An Introduction to The CBOE S&P 500 PutWrite Index - CBOE.com

An Introduction toThe CBOE S&P 500PutWrite IndexConfidential – Do Not Copy or DistributeAnsbacher Investment Management, Inc. 515 Madison Avenue , 29th Floor, New York, N.Y. 10022 (212) 308-2929

Topics for Discussion• What Is An S&P 500 Index PutOption?• What Determines the Price of AnIndex Option?• Writing Index Put Options• Why Index Put Options HaveHistorically Been Overpriced• The Index Option Put Skew• Option Strategy Benchmarks• The PUT Index• The Mechanics of the PUT Index• Collateralized Short Put OneMonth P/L• PUT Index vs. S&P 500 TR• Differential Return By Year• PUT Index vs. Major TotalReturn Indexes• Differential Return By Year• PUT Index vs. BXM Index• Ansbacher Real TimeTrading Results• Exchange Traded Notes• XPT: The PUT Index Linked ETN• Ansbacher Investment Management1

Why Index Put Options Have Historically Been Overpriced• S&P 500 Index put option writers assume the full downside risk ofthe underlying index in return for a fixed amount.• Therefore, as with anybody who provides insurance, the put writercan demand a premium for offering this protection.• The huge demand for portfolio protection by those who are long theS&P 500 represents an almost unlimited market for the far smallernumber of natural put sellers.• Index put buyers are insuring their portfolios against an unlikelyevent, not hoping to turn a profit on the trade.• This is why index options have historically been overpriced relativeto the realized movements of the underlying index.2

The Index Option Put Skew• Portfolio insurance buyers often utilize out-of-the-money, rather than atthe-moneyS&P 500 Index puts.• The distance between the strike price of the put and the current indexvalue can be compared to a deductible in an insurance policy.• The higher the deductible, i.e. the farther OTM the put, the lower thepremium.• Institutional investors’ voracious appetite for index protection causesOTM S&P 500 Index puts to be valued significantly higher thancomparably OTM calls. This causes a Skew in option pricing.• The overpricing is carried up through the entire option chain, causing allS&P 500 Index options to be overpriced relative to the realizedmovements of the underlying index.3

Option Strategy Benchmarks• The Chicago Board Option Exchange® (CBOE®) publishes severalbenchmarks for option based strategies.• All of these strategies are designed to capture the Alpha that consistentlyselling overpriced index options has proven to generate.• Among these, the well known CBOE S&P 500 BuyWrite Index(BXM SM ) Index tracks the results of a passive ATM covered callstrategy, executed on the S&P 500 Index.• Since June 1988, the BXM Index has offered long-term total returnscomparable to those of the S&P 500 with almost one third less volatilityand significant bear market outperformance.• The CBOE S&P 500 PutWrite Index (PUT) tracks the results of apassive program that sells near-term, at-the-money S&P 500 Index puts.4

The PUT Index• The PUT Index employs a similar strategy to the one employed by the BXMIndex. In fact, collateralized put writing has the same risk/reward profile ascovered call writing.• Therefore, even though it may seem counterintuitive, a consistent index putwriting strategy offers the same advantages as a consistent index coveredcall strategy.• The PUT Index offers a way to gain exposure to the S&P 500 that hashistorically offered higher long-term total returns with significantly lessvolatility and bear market outperformance.• The premium collected by the consistent sale of the ATM puts has more thancompensated for the loss of upside exposure to the S&P 500.• The PUT Index takes advantage of the fact that put buyers are willing tooverpay for portfolio protection.5

The Mechanics of the PUT Index• The PUT Index consistently sells near-term, ATM puts and holds themto expiration, when new ATM puts are sold.• The only other component of the strategy is collateral equal to the totalnotional S&P 500 exposure of the short put position.• This collateral is invested at the prevailing “risk-free rate”.• Therefore, just as in an S&P 500 Index covered call program, thedownside exposure is the same as a long position in the S&P 500 less thepremium received from the sale of the index option, and the upsidepotential is limited to the premium received.• The PUT Index strategy offers a way for investors to transfer the Alphagenerated by the excess risk premium imbedded in index options onto anasset class where they already assume downside risk: equities.6

