EFTA01393183.pdf

sold pursuant to the strategy we deemed to be the com- ponent securities of the strategy-based index. As of the date of this Supplement, the only strategy-based index on which options are approved to be traded is a buy- write index measuring the return on a hypothetical "buy- write" strategy Involving the simultaneous writing of call options on a stock index and purchase of the component securities of that index. Under the hypothetical strategy. a succession of at the money index call options with one month to expiration are assumed to be written, and the proceeds (i.e., the premiums received) from writing the options are assumed to be invested in a weighted basket of the component securities that mirrors the index. Divi- dends received from ownership of the component secu- rities of the index are similarly assumed to be reinvested in the basket of securities. The options are deemed held until expiration. and new call options are assumed to be written on the business day immediately after the settle- ment value is determined. All options written under the buy-write strategy are deemed to have been assigned an exercise notice on the expiration date if in the money on that date, and to have expired without value if out of the money on the expiration date. The buy-write index mea- sures the cumulative gross rate of return of the strategy since the inception of the index. The index will therefore rise during periods when the strategy is profitable and decline when it is unprofitable. The following example illustrates the calculation of the buy-write index. EXAMPLE: Assume that the buy-write index has a value of 800 on January 1. The return from the buy-write strategy, taking Into account the returns of the compo- nent securities of the stock index and of the options assumed to be written on the index, Is .5% and 1% on January 2 and 3. respectively. The index value at the end of a given trading day is equal to the previous closing value of the index multiplied by one plus the rate of return for that trading day. In this example, the value of the buy- write index at the close of trading on January 3 would be 812.04 (800 x 1.005 x 1.01). Assume that the return of the buy-write strategy on January 4, again taking into account the returns of the component securities of the stock Index and of the options assumed written on that index. is a negative .7%. The value of the buy-write index at the close of trading on January 4 would be 806.36 (812.04 x .993). The calculation of the buy-write index, as in the case of any strategy-based Index, requires the making of assumptions about. for example. the timing of transac- tions involved with a particular strategy and the prices received or paid for the securities traded (which are 155 CONFIDENTIAL - PURSUANT TOEFEESCIMC0066640 P. 6(e) CONFIDENTIAL SDNY_GM_00244824 EFTA01393183