Investors in some Asian countries might not be allowed to invest in these U.S. funds. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
71
6. Benchmark Indexes for Volatility-based Strategies – VIX, VPD, OVX, etc.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
72
Volatility Indexes at CBOE Index
Index Ticker
速
Options Available?
Website
Yes
www.cboe.com/VIX
CBOE Volatility Index速
VIX
CBOE DJIA Volatility Index
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速 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 GVZ EVZ
www.cboe.com/GVZ
CBOE Gold Volatility Index CBOE EuroCurrency Volatility Index
www.cboe.com/VXD
www.cboe.com/EVZ
www.cboe.com/volatility Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
73
News Clip Barron’s 21st July 2008
”… the current financial crisis has made CBOE's VIX a market darling … … In May, the Mumbai-based National Stock Exchange licensed VIX to create India VIX. CBOE also has agreements with the Taiwan Futures Exchange, Germany's Eurex, and Euronext. VIX indexes will be listed on London's FTSE 100, Amsterdam Exchange Index (AEX), France's CAC 40 and Belgium's BEL20 Index. … Last week, VIX was applied to crude oil, marking the start of a series of non-stock VIX indexes. By year's end, CBOE will introduce VIX indexes on gold, foreign currencies and interest rates. This will complement Dow (DJX), Nasdaq (VXN), Russell 2000 (RVX) and Standard & Poor's 100 (VXO) VIX indexes. … “ (emphasis added)
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
74
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 30day volatility implicit in the prices of near-term S&P 500 (SPX) options. VIX is quoted in percentage points, just like the standard deviation of a rate of return, e.g. 23.26. The SPX options used in the VIX calculation are – O-T-M puts and call covering the entire range of strike prices (the “ volatility skew”) From the nearby and next-to-nearby expiration months for a constant 30-day volatility measure VIX futures in 2004 and VIX options in 2006, with settlement date on Wednesday (30 days before SPX expiration) www.cboe.com/VIX
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
75
Unique Features of Volatility Index Products
Futures Pricing Based on Forward Value of Volatility Index Pricing Can Be Different for a Number of Reasons Wednesday Settlement Special Opening Quotation Price Negative Correlation to Stock Indexes High Volatility of Volatility
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
76
Why Trade Volatility?
Negative correlation to most equity indexes Positive correlation to credit prices Efficient way to manage unwanted market risk Unique properties of volatility create trading opportunities
Historical difference between realized and implied volatility Volatility Term Structure High Volatility of Volatility
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
77
CBOE Volatility Index (VIX) 75
1800 S&P 500 (SPX)
50
1200
SPX
VIX Daily Closing Prices
VIX and S&P 500
25 VIX 2/4/2008
26-Jan-05
01/18/02
01/08/99
01/05/96
01/04/93
01/02/90
0
600
0
Sources: CBOE and Bloomberg. (2-Jan-1990 - 22-July-2008). www.cboe.com/VIX
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
78
Four Volatility Indexes Since Jan. 2007 CBOE Crude Oil Volatility Index (OVX) CBOE Russell 2000 Volatility Index (RVX)
Daily Closing Prices
60
CBOE NASDAQ-100 Volatility Index (VXN) CBOE Volatility Index速 (VIX)
Select volatility indexes at CBOE
50
OVX
40
VXN
30
RVX
20
VIX
10 0 3-Jan-2007
5-Jul-2007
3-Jan-2008
3-Jul-2008
(3-Jan-2007 to 22-July-2008) Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
79
One Year of Prices US Oil Fund ETF (USO) CBOE Crude Oil Volatility Index (OVX) CBOE Volatility Index速 (VIX)
120 USO ETF
100 80
OVX Index
60 40
VIX Index
20 0 23-Jul-2007
23-Oct-2007 23-Jan-2008 23-Apr-2008
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
80
ETFs and Volatility Indexes (July 23, 2007 – July 30, 2008) 200
150
FXE ETF
FXE – CurrencyShares Euro Trust
USO ETF
USO - US Oil Fund
GLD ETF
GLD - SPDR Gold Shares
100
50
0 23-Jul-2007
23-Dec-2007
23-May-2008
OVX
OVX - CBOE Crude Oil Volatility Index
GVZ
GVZ - CBOE Gold Volatility Index
VIX
VIX - CBOE Volatility Index
EVZ
EVZ - CBOE EuroCurrency Volatility Index
Sources: CBOE and Bloomberg Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
81
Three Volatility Indexes Since Jan. 2007 CBOE S&P 100 Volatility Index (VXO)
Daily Closing Prices
40
CBOE Volatility Index (VIX) CBOE DJIA Volatility Index (VXD)
Select volatility indexes at CBOE
30
VXO VIX
20
VXD
10 0 3-Jan-2007
5-Jul-2007
3-Jan-2008
3-Jul-2008
(3-Jan-2007 to 22-July-2008) Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
82
High Volatility of Volatility 132.0%
140% 120% 100%
83.3%
94.2% 78.5%
VIX (spot)
80% 60%
56.0%
VIX Near-term Futures
45.8%
40% 20% 0%
2005
2006
2007
Historic Volatility of Daily Returns (Source: CBOE).
