EFTA00506026.pdf

Managing a Concentrated Position: Strategies & Solutions Client Name I Presentation Date IMPORTANT NOTE: Many of the strategies discussed in this presentation involve hedging or pledging shares. Name, Banker - phone Name, Global Investment Specialist - phone Executives and other insiders of publicly-traded Name, Wealth Advisor - phone companies are often restricted in their ability to hedge/pledge company stock. Do not provide this presentation to a corporate insider subject to hedging/pledging restrictions. Contact Advice Lab Q&A with questions. INVESTMENT PRODUCTS: NOT FDIC INSURED I NO BANK GUARANTEE I MAY LOSE VALUE Please read important information section at the end of the presentation. JP Morgan EFTA00506026 Please keep in mind This information is intended to be a high level overview of potential hedging strategies that can be executed through OTC options to achieve specific goals. These strategies may not be suitable for all investors. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In discussion of options and option strategies, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option- related products in general, are suitable to their needs. For a complete discussion of risks associated with any investment, please review offering documents and speak with your investment specialists. This material is intended to help you understand the financial consequences of the concepts and strategies discussed here in very general terms. However, the strategies found herein often involve complex tax and legal issues. Only your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances. J.P. Morgan Chase & Co. and its affiliates and/or subsidiaries do not practice law, and do not give tax, accounting or legal advice. We will, however, be pleased to consult with you and your legal and tax advisors as you move forward with your own planning. Additionally, please read the Important Information pages at the end of this presentation. 2 ei EFTA00506027 Agenda Topic Page Concentration Risks & Planning Options 4-5 Hedge 6 — Puts 7-8 — Collars 9-10 Monetize 11 — Qualified Covered Call Writing 12-14 — Unhedged & Hedged Loans 15 Diversify 16 — Outright Sale 17 — PrISMs1 18-20 — Private Placement Exchange Funds 21 — Personal Exchange Funds 22-29 — Charitable Remainder Trusts 30-33 Synergizing Strategies 34 Appendix 35-44 1. A Principal Installment Stock Monetization ("PrISM") is a prepaid variable forward strategy. 3 EFTA00506028 Concentrated investors should carefully consider how they manage their concentration risk • While some companies substantially outperform the broad market and maintain their value, the odds are stacked against the average concentrated investor — Of Russell 3000 Index companies since 1980, the return of the median stock versus the index was -54%, and roughly 40% of all stocks suffered a permanent 70%+ decline from their peak value Total % of companies experiencing Cumulative number of companies removed from the S&P 500 Sector "catastrophic loss," 1980-2014 due to distress, number of companies All sectors 40% 350 Consumer discretionary 43% 300 Consumer staples 26% 250 Energy 47% 200 Materials 34% Industrials 35% 150 Health Care 42% 100 Financials 25% 50 Information Technology 57% 0 Telecommunication Services 51% 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Utilities 13% Analysis of lifetime returns by sector, 1980-2014 Median excess return vs. Percentage of stock with Percentage of stock with Percentage of "extreme Sector Russell 3000 negative EXCESS returns negative ABSOLUTE returns winner"? stocks All sectors -54% 64% 40% 7% Consumer discretionary -62% 65% 44% 7% Consumer staples -3% 51% 26% 15% Energy -93% 72% 48% 6% Materials -73% 66% 34% 8% Industrials -58% 64% 37% 7% Health Care -39% 60% 42% 8% Financials -21% 58% 30% 6% Information Technology -63% 71% 53% 6% Telecommunication Services -57% 68% 54% 6% Utilities -141% 85% 14% 0% Source: Bloomberg, FactSet, Standard & Poor's, 1.P. Morgan Asset Management. 1. "Catastrophic loss" defined as a 70% decline from peak value with minimal recovery. This is a subjective cutoff point; some investors may see smaller permanent declines as equally unacceptable. 2. "Extreme winner" stocks defined as those stock with a 500%+ time-adjusted lifetime price return vs. the Russell 3000 Index. The Russell 3000 index measures the performance of the 3,000 largest U.S. companies representing approximately 98% of the investible U.S. equity market. 4 EFTA00506029 What solutions are available to manage your concentrated position? Depending on your objectives, J.P. Morgan can help create a plan to manage your wealth by using a combination of strategies: Puts Hedge tat. Collar Hedge a concentrated position, potential for monetization Qualified Covered Calls Unhedged Loan Gain liquidity from a Collar + Loan concentrated position Outright Sale PrISM' Diversify Exchange Fund Generate proceeds for reinvestment Charitable Remainder Trust 1. A Principal Installment Stock Monetization ("PrISM") is a prepaid variable forward strategy. The views and strategies described herein may not be suitable for all investors. