TAIL RISK STRATEGIES

RESEARCH BRIEF March 2012

Options Strategies: An Alternative to Expensive Complex Tactics

Volatile financial markets can create potential problems for investors and their advisors. While many expenses are generally fixed, assets designated to fund expenses may increase or decrease in value. In a worst case scenario, managers may have to liquidate assets at potentially distressed levels to meet these obligations. In the current environment, many managers have been forced to sell what they can, rather than what they want, resulting in skewed allocations in which less-liquid asset classes have become larger components of portfolios.

Parametric 1918 Eighth Avenue Suite 3100 Seattle, WA 98101 T 206 694 5575 F 206 694 5581 www.parametricportfolio.com Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved. For informational purposes only; not an offer to buy or sell securities.

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

Overall market events since 2008 have given rise to a heightened awareness of the extreme downside risk of all asset classes. These downside risks, also known as tail-risk or black swan events are generally rare occurrences which result in large movements in the market. The concept of tail-risk or black swan is based on the notion that market returns are distributed as a Bell Curve, where most of the market returns are centered about an average return and the less-frequent occurrences of large positive and negative returns are at the tails of the return distribution:

FIGURE 1: ACTUAL AND IMPLIED DISTRIBUTION OF S&P 500 INDEX RETURNS, 1998 - 2011

Source: Parametric Risk Advisors and Bloomberg.

This situation has recently led many advisors to have their clients consider various tailrisk hedging strategies. TYPICAL TAIL-RISK HEDGING The concept of tail-risk hedging is relatively straightforward; however, choosing the right implementation strategy to best mitigate tail-risk is less straightforward. The potential causes of a tail-risk event are numerous. As a result, trying to hedge against a single cause is difficult. In our opinion, it is best to define the potential consequences of a tailrisk event and then implement a strategy to mitigate those. In this report, we will limit the discussion to diversified equity portfolios, which largely narrows the available mitigation tools to primarily equity derivatives, such as options. In our experience, the most commonly proposed strategy for hedging tail-risk is a systematic purchase of S&P 500 Index put options. Put options can generally be thought of as a form of insurance. The buyer of the option receives the difference between the strike price of the option and the price of the S&P 500 at maturity (as determined by the exchange). There is no optimal strike price but most programs utilize strikes which are generally ~25% out-of-the-money (meaning the strikes are priced~25% lower than the market level at the time of purchase).

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities.

02

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

For example, a systematic purchase of equity options can be a program of purchasing either short-dated (e.g., three months) or longer-dated (e.g., 12 months) S&P 500 put options. One benefit of utilizing shorter dated options is the frequency of re-striking the protection level to keep pace with market rallies (i.e., rolling the options); however, the downside is the increased cost of purchasing new options every three months. A longer-dated program may initially seem less expensive per diem since the investor is purchasing new options less frequently; however, as the market rallies, the program requires ongoing maintenance. The long dated option can lose value quickly in this scenario and needs to be rolled into a higher strike option to maintain protection; however, the result is increased total cost. An alternative to S&P 500 Index put options are CBOE Volatility Index (VIX) options and S&P 500 variance swaps, which can be utilized to hedge equity tail-risk. The theory behind these hedges is that the implied volatility of equity options increases during market declines. Both VIX call options and long S&P 500 variance swaps are general measures of the implied volatility of options and should increase in value during market declines, assuming correlation to the Index remains constant. A VIX call option is similar to an S&P 500 put option; in exchange for an upfront premium, the option buyer seeks to benefit from a payout equal to the difference of the VIX level at maturity and the strike price. However, hedging S&P 500 Index exposure with an instrument linked to S&P 500 implied volatility introduces basis risk. This effectively introduces another variable, correlation. We believe an effective hedge using VIX options requires the S&P 500 Index (SPX) and VIX to be negatively correlated, otherwise the exact market decline the investor has hoped to mitigate might occur without the VIX increasing. Figure 2 illustrates the historical correlation. As seen in Figure 2, while the negative correlation has been consistent, there have been times when this correlation breaks down and a hedging strategy utilizing VIX options would not have worked as hoped. Specifically, during periods around the internet bubble in 2002 and the subprime crisis in 2008/2009, the negative correlation disappeared, resulting in the reduced effectiveness of the VIX hedge strategy. S&P 500 variance swaps are more like a futures contract, rather than an option. A variance swap is basically a long or short position on the direction of volatility. Assuming the investor goes long variance, they potentially benefit if the final VIX level is higher than the swap strike; however, unlike an option, in this example the investor owes the counterparty should the VIX level be lower than the VIX strike at maturity. In addition to the introduction of basis risk between the S&P 500 Index and S&P 500 variance, we believe a variance swap is a less-predictable hedge because the ultimate downside exposure is not known until maturity (unlike an index put option, where the downside is limited to the premium paid). A tail-risk event is, by definition, a rare event. As a result, a true tail-risk hedging strategy should be a long-term commitment. Opportunistic hedging in hopes of protecting against the occurrence of an actual tail-risk event is akin to the odds of drawing the winning numbers for Powerball. Effective hedging is not luck. Our own experience suggests that investors generally commence a hedging strategy with a long-term intention; however, after several months of spending premium costs with no return, a discussion of effectiveness may result. Many times this results in an investors early termination or suspension of the program, often at exactly the wrong time.