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
83
Volatilities of VIX, Stocks, & Stock Index Historic Volatility in Years 2005, 2006, & 2007 VIX (spot)
150% 132.0%
100%
94.2%
VIX Near-term Futures
GM
83.3%
AAPL GOOG
50%
IBM S&P 500 (SPX)
0% 2005
2006
Historic Volatility
2007
Source: CBOE VIX (spot) VIX Near-term Futures
GM AAPL GOOG IBM S&P 500 (SPX)
2005 83.3% 45.8% 42.6% 38.8% 32.1% 17.9% 10.3%
2006 94.2% 56.0% 41.3% 38.1% 34.0% 14.2% 10.0%
2007 132.0% 78.5% 39.8% 37.6% 24.3% 20.6% 16.0%
Source: CBOE
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
84
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 RVX and RUT
VXD and DJX VXN and NDX
0.0
-0.5 -0.76
-1.0 2004
-0.83
2005
-0.82
2006
-0.85
2007
Correlation of Daily Returns for Volatility and Stock Indexes. Source: CBOE. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
85
Key Dates for VIX Prices Closing Price VIX
SPX
% Change VIX
SPX
Three days on which VIX rose by more than 50% 18.19 358.76 27-Feb-2007 15-Nov-1991 19.22 355.66 23-Jul-1990 20.11 352.20
64.2% 51.7% 51.5%
-3.5% -3.7% -1.7%
Two days on which VIX fell by more than 24% 5-Apr-1994 25.01 1260.32 15-Jun-2006 24.05 1260.68
-24.0% -25.9%
2.1% 2.1%
Seven days on which VIX closed above 43.70 45.74 959.44 8-Oct-1998 10-Sep-1998 45.29 980.19 5-Aug-2002 45.08 834.60 23-Jul-2002 44.92 797.70 31-Aug-1998 44.28 957.28 43.74 1009.06 11-Sep-1998 20-Sep-2001 43.74 984.54
5.1% 14.2% 9.2% 7.3% 11.8% -3.4% 7.8%
-1.2% -2.6% -3.4% -2.7% -6.8% 2.9% -3.1%
Survey of Trading Days from 2-Jan-1990 to 22-July-2008. Source: CBOE. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
86
Key Specifications & Volume- VIX Futures & Options
Exchange
Futures
Options
CFE
CBOE
VX
VIX
$1,000
$100
Ticker Multiplier Last Day of Trading Expiration Date Trading Hours Avg. Daily Volume
Generally on
Tuesday, the day before expiration date.
Generally on Wednesday 30 days prior to the 3rd Friday of calendar month immediately following the expiring month.
8:30 a.m. – 3:15 p.m. Chicago Time 4,387
102,110
44,640
1,130,515
March 26, 2004
Feb. 24, 2006
(Jan-July 2008)
Open Interest (July 31, 2008)
Launch Date
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
87
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
3/16/2007
3/2/2007
2/15/2007
5
VIX Nov '07 Futures
2/1/2007
10
VIX Mar '07 Futures
On Feb. 27 the March '07 15.0 VIX calls rose 483%.