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument, and is being provided merely to illustrate a particular investment strategy. Typically such investment ideas can only be offered to suitable investors through a confidential offering memorandum which fully describes all terms, conditions and risks. In discussion of options and option strategies, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option•related products in general, are suitable to their needs. For a complete discussion of risks for any investment, please review offering documents and speak with your investment specialists. CrAT5 5 EFTA00506030 Hedge EFTA00506031 Protective puts are a hedge against a decline in the value of a single stock position Puts provide downside protection by giving the investor the right to sell shares at a fixed price (the put strike price). In exchange for this right, the investor must pay an upfront premium to acquire the put contract. This strategy is appropriate for investors who are neutral to moderately bearish on the stock. • Provides some downside protection Benefits • Investor retains all upside appreciation, dividends; and voting rights • Investor can borrow against hedged position to raise liquidity, as needed2 • Requires the investor to pay an upfront premium; this premium is an economic loss if the contract expires worthless • Shares are pledged as collateral for the put for the duration of the contract • Over-the-counter ("OTC") options are typically European-style options that expire at maturity; if unwound early, the payout may vary from expected payout at maturity; If stock price at maturity is less than the put strike price: — Physical settlement: Investor delivers shares and receives the put strike price Payment at — Cash settlement: Investor receives the difference between put strike price and stock price Maturity If stock price at maturity is greater than the put strike price: — Investor continues to hold the shares and the contract expires worthless — Investor may claim a capital loss in the amount of the premium paid to acquire the option contract 1. Dividend protection is as defined in the term sheet and confirmation. Dividends would not qualify for qualified dividend income tax treatment during the time the offsetting put is held. 2. Subject to credit approval. 3. Based on factors including the underlying stock price, volatility, interest rates, dividend yield and time to maturity. Note: This information is intended to be a high level overview of potential hedging strategies that can be executed through OTC options to achieve specific goals. These strategies may not be suitable for all investors. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In discussion of options and option strategies, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or optiomrelated products in general, are suitable to their needs. For a complete discussion of risks associated with any investment, please review offering documents and speak with your investment specialists. 7 EFTA00506032 Potential benefits of an OTC protective put strategy Payout Profile (Illustrative Only) 60% Value forgone vs. long stock 40% Put Strike Price 20% (-10%) 'SSC< Investor's Return eZel 4% Qt o-e 0% -6 20% 40% 60% -20% -40% Outperformance vs. long stock -60% Appreciation/Depreciation to Maturity Date The protective put strategy outperforms versus the long stock when the stock falls below the strike price plus the premium paid. Note: This information is intended to be a high level overview of potential hedging strategies that can be executed through OTC options to achieve specific goals. These strategies may not be suitable for all investors. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In discussion of options and option strategies, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option.related products in general, are suitable to their needs. For a complete discussion of risks associated with any investment, please review offering documents and speak with your investment specialists. 8 EFTA00506033 Collars provide downside protection and upside appreciation to a defined cap Collars provide downside protection by foregoing some potential upside appreciation. The strategy consists of buying a put and selling a call, with payoff contingent on the stock price at maturity. This strategy is appropriate for investors who are neither aggressively bullish nor bearish on the stock. Provides some downside protection • Less costly than purchasing the equivalent protection of a put alone; "cashless" collars incur no out-of-pocket cost • Benefits Investor retains all upside appreciation up to the call strike price, dividends', and voting rights • Investor can borrow against hedged position to raise liquidity, as needed2 • Investor caps the potential return on the stock at the call strike price and gives up any stock appreciation above • the call strike price; Shares are pledged as collateral for the collar for the duration of the contract • Over-the-counter ("OTC") options are typically European-style options that expire at maturity; if unwound early, • the payout may vary from expected payout at maturity' If stock price at maturity