Paul B. Stephens CBOE1-312-786-7495stephens@cboe.com

Mexico Risk Management 2006Four Seasons Hotel, Mexico City, October 12-13, 2006

Trading and Managing Equity Market Volatility

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CBOE Introduction

The Chicago Board Options Exchange, founded in 1973, is the creator of listed options and the world’s largest options marketplace. CBOE is the industry leader in product innovation, having created equity options, index options, LEAPS, and, more recently, “WeeklysSM” options and Options on VIX® – CBOE’s widely followed investor “fear gauge.”  

Currently, CBOE trades options on 1,766 individual equities, 56 broad- and sector- based indexes, 61 exchange-traded funds and 4 interest rate products. CBOE’s wholly-owned subsidiary, the CBOE Futures Exchange (CFE), lists 26 futures contracts including its flagship product, VIX Futures.

In Sep 2006 CBOE traded an average of 2.6 million contracts per day – 33% higher than Sep 2005.

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Managing Volatility

Latest Trends

Options-based Indexes

- Volatility indexes

- BuyWrite (covered call) indexes

Volatility-based products and trading

- Index and ETF options

- Volatility-based futures and options

Electronic trading

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Select Volatility Indexes

VIX – CBOE Volatility Index (S&P 500)

VXN – CBOE NASDAQ Volatility Index

VXD – CBOE DJIA Volatility Index

RVX – CBOE Russell 2000 Volatility Index

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CBOE Volatility Index (VIX )

Since 1993 VIX has been the premier barometer of investor sentiment and market volatility

In Sept. 2003 the VIX methodology was revised

VIX Futures were introduced in March 2004

VIX Options launched February 2006

See http://www.cboe.com/vix

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VIX: The Fear Gauge

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Volatility Index Methodology In September 2003, CBOE revised VIX:

1. Moved from using S&P 100 to S&P 500 Index options

2. Continued to use nearby and next-to-nearby expiration months for constant, 30-day volatility measure

3. Old VIX (now ticker VXO) was an average of implied volatilities and was a measure of ATM volatility. New methodology for VIX and all other CBOE volatility indexes is an average of options prices and covers the entire range of strike prices. (i.e., volatility skew)– A robust measure of expected volatility

– A better index for offering volatility-based products

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Select BuyWrite Indexes

BXM – CBOE S&P 500 BuyWrite Index BXY – CBOE S&P 500 2% OTM BuyWrite

Index

BXN – CBOE NASDAQ BuyWrite Index BXD – CBOE DJIA BuyWrite Index BXR – CBOE Russell 2000 BuyWrite Index

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CBOE S&P 500 BuyWrite Index (BXM)

The BXM is based on buying an S&P 500 Index stock portfolio and “writing” (or selling) the near-term S&P 500 Index (SPX) “covered” call option.

% Change In Year-End Prices, Select Stock Indexes

In October 2004, Ibbotson Associates found that CBOE’s BXM had the best risk-adjusted performance of major domestic and international equity-based indexes over the last 16 years. 

At least 8 licenses have been granted, and there is now more than $20 billion in over 30 BuyWrite funds.

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BXY $824BXM $735

S&P 500 $726

30-yr TBonds $419

3-mo.T-Bills $222

$0

$300

$600

$900

Jun

-88

Jun

-90

Jun

-92

Jun

-94

Jun

-96

Jun

-98

Jun

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Jun

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Jun

-04

Mo

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* June 1988 is the first month for daily prices for the SPTR and BXM indexes. Sources: CBOE & Bloomberg. The BXM Index is designed to represent a hypothetical buy-write strategy. Like many passive indexes, the BXM Index does 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.

Stocks, Bonds, T-Bills and BuyWrite IndexesTotal Return Indexes from June 1988* – Mar. 2006

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Return Comparisons

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Risk Comparisons

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Negative Skew

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CBOE Leading Indexes & ETFs Average Daily Volumes (ADV), 2006 Year through April

Cash Settled

SPX 346,000 + 42%

OEX 66,600 - 10%

DJX 30,200 – 4%

NDX 28,300 + 43%

MNX 22,300 – 9%

VIX 13,800 (new)

XEO 10,000 + 41%

MVR 8,300 + 521%

ETF Settled

QQQQ 119,000 + 19%

SPY 100,000 + 133%

IWM 90,000 + 112%

DIA 37,000 + 48%

XLE 17,600 + 242%

OIH 13,000 + 1270%

SMH 10,000 + 45%

ADV for CBOE 2.48 Million contacts April 2006 – New Record

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CBOE Leading Indexes & ETFs Average Daily Volumes (ADV), May 2006

Cash Settled

SPX 505,361 + 94% vs. May ‘05

OEX 87,089 + 24%

VIX 46,368 (new)

DJX 42,297 + 75%

NDX 38,077 + 43%

MNX 34,707 + 93%

XEO 18,165 + 153%

RUT 10,078 + 160%

MVR 8,676 + 214%

XSP 5,282 (new)