2.5 VIX May '07 15.0 Calls
2.0 1.5 1.0
VIX March '07 15.0 Calls
0.5 0.0 3/16/2007
3/2/2007
2/15/2007
2/1/2007
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
88
% Change in Prices on 27 Feb. 2007 S&P 500 (SPX) VIX Nov '07 Futures VIX Mar '07 Futures
-3.5% 3.2% 29.5%
VIX Spot Index
64.2%
VIX May '07 15.0 Calls
77.3%
VIX March '07 15.0 Calls
483.3%
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
89
VIX and VIX Futures in July 2008 30 28
VIX Spot
26 VX July08 Fut 24 VX Nov08 Fut 22 20 31-Jul
29-Jul
27-Jul
25-Jul
23-Jul
21-Jul
19-Jul
17-Jul
15-Jul
13-Jul
11-Jul
9-Jul
7-Jul
5-Jul
3-Jul
1-Jul
The 2-week % change from 1-July to 15-July was 21% for VIX spot, 17% for VIX July’08 Futures, and 8% for VIX Nov’08 Futures. Sources: CBOE and Bloomberg. Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
90
Benchmark Indexes and VIX Futures
CBOE Lehman 5-Month Constant Maturity VIX Futures Index (VWX) - reflects the performance of a strategy that systematically holds a "long volatility" position consisting of VIX futures with expiries ranging from 4 to 7 months. The strategy's objective is to maintain a constant maturity exposure to 5-month VIX forward implied volatility. The portfolio is adjusted daily by selling a portion of the 4th month VIX futures and buying an equal amount of 7th month VIX futures, effectively spreading the futures "roll" over each month. CBOE VIX Premium Strategy Index (VPD) - tracks the performance of a strategy that systematically sells 1-month VIX futures. This index tracks the value of a portfolio that overlays a sequence of short one-month VIX futures on a money market account. The VIX futures are held until expiration and new VIX futures are then sold. The money market account decreases leverage relative to a stand-alone short position in VIX futures. To further limit risk, the number of VIX futures sold at each roll is set to preserve 75% of the initial value of the portfolio in the event that VIX futures increase by 25 points. CBOE Capped VIX Premium Strategy Index (VPN) - tracks the performance of a strategy that systematically sells 1-month VIX futures, capped by the purchase of a VIX call option. The short VIX futures position is capped with long VIX calls struck 25 points higher than the VIX futures price, or calls at the closest strike below if this strike is not listed.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
91
Month-end Price Levels -- CBOE VIX Premium Strategy Index (VPD) -- CBOE Capped VIX Premium Strategy Index (VPN) -- CBOE Lehman 5-Month Constant Maturity VIX Futures Index (VWX) -- CBOE Volatility Index (VIX)
200
VPD
150
VPN
100
VWX 50
VIX 0 Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
(June 2004 - June 2008). Sources: CBOE and Bloomberg.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
92
One-Year Change in Select Index Prices
140% 130% 120%
Up 14% VWX
110% Up 6% VPD Up 3% VPN
100% 90%
Down 11% S&P 500 (TR)
80% 70% 31-Jul-08
31-May-08
31-Mar-08
31-Jan-08
30-Nov-07
30-Sep-07
31-Jul-07
Daily Closing Prices, re-scaled to 100% on July 23, 2007
CBOE Lehman 5-Month Constant Maturity VIX Futures Index (VWX) CBOE VIX Premium Strategy Index (VPD) CBOE Capped VIX Premium Strategy Index (VPN)
(July 31, 2007 - July 31, 2008) Sources: CBOE and Bloomberg.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
93
7. Volatility-based Strategies
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
94
Volatility Trading
1. 2. 3. 4.