is less than the put strike price: — Physical settlement: Investor delivers shares and receives the put strike price — Cash settlement: Investor receives the difference between put strike price and stock price Payment at If stock price at maturity is greater than the call strike price: Maturity — Physical settlement: Investor delivers shares and receives the call strike price — Cash settlement: Investor pays the difference between stock price and call strike price If stock price at maturity is equal to or greater than the put strike price and equal to or less than the call strike price: No payments are made by either party and contract expires worthless 1. Dividend protection is as defined in the term sheet and confirmation. Dividends would not qualify for qualified dividend income tax treatment during the time the collar is in place. 2. Subject to credit approval. 3. The collar locks in the amount that can be realized at maturity to a range defined by the put and call strike prices. 4. Based on factors including the underlying stock price, volatility, interest rates, dividend yield and time to maturity. Note: This information is intended to be a high level overview of potential hedging strategies that can be executed through OTC options to achieve specific goals. These strategies may not be suitable for all investors. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In discussion of options and option strategies, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or optiomrelated products in general, are suitable to their needs. For a complete discussion of risks associated with any investment, please review offering documents and speak with your investment specialists. 9 EFTA00506034 Potential benefits of an OTC cashless collar strategy Payout Profile (Illustrative Only) 60% • 40% - Put Strike Price 20% - (-10%) Investor's Return Collar 0% -60 -40% -200/0 0% 40% 60% -20% \\\\\ Call Strike Price -40% \\\ Outperformance (+20%) vs. long stock r -60% Appreciation/Depreciation to Maturity Date The collar strategy outperforms versus the long stock when the stock price at maturity is below the put strike price. Note: This information is intended to be a high level overview of potential hedging strategies that can be executed through OTC options to achieve specific goals. These strategies may not be suitable for all investors. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In discussion of options and option strategies, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option related products in general, are suitable to their needs. For a complete discussion of risks associated with any investment, please review offering documents and speak with your investment specialists. 10 EFTA00506035 Monetize ef, EFTA00506036 Call overwriting allows you to retain stock ownership and potentially enhance yield Call writer receives an upfront payment ("premium") in exchange for selling partial upside above a predetermined price. This strategy is appropriate for investors who are neutral to moderately bullish and do not expect the stock price to increase above the "effective sales price" on the call overwriting strategy. • Investor receives an upfront premium, available for current reinvestment • Investor retains dividends2 and voting rights on the shares during the term of the transaction • Assuming the calls meet the definition of a "qualified covered call" (QCC)3 for tax purposes: Benefits — Investor does not realize a tax event until the exercise or expiry of the call option — Shares continue to accrete holding period — Dividends continue to qualify for tax treatment as qualified dividend income — There would be no limitation on loss recognition if shares are sold • Potential return on stock appreciation is capped at the call strike price • Partial downside protection is limited to the amount of call premium received I Risks • Shares are pledged as collateral for the duration of the strategy • OTC options are European-style options which are exercisable only at maturity. If unwound early, the payout may vary from expected payout at maturity' If stock price at maturity is greater than the call strike price: — Physical settlement: Investor delivers the underlying stock and receives the call strike price Payment at — Cash Settlement: Investor pays difference between the stock price and the call strike price Maturity • If stock price at maturity is less than or equal to the call strike price: Call option expires worthless • Investor keeps the upfront premium in all cases 1. The effective sales price is the call strike plus the upfront premium. 2. Dividend protection is as defined in the term sheet and confirmation. 3. ft exchange-listed calls exist on the position, an OTC call option generally will be treated as a Oa if written: i) out-of-the-money, ii) with a maturity date in 33 months or fewer, and iii) more than 30 days before expiry 4. Based on factors including the underlying stock price, volatility, interest rates, dividend yield and time to maturity. Note: This information is intended to be a high level overview of potential hedging strategies that can be executed through OTC options to achieve specific goals. These strategies may not be suitable for all investors. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In discussion of options and option strategies, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option-related products in general, are suitable to their needs. For a complete discussion of risks associated with any investment, please review offering documents and speak with your investment specialists. 12 EFTA00506037 Potential benefits of an OTC call overwriting strategy Payout Profile (Illustrative Only) 60% Value forgone vs. long stock cat 40% 20% Investor's Return Call Writing 0% -60% -40% -20% 0% 40% 60% -20% - Call Strike Price (+5%) -40% - Outperformance vs. long stock -60% - Appreciation/Depreciation to Maturity Date The covered call strategy outperforms versus the long stock as long as the stock does not appreciate by more than the upfront premium plus the call strike price. Note: This information is intended to be a high level overview of potential hedging strategies that can be executed through OTC options to achieve specific goals. These strategies may not be suitable for all investors. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In discussion of options and option strategies, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option.related products in general, are suitable to their needs. For a complete discussion of risks associated with any investment, please review offering documents and speak with your investment specialists. 13 EFTA00506038 Overwriting a covered call spread would allow you to retain some exposure to the upside Payout Profile (Illustrative Only) 60% Value forgone vs. .• long stock o pet, 40% •••\ 20% Investor's Return Short Call Strike Price (+5%) 0% -6 -40% -20% 0% 20% 40% 60% -20% Long Call Strike Price (+20%) -40% Outperformance vs. long stock -60% Appreciation/Depreciation to Maturity Date By using part of the premium received from writing a covered call to purchase another call option at a higher strike price, you can retain some exposure to the upside. Note: This information is intended to be a high level overview of potential hedging strategies that can be executed through OTC options to achieve specific goals. These strategies may not be suitable for all investors. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In discussion of options and option strategies, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option.related products in general, are suitable to their needs. For a complete discussion of risks associated with any investment, please review offering documents and speak with your investment specialists. 14 EFTA00506039 A securities-based line of credit can be an effective way to monetize your concentration Borrower is able to extract value from the concentrated position by pledging the securities as collateral on a line of credit facility extended by the bank Borrower may use the loan proceeds for any purpose; if reinvested at a rate of return greater than the rate of interest on the line of credit, an arbitrage opportunity may exist Lending value of a concentrated position will be lower than lending value of a diversified portfolio of investments; protecting the position with a collar or other hedging strategy may increase lending value, Shares are pledged as collateral for the duration of the strategy and may be subject to forced sale by the lender A decline in the value of the pledged securities may require the borrower to pledge additional collateral and/or pay down the line of credit; this risk is heightened by the concentrated nature of the pledged shares Borrowers hedging their concentrated position with a protection strategy intended to match the anticipated maturity of the loan run the risk that the hedging strategy and/or the loan must be unwound early 1. Lending values are determined by JPMorgan Chase Bank, N.A. in its sole discretion. Advance rates on securities are determined by JPMorgan Chase Bank, N.A., and are subject to change without notice. Lines of credit are extended at the discretion of J.P. Morgan, and J.P. Morgan has no commitment to extend a line of credit or make loans available under the line of credit. Any extension of uedit is subject to credit approval by the lender in accordance with the terms contained in definitive loan documents. Loans collateralized by securities involve certain risks and may not be suitable for all borrowers and investors. A decline in the value of securities pledged as collateral may require the borrower to provide additional collateral and/or pay down the loan or line of uedit in order to avoid the forced sale of the securities by the lender. 