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities.

03

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

Complexities aside, the upfront cost of these strategies, especially in higher-volatility environments, typically results in no action. Upon review, most investors may realize that they dont really need expensive tail-risk protection, but rather a plan that aids in normalizing their cash flows between times of market balance and times of market stress.

FIGURE 2: CORRELATION BETWEEN S&P 500 AND VIX INDICES (JAN. 21, 2000 - SEPT. 30, 2011)

AVERAGE STD. DEV.

-74.32% 25.60% -99.26% 50.09%

MINIMUM
MAXIMUM

Source: Parametric Risk Advisors and Bloomberg.

CALL WRITING Parametric Risk Advisors (PRA) implements an alternative to traditional tail-risk hedging strategies which, over the long-term, seeks to offer cash flow enhancement during periods of portfolio stress, without disrupting typical portfolio management. Instead of purchasing options, PRA utilizes an index option-overlay program designed to reshape the risk/return profile of equity portfolios as follows: Systematic option overlay programs can potentially generate extra income to help investors achieve their cash flow requirements. Call writing seeks performance in moderately up, flat or down markets, potentially providing additional cash flow, which reduces the need for depressed asset sales. Active risk management, a critical factor in any successful call writing program, can allow for corresponding potential growth in the underlying investments during rising markets. Call writing can be implemented in an operationally friendly manner.

While many industry, consultant and academic pieces have been written on the benefits of systematic call writing over the last several years, the goal here is to promote further discussion by providing some examples and practical applications of an option-overlay program strategy.

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities.

04

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

VALUE PROPOSITION Our research shows that an equity option volatility disparity exists and is persistent. Simply put, there is a supply vs. demand imbalance for equity options. Investors generally buy call options to speculate on the potential appreciation of a stock and/or buy put options for protection from a potential decline. The sellers of those options, often banks, broker/dealers and institutional traders, incur general risks and costs to hedge options positions thus, in our view, effectively increasing the market prices above the theoretical prices. The risk of hedging is an unknown, so a slight risk premium generally exists. This risk premium is illustrated in the market when comparing implied and realized volatility. Implied volatility is generally the market expectation of the future volatility of the underlying stock, as observed via the option market. The VIX is an index that measures the implied volatility of the S&P 500. Realized volatility is the actual realized volatility of the underlying stock. As seen in Figure 3: Historically, the S&P 500s implied volatility generally has exceeded its realized volatility. Over the last five years, the average ratio of SPX implied call option volatility to SPX realized volatility was approximately 1 19.5%.

FIGURE 3: IMPLIED VOLATILITY VS. HISTORICAL VOLATILITY FOR THE S&P 500 INDEX*

Source: Bloomberg.

* This data is for illustrative purposes only. Each stock/index will have a different historical volatility and observed, implied volatility set.