Negative Correlation? Mean Reverting? Implied versus Historical? Other Issues‌
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
95
Sources of Volatility Trading Ideas
Volatility Report: Macro Themes Relationships Term Structure Relative Volatility Range Volatility Surfaces Ranking Screening/Scanning Correlation/Dispersion Trading Activity Backtesting Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
96
Volatility Report - Relationships Index
Closing
Weekly
52Week
52-Week
52Week
52-Week
10-Day
30-Day
HV
30-Day
IV
Symbol
Value
Change
High
High Date
Low
Low Date
HV
HV
Percentile
IV
Percentile
VIX
24.06
-3.84%
37.57
1/22/2008
9.70
2/22/2007
54.08
91.92
17%
65.33
9%
VXV
24.40
-4.09%
30.29
1/22/2008
11.32
2/22/2007
29.15
53.06
9%
-
-
VXN
26.30
-1.46%
40.77
1/22/2008
14.54
6/15/2007
72.01
88.97
37%
81.48
26%
RVX
29.58
0.51%
42.60
8/16/2007
14.25
2/22/2007
51.92
68.65
7%
59.90
16%
VXD
21.75
-3.76%
34.21
8/16/2007
8.93
2/22/2007
64.34
92.78
15%
-
-
VXO
26.51
-3.00%
38.88
1/22/2008
9.03
2/22/2007
54.52
106.47
21%
-
-
SPX
1353.11
0.23%
1576.09
10/11/2007
1270.05
1/23/2008
14.53
22.19
85%
22.58
68%
SPY
135.62
0.36%
157.52
10/11/2007
126.00
1/22/2008
11.13
20.51
74%
23.19
69%
1. 2. 3. 4.
Spreads between volatility indexes IV and HV percentiles 10-day to 30-day HV Proximity to high and low readings
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
97
Term Structure of Volatility Term Structure of VXN / RVX (2-18-08)
Term Structure of VIX (2-18-08) 27
32 26.07
31.39 30.97
25.91
26
31.39
25.50 25.36
25.93
31
30.42
VXV 25.44
30
VIX 25.02
25
30.27
24.68 24.45
24
24.41
RVX
RVX 29.43
25.17
VXN
29
RVX Spot 28.92
28
28.8
28.4
VXN Spot
28.5 28.2
1. 2. 3. 4.
20 A 08 u gu s N t2 o 00 ve 8 m be r 20 D ec 08 em b er 20 08
Ju ly
20 08
20 08
Ju n e
M ay
20 08
A p ri l
20 08
M ar ch
F eb ru ar y
20 08
23 27 VXN 26.69
26 Fe bruary M arch 2008 2008
April 2008
M ay 2008
June 2008
Relationship between spot and future volatility prices Provides valuable insights into market expectations Is the market fading recent gains or losses in spot? Is the info. consistent for the various products? Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
98
Changes in Term Structure Term Structure of VIX (2-18-08)
Term Structure of VIX (6-23-08)
27
25 26.07
25.91
26
25.50 25.36
25.93
25.17 24.45
24
23.54 23.43
24.68 24.41
23.43
23.72
23.38
VXV 23.57
23 VIX 22.87
31.39
20 O ct 08 o b e N r o 20 ve 08 m be r D 20 ec 08 em b er 20 08 Ja nu ar y F 20 eb 09 ru ar y 20 09 M ar ch 20 09
20 08
S ep t.
Term Structure of VXN / RVX (6-23-08)
Term Structure of VXN / RVX (2-18-08) 32
A u g.
