CBOE Risk Management Conference Europe Beyond BXM Next Generation Option Strategy Benchmarks William Speth, VP Research & Product Development September 28, 215
Forward Looking Statements This presentation may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those statements that reflect our expectations, assumptions or projections about the future and involve a number of risks and uncertainties. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause actual results to differ materially from that expressed or implied by the forward-looking statements, including: the loss of our exclusive licenses to list certain index options; decreases in the amount of trading volumes or a shift in the mix of products traded on our exchanges; legislative or regulatory changes affecting the options markets; increasing competition by foreign and domestic entities, including increased competition from new entrants into our markets and consolidation of existing entities; increasing price competition; our ability to maintain access fee revenues; economic, political and market conditions; our ability to operate our business without violating the intellectual property rights of others and the costs associated with protecting our intellectual property rights; our ability to accommodate increases in trading volume and order transaction traffic without failure or degradation of performance of our systems; our ability to protect our systems and communication networks from security risks, including cyber attacks; our ability to attract and retain skilled management and other personnel; our ability to maintain our growth effectively; our dependence on third party service providers; and the ability of our compliance and risk management methods to effectively monitor and manage our risks. More detailed information about factors that may affect our performance may be found in our filings with the SEC, including in our Annual Report on Form 1-K for the year ended December 31, 211 and other filings made from time to time with the SEC. 2
Strategy Benchmark Principles Systematic use of options to achieve an investment objective Enhance Yield CBOE BuyWrite Indexes (ATM & 2%OTM) CBOE PutWrite Indexes Reduce Risk CBOE Collar Index CBOE Tail Hedge Index Capture Alpha 3
New Strategy Benchmarks Enhance Yield Reduce Risk Capture Alpha Conditional BuyWrite 3 BuyWrite Weekly BuyWrite Rolling Weekly BuyWrite Weekly PutWrite Protective Put Zero-Cost Put Spread Collar Iron Butterfly Iron Condor VIX Strangle 4
Yield Enhancing Strategies Selling options is one way to capture risk premium & enhance portfolio yield Selling at-the-money options captures the most time premium, but offers the least upside Option price time Collect more total premium selling short-dated options Risk / Return profiles can be very different Be aware of implied volatility term structure 5
Conditional BuyWrite CBOE Russell 2 Conditional BuyWrite Index Call sale depends on level of CBOE Russell 2 Volatility Index (RVX) Sell 1 ATM call if RVX > 2 16 14 12 1 8 6 4 Sell ½ ATM call if RVX < 2 CBOE Russell 2 Conditional BuyWrite Index CBOE Russell 2 BuyWrite Index (BXR) Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 5,4 Russell 2 TR Index 3,4 1,4 January 27 through August 215 6
Avg. Monthly Return Conditional BuyWrite 1% CBOE Russell 2 Conditional BuyWrite Monthly Returns 8% 6% 4% 2% % -2% -4% < -5% -5% to -2% -2% to % % to 2% 2% to 5% > 5% Russell 2 Total Return Bucket -6% -8% -1% CBOE Russell 2 Conditional BuyWrite BXR Russell 2 TR Index 7
Weekly BuyWrite / PutWrite 14 13 12 11 1 9 8 7 6,5 CBOE Russell 2 Weekly BuyWrite Index Buy RUT, Sell 1-Week ATM call CBOE Russell 2 Weekly PutWrite Index Sell 1-Week ATM put, Hold cash CBOE Russell 2 Weekly BuyWrite CBOE Russell 2 Weekly PutWrite Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 4,5 Russell 2 TR Index 2,5 March 211 through August 215 8
Avg. Monthly Return Weekly BuyWrite / PutWrite 1% 8% CBOE Russell 2 Weekly BuyWrite & PutWrite Monthly Returns 6% 4% 2% % -2% -4% < -5% -5% to -2% -2% to % % to 2% 2% to 5% > 5% Russell 2 Total Return Bucket -6% -8% -1% CBOE Russell 2 Weekly BuyWrite CBOE Russell 2 Weekly PutWrite Russell 2 TR Index 9
Risk Reducing ( Hedging ) Strategies Effective hedging programs do not try to eliminate all risk Weigh the benefits of protection with the cost of hedging to achieve an optimal risk profile Virtually limitless combinations Understand your hedging tools 1
