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THE POWERSHARES DB COMMODITY INDEX TRACKING FuND Listed in 2006, DBC has become the largest broad-based commodity ETF in the world. - Broad access to commodities - 100% daily transparency - Intraday liquidity // To download a copy of the prospectus, visit PowerShares.com/DBCpro // ETFs publish their holdings daily and trade on exchanges, like stocks, continuously throughout the trading day. // The fund is not a mutual fund or any other type of Investment Company within the meaning of the Investment Company Act of 1940 and is not subject to its regulation. // DB Commodity Services LLC, a wholly owned subsidiary of Deutsche Bank AG, is the managing owner of the fund. Certain marketing services may be provided to the fund by Invesco Distributors, Inc. or its affiliate, Invesco PowerShares Capital Management LLC (together, “Invesco”). Invesco will be compensated by Deutsche Bank or its affiliates. ALPS Distributors, Inc. is the distributor of the fund. Invesco, Deutsche Bank and ALPS Distributors, Inc. are not affiliated. // Commodity futures contracts generally are volatile and are not suitable for all investors. An investor may lose all or substantially all of an investment in the fund. powershares.com/DB | Follow us @PowerShares
Talking Indexes Options Before Quants Looking at a ‘new’ idea that’s been around a long, long time By David Blitzer Today options and investing with options means quant models, debates over how to measure implied volatility, or strategies to trade futures on the VIX. This modern era in options began in 1973 with the publication of Black-Scholes, 1 the first practical theory about options prices. But of course, options didn’t begin with Black-Scholes; some argue that both Greek mythology and the Bible include discussions or at least allusions to options trades. Sticking to written historical records and options similar to current ones, options history can easily reach back to the early 1600s in Amsterdam. At that time, Amsterdam was the leading European financial center, and the center of innovation. In 1602, the Dutch East India Company was the first stockholderowned corporation listed with shares that could be traded and held by people not otherwise linked to the company. While trading was active, settlement procedures were monthly, and recording ownership on the company’s books was more complex than today. Though electronic trading was four centuries in the future, the market was sophisticated and experienced in trading equities, commodities and fixed-income instruments. Options—both puts and calls—on Dutch East India Company stock were actively traded as well. 2,3 If the Amsterdam market in this historical context rings a bell for readers, remember that it is the same market that would experience a bubble in tulip bulbs in 1634-37—a bubble built on options and futures, not the cash market. Options trading without quantitative pricing models thrived. Research depended on a combination of technical and fundamental analysis. The latter included information regarding the local economy where the Dutch East India Company’s ships would be delivering their cargos; reports of economic conditions in India and South Asia where the ships bought and loaded cargos; and rumors of sailing and weather conditions, shipwrecks and other hazards. Options trading was supported by two factors: 1) with limited information, many investors preferred options to stocks because the downside risks could be limited; and 2) the share price for the Dutch East India Company was high, and options were a way to invest without risking too large a proportion of one’s wealth. As the old Dutch traders knew, options are analytically—and historically—similar to insurance. A put on a stock is one way to purchase insurance to limit downside risk. Writing a call can be thought of as insurance to the buyer of a call as well—insuring against the regret suffered if one doesn’t buy a stock and misses a big move. In either case, the writer is offering insurance and is paid a premium for accepting the risks while having no control of whether the option is exercised. Options have changed and expanded since the 1600s. With the support of various quantitative models and theories, we now think we understand them better. Their coverage can also be broader today than a single stock or a single risk. Through options on indexes, one can insure, or accept risk on, a portfolio of stocks. Further, to the extent that a particular portfolio is similar to a widely recognized index, one can insure, or add risk to, one’s own personal portfolio through the use of options. Many investors looking back at the last few years of financial turmoil would like to insure their entire portfolio, maybe their total net worth, against all risks. Until the S&P 500 lost 50 percent twice in the last decade, we all thought that was a once-in-a-lifetime event. Until the financial crisis began in 2007, we were completely convinced the Great 34 November / December 2012
Page 1 and 2: Plus Blitzer on the history of opti
Page 3: Contributors Mark Abssy Mark Abssy
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Page 8 and 9: People’s futures are in your hand
Page 10 and 11: ©2012 Morningstar, Inc. All rights
Page 12 and 13: Exchange-traded products span a wid
Page 14 and 15: Figure 5 Median notional Volume ($B
Page 16 and 17: the put spread in this example is $
Page 18 and 19: The Loch Ness Monster. Sightings of
Page 20 and 21: TAKE A NEW LINE WITH YOUR EQUITY Po
Page 22 and 23: Over the past 12 years, U.S. invest
Page 24 and 25: Figure 6 $15 $12 $9 $6 $3 5 Indexes
Page 26 and 27: 500 BuyWrite Index (BXM)—was anno
Page 28 and 29: volatility that was about 30 percen
Page 30 and 31: Most investors are familiar with op
Page 32 and 33: equired to establish this position
Page 36 and 37: Depression was history, rather than
Page 38 and 39: academic assessment of the very exi
Page 40 and 41: Alternative Investments 4.0% Real E
Page 42 and 43: tion and management. Within it, an
Page 44 and 45: Much ink has been spilled on the pe
Page 46 and 47: Figure 1 sectors No. of top dogs Re
Page 48 and 49: over the 30-year span. “Business
Page 50 and 51: States, the average concentration p
Page 52 and 53: Figure 10 sectors Source: Research
Page 54 and 55: investors were charging, ProShares
Page 56 and 57: of health care services, primarily
Page 58 and 59: open the Etracs Long-Short S&P 500
Page 60 and 61: Morningstar Index Funds U.S. Style
Page 62 and 63: Exchange-Traded Dow Jones U.S. Indu
Page 64 and 65: ETF Analytics Your clients want mor
Page 66 and 67: PICK THE HIGH HANGING FRUIT. Find 1
Page 68 and 69: InsideETFs portFolio management str
Page 70 and 71: ©2012, THE NASDAQ OMX GROUP, INC.
Page 72: Crossword Thinking About Options Te

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