15 EFTA00506040 Diversify EFTA00506041 An outright sale of shares is the most direct path to diversification But deciding on a selling strategy is more complex than it may seem • Shares can either be sold all at once or in stages Investors selling a concentrated position must ask themselves the following questions: — What is the right amount for me to sell? (Consider liquidity needs and appetite for continued exposure to single-stock risk) Am I comfortable selling out of the position more gradually if it means potentially selling at a higher price? Am I comfortable selling out of the position more gradually if it means potentially selling at a lower price? If I sell in stages, what is an appropriate pace for the sales? How will the realized capital gains event(s) impact my overall income tax situation? Immediate Sale Staged Selling Strategy • Generates immediate cash for diversification • Liquidity realized more gradually • Possibility of selling at a depressed or undervalued price • Greater potential upside and downside because • Large lots may move markets concentration is held longer • Investor may be subject to trading restrictions • Can accommodate investors subject to trading restrictions • Creates an immediate capital gains tax liability • Capital gains taxes incurred, albeit at a staggered pace The views and strategies described herein may not be suitable for all investors. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument, and is being provided merely to illustrate a particular investment strategy. J.P. Morgan Chase & Co. and its affiliates and/or subsidiaries do not practice law, and do not give tax, accounting or legal advice. 17 EFTA00506042 A "PrISM" adds value by providing proceeds upfront A Principal Installment Stock Monetization ("PrISM")' is a private contract that allows an investor to receive attractive upfront liquidity (typically 75%-90% of the stock value), downside protection, and flexibility in the use of investment proceeds. At trade date: During term of trade: At maturity date: Investor receives proceeds2 Investor can use PrISM proceeds Investor delivers shares or cash3 for any purpose Investor posts underlying Investor receives back excess stock as collateral Can be structured such that shares4 investor retains all or most dividends (optional) and voting Number of shares (or amount rights during term of of cash) depends on stock price transaction at maturity 1. A PrISM is also known as a prepaid variable forward. 2. Strategy typically allows a client to receive 75.90% of the stock value upfront with a variable number of shares delivered (or cash value payable) at maturity. 3. May be settled in stock or the cash equivalent, upon Client's election. 4. If stock price at maturity is greater than the hedged value; total number of shares retained subject to payments under the cap level. Note: This information is intended to be a high level overview of potential hedging strategies that can be executed through OTC options to achieve specific goals. These strategies may not be suitable for all investors. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In discussion of options and option strategies, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option•related products in general, are suitable to their needs. For a complete discussion of risks associated with any investment, please review offering documents and speak with your investment specialists. 18 EFTA00506043 A PrISM offers limited exposure to the upside and proceeds upfront A Principal Installment Stock Monetization ("PrISM") is a private contract that allows an investor to receive attractive upfront liquidity (typically 75%-90% of the stock value), downside protection, and flexibility in the use of investment proceeds. • Upfront liquidity, protection below the hedged value, and upside appreciation to a predetermined limit • While similar to collar plus a loan, no interim interest payments required, structure generally provides more cash Benefitslill upfront, and more flexibility in the use of proceeds • Taxes on underlying shares deferred until maturity (or beyond if cash settled) • Can be structured so investor retains dividends' (optional) and voting rights during contract • Stock appreciation is capped at the upside limit • Shares are pledged for the duration of the PrISM • OTC options are European-style options which are exercisable only at maturity. If unwound early, the actual payout may vary from expected payout at maturity' If stock price at maturity is less than hedged value: — Investor delivers 100% of the shares (or cash value) If stock price at maturity is between the hedged value and the upside limit: Payment at — Investor delivers a percentage of the number of shares equal to the hedged value divided by the settlement Maturity price (or cash value) If stock price at maturity is greater than the upside limit: — Investor delivers a percentage of the number of shares equal to the hedged value of shares plus appreciation above the upside limit divided by the settlement price (or cash value) 1. Dividend protection is as defined in the term sheet and confirmation. Dividends would not qualify for qualified dividend income tax treatment during the term of the PrISM contract. 2. Based on factors including the underlying stock price, volatility, interest rates, dividend yield and time to maturity. Note: This information is intended to be a high level overview of potential hedging strategies that can be executed through OTC options to achieve specific goals. These strategies may not be suitable for all investors. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In discussion of options and o