Collateralized Short Put One Month P/LP/LS&P Value at 1-Month Option ExpirationA: Possible Month-End P/L for the Collateralized Put PositionB: Possible Month-End P/L for the Long S&P 500 PositionC: Amount of Premium Received for the Sale of the Put Option7

PUT Index vs. S&P 500 TRJune 1988 – January 2008$11,000$9,563$8,140PUT Index8Jun-88Jun-89Jun-90Jun-91Jun-92Jun-93Jun-94Jun-95Jun-96Jun-97Jun-98Jun-99Jun-00Jun-01Jun-02Jun-03Jun-04Jun-05Jun-06Jun-07$9,000$7,000$5,000$3,000Growth of $1,000$1,000S&P 500 TR

PUT Index vs. S&P 500 TRRolling 5-Year Annualized Returns930%20%10%0%-10%PUT IndexS&P 500 TRMay-93May-94May-95May-96May-97May-98May-99May-00May-01May-02May-03May-04May-05May-06May-07

PUT Index vs. S&P 500 TRRolling 5-Year Annualized Standard Deviation20%PUT Index1017%15%12%10%7%5%2%S&P 500 TRMay-93May-94May-95May-96May-97May-98May-99May-00May-01May-02May-03May-04May-05May-06May-07

PUT Index vs. S&P 500 TRLong Term Relative Performance (June 1988 – January 2008)Annualized Standard Correlation Tracking Active Info.Statistical Analysis ROR Deviation Sharpe Alpha Beta R R 2 Error Premium RatioPUT Index 12.17% 8.30% 0.84 6.40% 0.49 0.80 0.64 8.59% 0.91% 0.11S&P 500 TR 11.25% 13.65% 0.49Bull Market Relative Performance (July 1994 – March 2000)Annualized Standard Correlation Tracking Active Info.Statistical Analysis ROR Deviation Sharpe Alpha Beta R R 2 Error Premium RatioPUT Index 19.66% 7.93% 1.70 8.00% 0.44 0.79 0.62 9.50% (6.28)% (0.66)S&P 500 TR 25.94% 14.20% 1.37Bear Market Relative Performance (April 2000 – February 2003)Annualized Standard Correlation Tracking Active Info.Statistical Analysis ROR Deviation Sharpe Alpha Beta R R 2 Error Premium RatioPUT Index (4.30)% 13.73% (0.61) 7.21% 0.62 0.81 0.66 11.17% 12.49 1.12S&P 500 TR (16.79)% 17.80% (1.21)11

Differential Return by Year(June 1988 – January 2008)2008 2007 2006 2005 2004 2003 2002 2001 2000PUT Index (5.37)%9.50% 15.16% 6.71% 9.48% 21.77% (8.58)% (10.63)% 13.06%S&P 500 TR (6.00)% 5.49% 15.79% 4.91% 10.88% 28.68% (22.10)% (11.88)% (9.11)%+/- 0.63% 4.01% (0.64)% 1.80% (1.40)% (6.91)% 13.52% 1.25% 22.17%1999 1998 1997 1996 1995 1994 1993 1992 1991 199021.01% 18.54% 27.68% 16.40% 16.88% 7.10% 14.14% 13.80% 21.32% 8.88%21.04% 28.58% 33.36% 22.96% 37.58% 1.32% 10.08% 7.62% 30.47% (3.11)%(0.03)% (10.03)% (5.68)% (6.55)% (20.70)% 5.78% 4.06% 6.18% (9.15)% 11.99%12

PUT Index vs. Major Total Return IndexesJune 1988 – January 2008$11,000PUT, $9,563B XM, $ 8,022Russell 2000, $6,741LB Aggregate, $4,262MS CI EAFE, $ 3,5933 Mnth Libor, $2,59413Jun-88Jun-89Jun-90Jun-91Jun-92Jun-93Jun-94Jun-95Jun-96Jun-97Jun-98Jun-99Jun-00Jun-01Jun-02Jun-03Jun-04Jun-05Jun-06Jun-07$9,000$7,000$5,000$3,000Growth of $1,000$1,000