A holder of equity beta via a diversified equity portfolio or an index may be uniquely positioned to systematically sell call options for more than their theoretical value. In a sense, these investors are natural sellers since they are already hedged; that is, they are long the underlying asset or beta and do not need to incur the costs associated with hedging. If the value of the underlying asset increases, resulting in an exercise of an option, we expect that the investors underlying portfolio should increase by at least as much as the exercise value. Obviously, in any non-covered transaction, the client incurs tracking risk between the underlying option and the underlying portfolio.

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities.

05

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

We have seen how a systematic program of selling call options against an equity portfolio may improve total return and reduce volatility. The BXM** and BXY Indices replicate a systematic program of selling S&P 500 calls against a long position in the S&P 500. Over the long term, the BXM and BXY have historically outperformed the S&P 500 and had lower volatility:

TABLE 1:
JUNE 1, 1988 - SEPT. 30, 2011
ANNUALIZED RETURN (%) VOLATILITY (%)

S&P 500 (Total Return) SPTR Index BXM Index BXY Index

8.78 8.95 9.98

18.09 12.76 14.51

The BXM Index consists of a long position in the S&P 500 combined with selling one-month call options with a near-the-money strike. The BXY Index is similar to the BXM Index, but a 2% out-of-themoney call is sold.

Source: S&P 500 / BXM/ BXY Returns: Bloomberg.

While the BXM and BXY may serve as benchmarks that make the case, in our opinion there are significant drawbacks when considering an actual program that attempts to replicate the BXM and/or BXY. The at-the-money options sold in a BXM strategy act to reduce equity upside potential to zero (not factoring in any alpha from the underlying portfolio). The BXY strategy utilizes 2% out-of-the-money options, which provide a bit more upside potential but do not reflect changes in equity option volatility. It is important that an overlay strategy (long equity portfolio plus systematically selling call options) have a consistent long-term risk/return target. In our opinion, it is difficult to analyze any strategy, in any asset class, without knowing the risk/return parameters. In addition, its important for investors to realize that the same relationship that makes call writing effective makes put buying unattractive over time. For example, put buyers are generally paying a higher-than-theoretical price for their options due to the implied vs. realized volatility premium. RISK-BASED OPTION SELECTION: A MORE SENSIBLE APPROACH Our research shows that a rules-based, actively managed, risk-managed overlay strategy, in which option strikes are selected based on a measure of risk and return, is better than one which is fixed in nature (i.e., BXM, BXY). We believe that an appropriate strategy effectively indexes the strike selection based on volatility; as volatility rises, so should strikes; as volatility falls, so should strikes.
** The CBOE S&P 500 BuyWrite Index (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index.

Generally, in our view, an actively managed call writing strategy may generate positive alpha under four different stock market scenarios: i. ii. iii. iv. Moderately rising markets Stable or flat markets Moderately down trending markets Sharp market declines

The CBOE S&P 500 2% OTM BuyWrite Index (BXY) uses out-of-the-money S&P 500 Index (SPX) call options, rather than at-the-money SPX call options.

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities.

06

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

Active call writing strategies do not provide protection from downside risk beyond the aggregate value of the option premium received. Experience tells us that the strategy should produce positive alpha in scenarios (iii) and (iv) above; however, the total return of the portfolio during that period would likely be down. We believe an overlay strategy should provide investors with cash flow during the periods they may need it most, because many of the calls written in scenarios (iii) and (iv) would most likely expire worthless. In strongly rising equity markets we believe a call writing strategy should generally underperform the underlying passive index. However, given the short-term nature of the options sold and the active rules-based management utilized, in our view the portfolio value should not be capped; rather in very strong equity markets the overall portfolio return may potentially trail the underlying index slightly. Below is a hypothetical simulation of an actively managed S&P 500 call writing program versus the S&P 500.