20 08 Ju ly
20 A 08 u gu s N t2 o 00 ve 8 m be r 20 D ec 08 em b er 20 08
Ju ly
20 08
20 08
Ju n e
M ay
A p ri l
20 08
M ar ch
20 08
22
20 08
23
23.87
23.72
23.51
VIX 25.02
25
F eb ru ar y
23.70
24
VXV 25.44
30
31.39 30.97
31
30.27
28.90
30.42
29
30
28
RVX Spot 28.4
VXN
VXN
29 28.8
RVX
RVX
RVX 29.43
28.92
28.89
28.63
28
VXN Spot
28.5 28.2
RVX Spot
27.63
VXN Spot 27.55
27
27.55
27.55
27.15
27
VXN 26.75 RVX 26.35
VXN 26.69
26
26 Fe bruary 2008
M arch 2008
April 2008
M ay 2008
June 2008
July 2008
August 2008
Se pte mbe r Nov e mbe r 2008 2008
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
99
Relative Volatility Range Select Sector SPDR Relative Volatility Range 2/18/08 -12.53%
XLB-Materials SPDR
-21.59%
XLE-Energy SPDR
-12.69%
XLF-Financial SPDR
-28.29%
XLI-Industrial SPDR XLK-Technology SPDR
-35.91%
XLP-Consum er Staples SPDR
-35.48% -20.24%
XLU-Utilities SPDR
-27.64%
XLV-Health Care SPDR
-33.48%
XLY-Consum er Discretionary SPDR
-40%
-30%
-20%
-10%
0%
Undervalued Premiums (Negative %)Overvalued Premiums (Positive %)
1. 2. 3. 4.
IV forward looking / HV backward looking Compares IV Percentile to HV Percentile Understand the challenges Interpretation is important
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
100
Relative Volatility Range Select Sector SPDR Relative Volatility Range 2/18/08 -12.53%
XLB-Mate rials SPDR
-21.59%
XLE-Ene rgy SPDR
-12.69%
XLF-Financial SPDR
-28.29%
XLI-Indus trial SPDR
-35.91%
XLK-Te chnology SPDR
-35.48%
XLP-Cons um e r Staple s SPDR
-20.24%
XLU-Utilitie s SPDR
-27.64%
XLV-He alth Care SPDR
-33.48%
XLY-Cons um e r Dis cre tionary SPDR
-40%
-30%
-20%
-10%
0%
Undervalued Premiums (Negative %)Overvalued Premiums (Positive %)
Select Sector SPDR Relative Volatility Range 6/23/08 28.03%
XLB-M ate rials SPDR
22.73%
XLE-Ene rgy SPDR XLF-Financial SPDR
17.11%
XLI-Indus trial SPDR
16.77% 10.00%
XLK-Te chnology SPDR XLP-Cons um e r Staple s SPDR
-8.11% 9.21%
XLU-Utilitie s SPDR XLV-He alth Care SPDR XLY-Cons um e r Dis cre tionary SPDR -10%
Undervalued Premiums (Negative %)
2.72% 2.21% 0%
10%
20%
30%
Overvalued Premiums (Positive %)
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
101
Volatility Surfaces SPX Volatility Surface - 2-28-08
VIX Volatility Surface - 2-28-08 1.00
0.40
0.80
0.20 0.00
30
OTM
40
Term
0.40
0
720
0.60
20
40
0
20
OTM
10
30 30
50
0.00
IV
10
0.10
0.3000-0.4000 0.2000-0.3000 0.1000-0.2000 0.0000-0.1000
50
IV 0.20
30
0.30
720
Term
4.
Valuable insights into intricacies of volatility Easily visualize skews, smiles and smirks Pinpoints possibly profitable aberrations Ask why the surface is shaped like it is
5.
Make sure VIX data is based off of futures!
1. 2. 3.
0.8000-1.0000 0.6000-0.8000 0.4000-0.6000 0.2000-0.4000 0.0000-0.2000
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
102
Ranking – IV Percentile S&P 500 Stocks with Highest IV as % of 52 Week Range
Symbol
Underlying Asset
IV
IV
Ratio
HV
Range
Last
IV/HV
Last
S&P 500 Stocks with Lowest IV as % of 52 Week Range
Symbol
IV
IV
Ratio
HV
Range
Last
IV/HV
Last
Trane Inc
4%
16.61
137.15
12.11
Underlying Asset
AMT
AMERICAN TOWER CORP
100%
47.45
113.14
41.94
1
TT
ADI
ANALOG DEVICES INC
100%
47.89
127.72
37.50
2
CBH
COMMERCE BANCORP INC.