ETF Settled

IWM 296,971 + 464%

QQQQ 152,511 + 45%

SPY 121,409 + 123%

DIA 47,825 + 62%

XLE 39,799 + 307%

OIH 17,576 + 1214%

SMH 8,591 + 72%

EEM 6,581 (new)

All CBOE 3.2 Million contacts ADV– New Record

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CBOE Mini-SPX (XSP)

Weeklys SPX, XSP OEX, XEO

VIX Options

CFE• Volatility-Based Futures

• VIX and VXD• VT (3-month realized

variance)• VA (12- month realized

variance)

BXM Futures (launched Oct 2006)

Select New Product Introductions

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VIX Futures

Trade on CBOE Futures Exchange (CFE)

Settle to implied volatility• May 2006 average daily volume (ADV) was

2,294 contracts

• Open interest on May 31 was 33,346 contracts

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VIX Futures: “VXB <Index> CT <Go>”

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Volatility of Volatility

Historic Volatilities Based on Daily Returns in 2005

* refers to the price of the near-term VIX futures

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VT and VA Futures

Trade on CBOE Futures Exchange (CFE)

Settle to realized variance• VT Futures – 3 month variance• VA Futures – 12 month variance

The typical quote for $250,000 vega on one-year variance has been about ½ vol point wide.

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VT Futures: “VTA <Index> CT <Go>”

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VA Futures: “VAA <Index> CT <Go>”

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VIX Options

Launched Friday, February 24, 2006

Cash-settled index options trade on CBOE (SEC-regulated)

Settle to Special Opening Quotation (SOQ) of VIX • $100 multiplier• Settle on Wednesdays, 30 days

prior to SPX monthly expirations

VIX Since 1990

0

25

50

01/02/90

01/06/92

01/06/94

01/11/96

01/14/98

01/20/00

01/31/02

02/06/2004

(Jan. 2, 1990 - Dec. 30, 2005). Sources: CBOE, Bloomberg and S&P

VIX

Dai

ly C

losi

ng

Pri

ces

Average daily volume for April 2006: 15,052 contracts.

Open interest on April 28 was 351,146 contracts.

More than 60,000 contracts traded on Monday, May 1.

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VIX Options: “VIX <Index> OMON <Go>”

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VIX Futures & Options

Possible Uses Include – To take advantage of a market view on volatility

To manage options positions

To hedge equity portfolios or credit default swap (CDS) exposures

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The Hybrid Market Model Provides a choice of screen-based trading or open

outcry. Roll-out began in June 2003. All equity options and major ETF options traded under hybrid system. Remote Market Makers added in April 2005.

Executed electronically: 94% of orders (up from prior year 88%)

67% of contracts (up from prior year 46%)

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30%

40%

50%

60%

70%

80%

90%

100%

2004

Sep. 2

004

2005

2006

Aq

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O %

0

50

100

150

200

250

300

Av

era

ge

Qu

ote

d S

ize

Size CBOE Aqwa NBBO %

AQWA/Size & % of Time on NBBO All CBOE Options

January 2004 – March 13, 2006

63.4%

90.2%

49.0%

94.1%

80.1%

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New Technologies

Electronic FLEX• Agreement with Cinnober to provide trading

system set to launch late 2006, early 2007

Market Data Service• Web-based access to CBOE and OPRA options

data (including tick data, volume by series,…)• Historical data to go back to 1990, in some

cases to 1973

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Resources Index-Related Products:

• www.cboe.com/VIX• www.cboe.com/BuyWrite• www.cboe.com/Weeklys

Trading:• www.cboe.com/Hybrid• www.cboe.com/FLEX

Spanish Website:• www.cboe.com/Spanish

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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, which is available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL 60606. The information in these slides 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 these materials should be construed as a recommendation to buy or sell a security or to provide investment advice. Any strategies discussed, including examples, do not include commissions, dividends, margin, taxes, and other transaction costs. However, these costs will affect the outcome of transactions and should be considered. For further information regarding the tax effects of transactions, consult your tax advisor. These slides have been prepared solely for informational purposes, based upon information generally available to the public from sources believed to be reliable, but no representation or warranty is given with respect to its accuracy or completeness. Supporting documentation for any claims, comparisons, statistics or other technical data is available by calling 1-888-OPTIONS, sending an e-mail to help@cboe.com, or by visiting www.cboe.com. Past performance is not indicative of future results.

S&P 100 ® and S&P 500 ® are registered trademarks of McGraw Hill, Inc. and are licensed for use by the Chicago Board Options Exchange, Inc. CBOE ®, Chicago Board Options Exchange®, OEX® , XEO® , MNX® , VIX ®, CBOEdirect ®, CBOE Volatility Index®, and HyTS® are registered trademarks of the Chicago Board Options Exchange, Inc. SPXSM and BXMSM are servicemarks of the Chicago Board Options Exchange, Inc. Nasdaq 100 ® is a registered trademark of the Nasdaq Stock Market Inc.

Copyright 2006, Chicago Board Options Exchange®, Incorporated. All rights reserved.

CBOE Presentation