P&L P&L P&L Optimizing Your Hedging Strategy Protective Put 1 1 9 9 9 5-1 Unhedged Hedged Protection Upside Upfront Cost Zero-Cost Collar 1 1 7 5 3-1 Unhedged Hedged Zero-Cost Put Spread Collar 1 1 5 Protection Upside Upfront Cost 5 5-1 Unhedged Hedged Protection Upside Upfront Cost 11
Constructing a Hedging Strategy CBOE S&P 5 Protective Put Index ( PPUT ) Buy 1M 5% OTM SPX Put Avg. cost.5%; No upside cap CBOE S&P 5 Zero-Cost Put Spread Collar ( CLLZ ) Buy 1M 2.5% OTM SPX Put / Sell 1M 5% OTM SPX Put Sell 1M OTM SPX Call to cover cost of put spread Avg. cost.5%; Avg. upside cap 3.5% 12
Protective Put & Put Spread Collar The real cost of hedging is not measured by option premium alone. 8 7 6 5 4 3 2 1 PPUT CLLZ 2, 1, S&P January 1988 through August 215 13
Avg. Monthly Return Protective Put & Put Spread Collar 8% CBOE S&P 5 Protected Put & Zero-Cost Put Spread Collar Monthly Returns 6% 4% 2% % -2% -4% < -5% -5% to -2% -2% to % % to 2% 2% to 5% > 5% S&P 5 Total Return Bucket -6% -8% -1% PPUT CLLZ SPTR 14
Alpha Capture Strategies Non-directional Limited risk Limited profit potential Actual volatility of the underlying asset is expected to be lower than the implied volatility 15
P&L P&L Alpha Capture Strategy Payouts Iron Butterfly 1 5-5 -1 1 5-5 -1 Iron Condor Sell ATM put & call ( straddle ), buy OTM put & call ( wings ) Collect premium Max payout at straddle strike Max loss outside of wing strike Sell OTM call spread & OTM put spread Collect premium Max payout in range between closest to the money call & put strikes Max loss outside of furthest OTM call & put strikes 16
Alpha Capture Strategies CBOE S&P 5 Iron Butterfly Index ( BFLY ) sell 1M ATM straddle; buy 5% OTM wings CBOE S&P 5 Iron Condor Index ( CNDR ) sell 1M 2 /5 call & put spreads 1, 8 6 4 Monthly risk outlay limited to 1% of capital 2 BFLY CNDR 5, 2,5 S&P 5 TR Index January 1988 through September 16, 215 17
Alpha Capture Strategies 15% BFLY 1% 5% % -8% -6% -4% -2% % 2% 4% 6% 8% Low volatility vs. S&P 5 SPTR 17.9% BFLY 1.8% CNDR 7.2% -5% -1% R² =.455 15% 1% CNDR -15% SPTR Returns 5% Low correlation with S&P 5 Index % -6% -4% -2% % 2% 4% 6% -5% -1% R² =.131-15% SPTR Returns 18
What s next? Roll out full suite of CBOE Russell 2 Strategy Benchmarks by year-end Create strategy benchmarks based on MSCI, other FTSE-Russell Indexes Develop new strategy methodologies Smart / Factor strategies Hybrid / Switching strategies E.g., VIX / SPX options; RVX / RUT options E.g., BXM / LOVOL Risk Budget, Cross-Asset, Relative Value 19
Disclaimer 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. Copies are available from your broker, by calling 1-888-OPTIONS, or at www.theocc.com. The information in this document is provided solely for general education and information purposes. Past performance is not indicative of future results. No statement within this document should be construed as a recommendation to buy or sell a security or to provide investment advice. This document contains index performance data based on back-testing, i.e., calculations of how the index might have performed prior to launch. Backtested performance information is purely hypothetical and is provided in this document solely for informational purposes. Back-tested performance does not represent actual performance and should not be interpreted as an indication of actual performance. Multiple leg strategies involve multiple commission charges. Investors should consult their tax advisor as to how taxes affect the outcome of contemplated options transactions. CBOE, Chicago Board Options Exchange, CBOE Volatility Index, Execute Success and VIX are registered trademarks and BXM, BXR, BuyWrite, PutWrite and RVX are service marks of Chicago Board Options Exchange, Incorporated (CBOE). Russell and Russell 2 are registered trademarks of The Frank Russell Company, used under license. S&P 5 is a registered trademark of Standard & Poor s Financial Services, LLC and has been licensed for use by CBOE. Financial products based on S&P indices are not sponsored, endorsed, sold or promoted by Standard & Poor s, and Standard & Poor s makes no representation regarding the advisability of investing in such products. 215 CBOE. All Rights Reserved. 2