9%
21.18
81.01
26.14
EXPRESS SCRIPTS INC [class A]
100%
45.75
125.03
36.60
3
CINF
CINCINNATI FINANCIAL CORP
17%
32.89
89.07
36.93
20%
35.11
111.81
31.40
25%
41.12
121.50
33.85
ESRX
FISV CSCO
FISERV INC
100%
38.19
140.63
27.15
4
FRX
FOREST LABORATORIES INC
CISCO SYSTEMS INC
100%
49.91
146.39
34.10
5
TDC
Teradata Corp.
1. 2.
Ranks stocks for high and low IV Percentile Critical – find out why they are on the list!!! a) b) c)
3.
Takeover Earnings Corporate News - Clinical Trial results, etc.
Interpretation is critical
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
103
Ranking – Ratio of IV to HV S&P 500 Stocks with Highest Ratio of IV to HV
Sym.
Underlying Asset
S&P 500 Stocks with Lowest Ratio of IV to HV
Ratio
IV
IV
HV
IV/HV
Last
Range
Last
Sym.
Underlying Asset
Ratio
IV
IV
HV
IV/HV
Last
Range
Last
CCU
CLEAR CHANNEL COMMUNICTNS INC
214%
96.35
91%
45.07
1
YHO O
YAHOO INC
34%
43.13
42%
126.93
MCO
MOODY'S CORPORATION
187%
75.90
100%
40.65
2
HAR
HARMAN INT L IND INC
36%
54.81
77%
151.57
LH
LAB CORP OF AMERICA HOLDINGS
161%
31.06
83%
19.32
3
CFC
COUNTRYWIDE CREDIT INDS INC
46%
85.87
27%
188.35
WPI
WATSON PHARMACEUTICALS INC
160%
39.01
91%
24.31
4
WAT
WATERS CORP
46%
34.12
67%
73.59
COMPUTER ASSOCIATES INTL INC
56%
34.65
64%
61.70
TLAB
TELLABS INC
1. 2. 3.
151%
83.93
49%
55.46
5
CA
Ranks stocks for high and low IV / HV Ratio Find out why they are here!!! Distinguish between temporary aberration or real opportunity
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
104
Screening / Scanning Option
Expiration
Option
Stock
Call
Return if Called
Return if Unchanged
Downside
Downside
Stock
Ticker
Month
Strike
Last
Bid
Return
Annualized
Return
Annualized
Break
Protection
Symbol
Symbol
(Year)
Price
Price
Price
(percent)
(percent)*
(percent)
(percent)
Even
(percent)
AJG
AJGDE
Apr08
25
$23.97
$0.85
9.47%
34.10%
5.02%
18.06%
$22.81
4.84%
BAC
BACAH
Jan08
40
$39.30
$0.65
3.49%
139.72%
1.68%
67.27%
$38.65
1.65%
BAC
BACBH
Feb08
40
$39.30
$1.75
6.52%
63.48%
4.66%
45.34%
$37.55
4.45%
BAC
BACBV
Feb08
42 1/2
$39.30
$0.70
10.10%
98.31%
1.81%
17.64%
$38.60
1.78%
BBT
BBTBF
Feb08
30
$27.61
$0.60
11.07%
107.71%
2.22%
21.61%
$27.01
2.17%
BBT
BBTCF
Mar08
30
$27.61
$1.00
12.74%
63.70%
3.76%
18.79%
$26.61
3.62%
BEN
BENBB
Feb08
110
$105.9 6
$4.00
7.89%
76.72%
3.92%
38.17%
$101.96
3.78%
BEN
BENDB
Apr08
110
$105.9 6
$7.60
12.04%
43.33%
7.93%
28.55%
$98.16
7.36%
BEN
BENDC
Apr08
115
$105.9 6
$5.50
14.67%
52.82%
5.67%
20.43%
$100.26
5.38%
Scan massive trading data for valuable insights 2. Very powerful when combined with backtesting 3. Don’t confuse macro issues as micro opportunities 4. Understand what the numbers are telling you and the interaction between factors Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. 1.