FIGURE 4: TOTAL RETURN IMPLEMENTATION* (DIVIDENDS AND OPTION PREMIUMS MAINTAINED IN ACCOUNT)

* This data is for informational and illustrative purposes only. It should not be considered investment advice, a recommendation to buy or sell a particular security or to adopt any investment strategy. The information presented is based, in part, on certain hypothetical assumptions, the experience of PRA, and the application of an option overlay strategy process in a back-testing environment with the benefit of hindsight. The hypothetical information presented does not represent the results or investment experience that any particular investor actually attained. Actual performance results will differ, and may differ substantially, from the hypothetical performance presented above. Each stock or index will have a different historical volatility and observed, implied volatility set. It is not possible invest directly in an Index. Past performance is no guarantee of future results. Please refer to the Appendix, beginning on page 13, for a description of the assumptions used in the above Chart and additional important information and disclosure.

Source: PRA.

INDEX LEVEL AT END OF 1 YEAR $ INDEX LEVEL % CHANGE

LONG INDEX TOTAL RETURN

SIMULATION TOTAL RETURN

$1,524.80 $1,461.27 $1,397.74 $1,334.20 $1,270.67 $1,207.14 $1,143.60 $1,080.07 $1,016.54

Up 20.00% Up 15.00% Up 10.00% Up 5.00% (Initial Price) Down 5.00% Down 10.00% Down 15.00% Down 20.00%

22.14% 17.14% 12.14% 7.14% 2.14% (2.86%) (7.86%) (12.86%) (17.86%)

19.26% 15.78% 12.16% 8.39% 4.47% 0.40% (3.80%) (8.14%) (12.62%)

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities.

07

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

The previous chart illustrates the simulated performance of a hypothetical overlay program versus the underlying index. In this simulation, the hypothetical overlay program outperforms (and generates excess free cash flow) in down, flat and moderately up markets. Equally important is that in a significant up market, the simulations hypothetical program continues to appreciate, though slightly slower than the underlying index, and avoids the capped (hockey stick) payoff traditionally associated with the sale of covered calls. Below, we discuss the risk management component of the hypothetical program that seeks to avoid the capped nature of traditional call writing programs. RISK MANAGEMENT An overlay program seeks to transform a theoretically designed framework into an actionable, risk-managed investment strategy. While the volatility discrepancy is observable and persistent, the sale of options results in an asymmetric liability. Selling (typically) only 12 options per year (the BXM strategy) may not result in sufficient observations to exploit the inefficiency and may unintentionally introduce concentration (date, time, notional specific) risk. The lack of active risk management further exposes the portfolio to potentially big losses that may affect the long-term goals of the portfolio. PRAs risk management incorporates several key steps: Overlay Strategy We use multiple strikes and maturities to maximize the observation set as opposed to common passive strategies that generally expose the portfolio to a single path of only 12 observations per year: Create a laddered portfolio of options with multiple strikes and maturities seeking to diversify the time-/date-/price-specific risk of selling call options.

We use sale of short-dated options only to minimize and seek to diversify time- and eventspecific risks as opposed to common passive strategies that generally expose the portfolio to widely divulged expiry and sale (roll) date: Seek to reduce the sold call option risk by limiting the time to expiration and staggering expiries across many dates.

Ongoing risk management Early profit capture When the opportunity arises we attempt to take advantage and repurchase short options at a fraction of the original price resulting from index movement, change in volatility or excessive time decay. As an overlay, or alpha, strategy, we believe it is prudent to capture profits if and when available (which otherwise could turn into losses) seeking to transform potential profit with an associated open-ended liability into certain profit with no associated ongoing liability.

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities.

08

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

Loss mitigation If the underlying index appreciates from the initial index level whereby the risk vs. reward exposure to the portfolio, in our opinion, becomes unfavorable, we seek to mitigate the risk by attempting to repurchase open options and reallocating to a time decay state by rolling option up and out.

For us, the greatest value-added proposition of an option overlay strategy is the objective and systematic application of loss mitigation. The volatility inefficiency that ultimately generates alpha is independent of the absolute direction of the market (or delta). Even if the volatility imbalance is in the sellers favor, in any period the market may move against the position. In our opinion, it is prudent to quickly mitigate the small losses (that can grow asymmetrically large) and reallocate to options which meet the initial risk/return targets. This loss mitigation technique is why we believe an option overlay strategy program may have ongoing upside participation in appreciating markets as opposed to the traditional hockey stick payoff associated with passive covered call strategies. Using these rules-based risk management guidelines allows PRA to adjust an option overlay strategy program to reflect the desired risk/return guidelines: Hypothetical Examples*

FIGURE 5: EXAMPLE 1: EARLY PROFIT CAPTURE

* Source (Figures 5 - 7): PRA. Hypothetical examples and hypothetical index path. There is no guarantee that an actual index will have similar performance as seen in the above examples or that PRA will be able to achieve the results illustrated in the hypothetical examples.