PUT Index vs. BXM IndexLong Term Relative Performance (June 1988 – January 2008)Annualized Standard Correlation Tracking Active Info.Statistical Analysis ROR Deviation Sharpe Alpha Beta R R 2 Error Premium RatioPUT Index 12.17% 8.30% 0.84 2.26% 0.87 0.96 0.93 2.53% 1.00% 0.39BXM Index 11.17% 9.17% 0.67Differential Return Performance (June 1988 – January 2008)2008 2007 2006 2005 2004 2003 2002 2001 2000PUT Index (5.37)%9.50% 15.16% 6.71% 9.48% 21.77% (8.58)% (10.63)% 13.06%BXM Index (5.92)% 6.58% 13.34% 4.23% 8.29% 19.38% (7.64)% (10.94)% 7.38%+/- 0.55% 2.92% 1.82% 2.49% 1.19% 2.40% (0.93)% 0.31% 5.68%1999 1998 1997 1996 1995 1994 1993 1992 1991 199021.01% 18.54% 27.68% 16.40% 16.88% 7.10% 14.14% 13.80% 21.32% 8.88%21.17% 18.96% 26.64% 15.51% 20.97% 4.51% 14.09% 11.52% 24.39% 3.99%(0.15)% (0.41)% 1.04% 0.90% (4.09)% 2.59% 0.04% 2.27% (3.07)% 4.89%14

Ansbacher Real Time Trading Results(May 2007 – January 2008)Annualized Standard Correlation Tracking Active Info.Statistical Analysis ROR Deviation Sharpe Alpha Beta R R 2 Error Premium RatioReal Time Trading 2.61% 8.45% (0.23) 0.77% 0.96 1.00 1.00 0.55% 0.72% 1.31PUT Index 1.89% 8.78% (0.30)15

Exchange Traded Notes• Exchange Traded Notes (ETNs) are exchange traded securitieswhose performance is linked to the return of a benchmark index.• ETNs are senior, unsecured, unsubordinated debt securities issuedby a bank. As such, they are debt instruments, subject to thecredit rating of the issuer.• ETNs are designed to provide investors a return that is linked tothe performance of a market index, minus investor fees.• Unlike Closed End Funds, ETNs should not trade at a significantdiscount or premium to their NAV.16

Ansbacher Investment Management• Founded in 1995 by Max Ansbacher, who wrote the first book onexchange-traded options.• With $120 million under management, one of the largest firms in theU.S. exclusively devoted to managing index option strategies.• Two full-time portfolio managers with more than 50 years ofcombined option management experience.• Ansbacher’s flagship fund, Elizaville Partners LP, has ranked amongthe Top-10 large U.S. CTAs for risk-adjusted return in the last one-,three-, five- and ten-year periods (MARHedge Magazine).• Ansbacher Investment Management was the first firm to receive alicense to offer investment products based on the PUT Index.17

Key Points• The voracious demand for portfolio protection has caused S&P 500Index options to be overpriced relative to the actual movements of theindex.• The CBOE tracks several strategies that have outperformed a longposition in the S&P 500 by consistently collecting index optionpremium.• Since 1988, the CBOE S&P 500 PutWrite Index has offered greaterreturn, significant volatility reduction and bear market outperformance.• The PUT Index won the award for Most Innovative New BenchmarkIndex at the 2007 Super Bowl of Indexing.• The PUT strategy is available as an ETN and can also be used as abenchmark for active management.18

Ansbacher Investment ManagementThe Management TeamMax G. Ansbacher, President, founded the firm in 1995after 20 years with Bear Stearns, where he managed optionaccounts on a discretionary basis. He is frequently quoted inthe media, including The Wall Street Journal, and has been afrequent guest commentator on the Bloomberg TelevisionNetwork, as well as the Fox News Channel and CNBC. He isthe author of three books on investing, including The NewOptions Market, Fourth Edition, which was the first book everpublished on exchange-traded options, and has become one ofthe all-time best-selling books on the subject. He was featuredin Forbes magazine, October 18, 2004. Mr. Ansbacher is agraduate of the University of Vermont and Yale Law School.Laurence E. Goellner, Vice President, Operations, has beenwith AIM for nine years. He is a registered broker, qualifiedto trade stocks and options with experience in a wide varietyof asset management areas including compliance, riskmanagement, and reporting. He is responsible for dailycommunications with AIM’s brokers on the floor of the CME,order allocation, and client liaison.Jason Ungar, Director, specializes in the development andimplementation of short volatility strategies designed to meetthe needs of institutional clients. For three years prior to hisjoining AIM, he was a Partner at Apogee Capital, LLC, andprior to that, he was a Financial Advisor with RBC DainRauscher. Mr. Ungar’s opinions on option strategies haveappeared in numerous publications including: Pensions &Investments, Investment News, and Thestreet.com. He isSeries 7, 66, and 3 licensed. Mr. Ungar is a graduate of St.John’s College, Annapolis.Herbert Moore, Vice President, Mr. Moore assists in thedevelopment and implementation of volatility strategies.Before joining AIM, he was a Portfolio Manager at Ezra ZaskAdvisors, where he was responsible for constructing customhedge fund portfolios for investors and quantifying portfoliorisk. Prior to that, he was an Associate at Azimuth Trust, afund of funds, where he monitored Fixed Income and GlobalMacro hedge fund managers. Mr. Moore holds a BA inEconomics from The George Washington University.Rosemary Zraly, Director of Administration, hasresponsibility for office management and all writtencommunications with clients and prospects, email processingand maintaining records. Before joining AIM, she was thePresident of her own firm, which marketed various brands ofFrench Champagne in the United States.19