This is meant to provide general information; it is not to provide investment advice.
105
Correlations - Dispersion Ticker
Equiv
Beta
Index IV A
Corr
Specific
Contribution
HV
IV Mean
%
Variance
To Index Voly
%
%
IV/HV
Vol
Weight
Weight
Ratio
%
Multipli er
7.09
1.3
43.11
23.63
0.02
26.19
21.41
0.82
0.33
0.11
1
AA
10.39
1.26
33.25
30.95
0.04
32.82
39.31
1.2
0.26
0.25
1
AAPL
10.95
0.54
21.54
21.22
0.05
21.73
27.43
1.26
0.4
0.67
1
ABC
7.53
-0.18
-5.25
29.94
0
29.98
26.05
0.87
0.29
0.07
1
ABI
7.6
0.7
21.93
26.95
0
27.62
24.21
0.88
0.31
0.04
1
ABK
10.44
0.97
59.95
11.23
0.01
14.03
16.89
1.2
0.62
0.07
1
ABT
10.23
1.16
62.73
12.44
0.09
15.98
18.85
1.18
0.54
0.65
1
ACE
9.02
0.97
47.87
15.48
0.02
17.63
18.35
1.04
0.49
0.15
1
ACS
11.45
-0.01
-0.84
14.53
0
14.53
19.18
1.32
0.6
0.04
1
ADBE
15.67
1.36
60.26
15.57
0.03
19.51
35.27
1.81
0.44
0.18
1
1. 2.
3.
Select
Ability to go long or short correlation Profit from large movements in individual stocks versus the index (or vice versa) Tends to experience periods where it “sets-up” and periods when it doesn’t
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
106
Trading Activity Quantity
Symbol
Expiry
Strike
Type
Price
Side
Exch.
Volume
Ivol
Delta
OI(t)
1300
ADBE
Feb08
35
Puts
$0.45
SELLER
ISE
1933
37.90%
-0.495
3788
3000
AIG
Jan09
55
Calls
$4.45
BUYER
ISE
3000
42.47%
0.35
17458
1502
AIG
Feb08
65
Puts
$19.50
BUYER
ARCA
3004
229.42%
-1
18581
1502
AIG
Feb08
65
Puts
$19.50
BUYER
ARCA
1502
236.25%
-1
18581
1500
AIG
Jan09
55
Calls
$4.45
MIDMKT
ISE
4520
42.52%
0.3425
17458
2000
BAC
Mar08
45
Calls
$0.85
SELLER
ISE
2567
33.28%
0.345
19440
2000
BAC
May08
40
Puts
$2.35
BUYER
ISE
4673
44.35%
-0.31
36620
2000
BAC
May08
47.5
Calls
$1.35
BUYER
ISE
2269
33.58%
0.315
25001
1925
BAC
Mar08
45
Calls
$0.97
SELLER
ISE
5900
32.35%
0.385
19440
1.
Increases/decreases in: a) b)
2. 3. 4.
Trading volume/Open interest Implied volatility levels
Determine possible pins near expiration Effective for analyzing roll activity for covered calls Watch out for dividend plays
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
107
Backtesting Asset
C/P
Strike
Expiration
Contracts
Price
B/S
1/24/1996
SPX
Put
615
2/17/1996
-100
4.50
Sell
45,000.00
45,000.00
2/15/1996
SPX
Put
615
2/17/1996
100
0.06
Buy
-625.00
44,375.00
2/21/1996
SPX
Put
640
3/16/1996
-100
4.00
Sell
40,000.00
84,375.00
3/14/1996
SPX
Put
640
3/16/1996
100
0.62
Buy
-6,250.00
78,125.00
3/27/1996
SPX
Put
640
4/20/1996
-100
7.50
Sell
75,000.00
153,125.00
4/18/1996
SPX
Put
640
4/20/1996
100
0.38
Buy
-3,750.00
149,375.00
4/24/1996
SPX
Put
640
5/18/1996
-100
5.00
Sell
50,000.00
199,375.00
5/16/1996
SPX
Put
640
5/18/1996
100
0.06
Buy
-625.00
198,750.00
5/29/1996
SPX
Put
660
6/22/1996
-100
6.38
Sell
63,750.00
262,500.00
1. 2. 3. 4. 5.