If the option loses a significant amount of value due to index movement, change in volatility or excessive time decay, PRA seeks to take advantage and attempt to repurchase previously sold call options at a fraction of the original sale price.

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities.

09

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

FIGURE 6: EXAMPLE 2: INDEX REMAINS RELATIVELY FLAT

If the underlying index stays within an expected range; the options value decays each day. If the index remains below the call strike, then PRA will either let it expire worthless, or seek to buy it back at a fraction of its original price.

FIGURE 7: EXAMPLE 3: INDEX APPRECIATES

If the underlying index appreciates from the initial index level and PRA believes the risk vs. reward exposure of the option becomes unfavorable, PRA may seek to mitigate the risk by repurchasing the sold call option (generally for a loss) and sell a new, higher strike option by rolling option up and out (up to a higher strike price and out to a longer maturity).

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities. 010

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

CONCLUSION So how is an option overlay strategy utilized in the real world? For investors, a managed option overlay program may be used as an alternative to a traditional tail-risk hedging program. When properly implemented, the strategy may provide significant cash flow generation in down markets (when excess cash may be needed most), while maintaining upside exposure in rising markets. In a typical scenario, a potential client approaches PRA to discuss risk management, hedging strategies or tail-risk strategies. After a thorough review of the alternatives, including purchasing puts, engaging in collars, VIX options and variance swaps, most potential clients may conclude that the uncertain outcome, costs and/or basis risk are too much to overcome. We find the one strategy that does merit further discussion tends to be a call writing strategy. For example, in 2007 we were approached about a hedging strategy. After significant analysis, the conclusion reached was that the results of a put purchasing strategy (with or without call writing) would not, over time, offset the significant premium or opportunity cost spent to implement the program. There was agreement that put options were appropriate if the investor had a discrete cash flow to hedge, but, for them, in this case the strategy was not appropriate as a portfolio strategy. Instead, they chose to engage in a call writing strategy as a simple alternative to help protect cash flow. During the 2008/2009 financial crisis, the strategy implemented provided strong performance, and delivered cash flow that allowed them to limit its sales of distressed securities. Then, during the period from March 2009 through April 201 the underlying market 1, increased approximately 100% as measured by the S&P 500 Index. The call writing program underperformed, but the active risk management guidelines helped limit the underperformance. Over the last six months ending 9/30/201 implementing call writing strategies have 1, once again provided cash flow for many investors while equity markets have declined. The implementation of a call writing program is extremely straightforward. We believe, in most cases, it can be accomplished without any disruption or restrictions related to the underlying managers and little or no administrative oversight from the Foundation office. A quick overview of the option overlay programs general implementation steps for a typical investor: Investor designates the beta component of portfolio that will be covered by the program. Investor opens a brokerage account with their choice of broker-dealer firm. PRA begins implementing call option selling; option positions settle in brokerage account. Investors custodian issues escrow receipts to cover the positions at the brokerdealer; all equity assets remain at custodian. Investor maintains underlying equity portfolio alpha plus any potential alpha generated from call writing overlay.

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities. 011

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

In our view, this strategy is an efficient method for monetizing embedded volatility exposure. Call writing alters the risk/return profile of the underlying portfolio, generally in line with investor goals and objectives: Strategy generally underperforms in strongly rising markets Strategy generally outperforms in moderately rising markets Strategy generally outperforms in flat markets Strategy generally outperforms in down markets

PRAs option overlay strategy seeks to generate excess cash flow when portfolio is most stressed, mitigating some of the need to sell securities at distressed levels to fund operations. The strategy generally requires excess cash flow when portfolio is least stressed, when portfolio gains are more likely to be realized. PRAs strategy may also allow for a reallocation of the risk budget from the underlying beta to other investments, due to the expected decrease in the standard deviation of returns.