Ansbacher General InformationAnsbacher Investment Management, Inc.515 Madison Avenue, 29th Floor, New York, NY 10021Phone: 212 308-2929Fax: 212 308-0777e-Mail:Website:ju@ansbacherUSA.comAnsbacherUSA.comLegal & Compliance:U.S. Fund Auditors:U.S. Fund Accountants:Fund Broker:U.S. Fund:Offshore Fund:Sidley Austin LLP, Stark & Stark LLPGoldstein Golub Kessler LLPMichael J. Liccar & Co.Bear Stearns Inc.Elizaville Partners LP,a New York State Limited PartnershipElizaville (BVI) Fund Ltd.,an International Limited Partnership formed in the British Virgin Islands20

DisclosuresExchange-traded notes based on the PUT Index ( " Securities " ) are not sponsored, endorsed, sold or promoted byStandard & Poor's ("S&P") or Chicago Board Options Exchange, Incorporated ("CBOE") and S&P and CBOEmake no representation regarding the advisability of investing in the Securities.Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receivea copy of Characteristics and Risks of Standardized Options (the " ODD " ). The ODD and supportingdocumentation for any claims, comparisons, recommendations, statistics or other technical data in these materialsare is available by calling 1-888-OPTIONS, or contacting CBOE at www.cboe.com/Contact. The PUT logo is aservice mark of CBOE. The methodology of the CBOE S&P 500 PutWrite Index is owned by CBOE and may becovered by one or more patents or pending patent applications. The CBOE S&P 500 PutWrite Index is designed torepresent a proposed hypothetical short put strategy. Like many passive indexes, the PUT Index does not take intoaccount significant factors such as transaction costs and taxes and, because of factors such as these, many or mostinvestors should be expected to underperform passive indexes. In the construction of the hypothetical PUT index,the SPX puts are assumed to be written at a certain price on the third Friday of the month. However, there is noguarantee that all investors will be able to sell at this price, and investors attempting to replicate the PUT Indexshould discuss with their brokers possible timing and liquidity issues. Transaction costs for a put writing strategysuch as the PUT could be significantly higher than transaction costs for a passive strategy of investing in TreasuryBills. Past performance does not guarantee future results. This website presentation contains comparisons,assertions, and conclusions regarding the performance of an index based on backtesting, i.e., calculations of how theindex might have performed in the past if it had existed. Backtested performance information is purely hypotheticaland is provided in this website presentation solely for informational purposes. Backtested performance does notrepresent actual performance, and should not be interpreted as an indication of actual performance. Historical PUTdaily data is provided for reference purposes only. Supporting documentation for claims, comparisons,recommendations, statistics or other technical data is available by calling 1-888-OPTIONS, sending an e-mail tohelp@cboe.com, or by visiting www.cboe.com/put. CBOE® and Chicago Board Options Exchange> ® areregistered trademarks of CBOE and BXM, BXD, BXN the PUT logo and BXY SPX are servicemarks of CBOE.Standard & Poor's, S&P and S&P 500 are registered trademarks of the McGraw-Hill Companies, Inc. and arelicensed for use by CBOE. Copyright © 2008 Chicago Board Options Exchange, Incorporated. All RightsReserved.21