Trade Net
P+L
Trade Date
Can provide extremely valuable insights Does the Past = the Future? Small changes can make big differences Be aware of macro issues impacting results Be careful of data mining and timeframe used for analysis
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
108
Summary – Volatility Idea Generation 1. 2.
3.
4. 5.
Many sources of information for ideas Some data extremely valuable, other data requires some work and interpretation Understand what the data is telling you and its limitations Watch macro issues = micro opportunities Be careful of data mining and the timeframe There is always a better way to do things‌
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
109
8. Conclusion
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
110
Potpourri of Option Knowledge
Can be good without being complicated If it is too good to be true find out why Understand how your position changes as asset changes and time passes Volatility is extremely important Know the probability of success It is worth the effort to understand options, their use is rapidly expanding
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
111
In conclusion „ „
„
Diversification and risk management Options-based strategies and benchmark indexes have attracted more interest Please see the last slide for important risk disclosures
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
112
In conclusion „ „
„
Diversification and risk management Options-based strategies and benchmark indexes have attracted more interest Please see the last slide for important risk disclosures
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
113
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 1-888OPTIONS, or contacting CBOE at www.cboe.com/Contact. The information in these materials is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in these materials. No statement within this material should be construed as a recommendation to buy or sell a security or to provide investment advice. The CBOE S&P 500 BuyWrite Index (BXMSM), CBOE S&P 500 2% OTM BuyWrite Index (BXYSM), CBOE DJIA BuyWrite Index (BXDSM), CBOE Russell 2000 BuyWrite Index (BXRSM) and CBOE NASDAQ-100 BuyWrite Index (BXNSM) (the “Indexes”) are designed to represent proposed hypothetical buy-write strategies. Like many passive benchmarks, the Indexes do not take into account significant factors such as transaction costs and taxes. Transaction costs and taxes for a buy-write strategy could be significantly higher than transaction costs for a passive strategy of buying-and-holding stocks. Investors attempting to replicate the Indexes should discuss with their brokers possible timing and liquidity issues. Past performance does not guarantee future results. These materials contain comparisons, assertions, and conclusions regarding the performance of indexes based on backtesting, i.e., calculations of how the indexes might have performed in the past if they had existed. Backtested performance information is purely hypothetical and is provided in this document solely for informational purposes. The methodology of the Indexes is owned by Chicago Board Options Exchange, Incorporated (CBOE) may be covered by one or more patents or pending patent applications. Standard & Poor's®, S&P®, and S&P 500® are registered trademarks of The McGraw-Hill Companies, Inc. and are licensed for use by CBOE. "Dow Jones", "The Dow", "DJIA" and “Dow Jones Industrial Average” are trademarks of Dow Jones & Company, Inc. and have been licensed for use for certain purposes by CBOE. CBOE's options based on Dow Jones indexes and financial products based on the CBOE DJIA BuyWrite Index are not sponsored, endorsed, marketed or promoted by Dow Jones and Dow Jones makes no representations regarding the advisability of investing in such products. Nasdaq®, Nasdaq-100®, and Nasdaq-100 Index®, are trademarks of The Nasdaq Stock Market, Inc. (which with its affiliates is referred to as the "Corporations") and are licensed for use by CBOE. The CBOE NASDAQ-100 BuyWrite Index (the "BXN Index") is not derived, maintained, published, calculated or disseminated by the Corporations. CBOE Volatility Index®, VIX®, CBOE® and Chicago Board Options Exchange® are registered trademarks and BXM, BXD, BXN and BXY are servicemarks of CBOE. Copyright © 2008 Chicago Board Options Exchange, Incorporated. All Rights Reserved.
Summer 2008 Presentation to CFA Society in Asia. Please see the last slide for important risk disclosures. This is meant to provide general information; it is not to provide investment advice.
114