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities. 012

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

APPENDIX Below are the assumptions applied in the hypothetical simulations and examples noted.* Simulated Index Path Terminal index levels are arbitrary and chosen for illustrative purposes only. 12-month simulation period (path is calculated on a bimonthly basis). Simulation volatility = 20.80% and is based upon historical trend as determined by Parametric Risk Advisors (Bloomberg observations). Bimonthly index levels are set on a straight line basis to achieve the terminal index level. Dividend amount is held constant. Total Return: (Ending index level + cumulative dividends) / initial index level. Hypothetical Returns 25.00% call option is written on available index units at beginning of each two-month period. Option volatility = 26.00% and is based upon relationship between near-the-money implied volatility and historical volatility as determined by Parametric Risk Advisors (Bloomberg observations. Not based off implied forward volatility). Historical volatility is assumed to be 82.00% of option volatility. Two-month LIBOR on simulation date is used to price options. Dividend is based off historical dividends as of simulation date and assumes no growth. All option premiums and dividends are held accruing no interest. Call premium received is equal to Black Scholes European style option with simulation date two-month LIBOR, implied volatility (as described above) and simulation date constant dividend amount. Call option expected liability is equal to Black Scholes European style option with simulation date two-month LIBOR, simulation volatility (as described above) and an adjusted dividend yield to result in forward price equal to simulation assumed growth. All options are cash settled. If option settlement value exceeds free cash, index units are sold to make up difference. Simulation assumes nine trades per year. Simulation option brokerage commission is $2.00 per contract. Simulation is net of management fees and transactions costs. Transactions costs will vary based on both the size of the account and the broker/ dealer. Assumed Eaton Vance (EV) Management fee is 0.60% per year. Fee is deducted from dividends and option premiums. If cash is insufficient, index units are sold to fund fees. Total Return:[(Ending cash balance resulting from option sales (less options commissions as indicated and EV fees) + (Ending index level x percentage of initial index units still owned) + cumulative dividends received] / the initial index level

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities. 013

Parametric White Paper / March 2012

Tail Risk Strategies / Options Strategies: An Alternative to Expensive Complex Tactics

About Parametric Parametric is an industry-leading provider of structured portfolio management, headquartered in Seattle, Washington. Parametric and its affiliate, Parametric Risk Advisors, offer a variety of structured portfolio solutions, including customized core equity portfolios (U.S., Non-U.S., global), options strategies, and overlay portfolio management. Parametric is a majority-owned subsidiary of Eaton Vance (ticker: EV). Disclosure This information is intended solely to report on investment strategies and opportunities identified by Parametric Portfolio Associates. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Past performance does not predict future results. The views and strategies described may not be suitable for all investors. Parametric does not provide legal, tax and/or accounting advice. Clients should consult with their own tax or legal advisor, who is familiar with the specifics of their situation, prior to entering into any transaction or strategy described here. The data and model information presented is based, in part, on hypothetical assumptions. No representation or warranty is made as to the reasonableness of the assumptions made or that all of the assumptions used in achieving the returns have been stated or fully considered. Hypothetical results have many limitations and no representation is made that any account will or is likely to profit similar to those shown. Actual performance results will differ and may differ substantially from this hypothetical performance. Changes in the assumptions may have a material impact on the hypothetical returns presented. Performance for back-tested data does not represent the results of actual trading, but was achieved by means of retroactive application of a model designed with the benefit of hindsight. Options are not suitable for all investors. Please ensure that you have read and understood the current options risk disclosure document before entering into any options transactions. In addition, please ensure that you have consulted with your own tax, legal and financial advisors prior to contemplating any derivative transactions. The options risk disclosure document can be accessed at the following web address: http://optionsclearing.com/ publications/risks/download.jsp.

Copyright 2012 Parametric Portfolio Associates, Inc. All rights reserved.

For informational purposes only; not an offer to buy or sell securities. 014